Introduction:
Under the Income Tax Act, the residency of an individual decides the scope of payable income tax. The residency of the person in the previous year along with the location of the income accrued in that year determines whether a person will be charged income tax as per a resident Indian or a non-resident Indian.
The definitions of a NRI are different under FEMA and Income Tax Act, enabling the individual to be a non-resident of India under one law and resident of India under another.
Taxation for Non-Resident Indians depends
upon his residential status under the Income Tax Act. Any income
that is
- received or deemed to be received in India during the financial year
- accrued or deemed to be accrued in India
- accrued or deemed to be accrued outside India but its first receipt is in India
forms part of the NRI income tax that he is due to pay.
The income of an NRI can be in the form of:
- Salaries
- House Property
- Capital Gains
- Business Income
1. Salaries
Depending on whom he is getting his salary from, an NRI has to either pay his income tax or be tax free. Any income in India or by an Indian is taxable whereas income coming from a foreign entity is non-taxable. Superannuation funds and pension are also taxable.
2. House Property - Taxation on Property Transaction
An immovable property (commercial/residential) owned by an
NRI is subject to NRI taxation rules and regulations. The NRI
taxable income includes the sales proceeds, rent and
one of two residential properties as if the property had been
let out even if the both are kept vacant. No tax is due on purchase
of an immovable property.
The Indian tax laws allow a general deduction
of 30% on the rental income and also a deduction towards interest
subject to certain conditions.
Non Taxable Properties:
The following categories of property enjoy exemption from taxation:
- Income earned from a farm house that is been used for agricultural purposes.
- Income earned from a property used for some charitable purposes.
- Property used for self occupation. If such a property is being used for business purposes, then the income earned is taxable under the "Business Income" head and not under head "House Income".
3. Capital Gains:
Capital gains are the profits earned when a property owned by NRI and situated in India is sold for a profit. Capital gains can be categorically divided into two types:
- A Short-Term capital gain is the gain on immovable property being sold within a period of 36 months from the acquisition. The liability for taxation is at the rate of 30%.
- A Long-Term capital gain, on the other hand, is on an asset that has been held for more than 36 months by the NRI. The tax thereon would be at the rate of 20%. The tax-inflation index decides the tax on long-term capital gains.
There is no tax on re-investment of long term capital gains and also when it is in the form of shares and securities.
4. Business Income:
Any income generated by any business venture that the NRI engages himself in India is taxable under the Income Tax rules of India applicable to an NRI. It could be selling an asset (metal like gold, silver) for business profit, profit from partnership with an Indian individual or company, cash assistance, payment received in lieu of services/products provided, bonus, interest et al.
Ready Reckoner for NRIs:
- Tax is computed during the financial year, i.e. a period of 12 months from 1st April to 31st March.
- Keep track of the number of days you stay in India from year to year and check the same before making the next trip to India.
- In the 1st year of leaving India for employment outside India, ensure that you leave before 29th September. Otherwise total income of the financial year (including the foreign income) will be taxable in India if it exceeds the basic exemption limit.
- During the last year of your stay abroad before coming back to India, make sure that you come back on or after Feb 1st (or Feb 2nd in case of a leap year) since arrival before this date will make your stay in India exceed 59 days. However, a person whose stay in India in the preceding four (4) previous years does not exceed 365 days, he may return after September 30th of the relevant year without loss of his non-resident status.
- The month for filing returns including NRI tax return is July of the subsequent financial year. An NRI is not required to file the ROI if his assets fall under Specified Assets list (Long Term capital gain, debentures, shares, securities, income form charitable sources) as defined under Section 115 C of Income Tax Act.
India has seen tremendous changes in the taxation scene, in
terms of exemptions/concessions for NRIs. The
repealing of Gift Tax, exemptions under the Wealth tax, exemption
of tax on income from Capital Gains and a host of other changes
are indeed very encouraging.