NRI Tax Benefits on Income Earned in India and Abroad

NRI Tax Benefits on Income Earned in India and Abroad

For Non-Resident Indians (NRIs), understanding taxation rules is essential for smart financial planning. Indian tax laws primarily focus on income generated within the country, while offering several provisions and exemptions that NRIs can take advantage of. Let’s break down how NRIs are taxed on income earned both in India and abroad, along with the available benefits.

Taxation of Income Earned in India by NRIs

Taxation on Indian Income (Section 5)

NRIs are only taxed on income earned within India. Any income generated outside of India is not subject to Indian taxes, according to Section 5 of the Income Tax Act.

Example: If you own a property in India that earns you ₹50,000 monthly in rent, the annual ₹6 lakh income will be taxable in India. However, your salary from a job in Dubai or the US is not taxed by India.

Tax-Free Interest on NRE and FCNR Accounts (Section 10(4)(ii))

Interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is entirely tax-free in India, making these accounts a tax-efficient way for NRIs to save and grow their funds.

Example: If you have ₹20 lakh in an NRE fixed deposit earning 6% interest, the ₹1.2 lakh interest is exempt from Indian tax.

Double Taxation Avoidance Agreement (DTAA)

To avoid being taxed twice on the same income, India has signed Double Taxation Avoidance Agreements (DTAA) with various countries. This ensures that NRIs aren’t taxed both in India and their country of residence.

Example: Suppose you earn ₹10 lakh in dividends from Indian stocks, and India taxes this income. Under DTAA, you can receive tax relief or credit for taxes paid in India when you report this income in your country of residence, such as the US.

Exemptions on Long-Term Capital Gains from Equity (Section 112A)

If you’re investing in Indian stocks or equity mutual funds, long-term capital gains (LTCG) up to ₹1 lakh per year are tax-exempt.

Example: If you sell shares after holding them for over a year and earn ₹90,000 in profit, it is tax-free in India. Gains above ₹1 lakh are taxable, but the first ₹1 lakh remains tax-exempt.

TDS on Indian Income – Refundable if Overpaid (Section 195)

NRIs often face a higher rate of Tax Deducted at Source (TDS) on certain income such as rent or interest. If the TDS amount exceeds your actual tax liability, you can claim a refund by filing a tax return.

Example: If your rental income is ₹1 lakh and ₹30,000 is deducted as TDS, but your actual tax liability is ₹15,000, you can claim a refund of the excess ₹15,000.

Deductions Under Section 80C

NRIs are eligible for tax deductions under Section 80C, which allows up to ₹1.5 lakh in deductions for investments such as Public Provident Fund (PPF), life insurance premiums, and ELSS funds.

Example: If you’re paying for a life insurance policy in India, you can reduce your taxable income by up to ₹1.5 lakh.

Capital Gains Exemption on Property Sales (Sections 54 and 54EC)

NRIs can avoid or defer tax on capital gains from property sales by reinvesting in another property (Section 54) or in specified bonds like NHAI and REC (Section 54EC).

Example: If you sell a property and make a ₹50 lakh profit, reinvesting that profit in another property or eligible bonds can help you avoid paying tax on the capital gains.

Continuing Benefits After Returning to India (Section 115H)

NRIs who return to India can still enjoy certain tax benefits for a limited period under Section 115H. These benefits apply to foreign income even after the NRI becomes a resident.

Example: If you move back to India but still earn income from foreign assets, you may continue to receive tax benefits for a few years.

Taxation of Income Earned Abroad by NRIs

Income earned abroad is generally not taxed in India if you are an NRI. Here’s a closer look:

Residential Status and Tax Liability (Section 5)

Your residential status determines how your income is taxed. If you haven’t stayed in India for 182 days or more during a financial year, you’re considered an NRI, and only your Indian income is taxed. Foreign income remains outside the scope of Indian taxation.

Example: If you’re working in the UK, your salary there will not be taxed in India. However, if you earn rental income from a property in India, it will be taxed in India.

Scope of Taxable Income (Section 9)

Income that is either received or accrued in India is taxable. Income from foreign sources, such as salary or business profits abroad, isn’t taxable unless brought into India.

No Tax on Foreign Income

As long as income earned abroad is not remitted to India, it remains completely tax-free in India.

DTAA for Foreign Income

In cases where foreign income is subject to tax in both India and the country of residence, the DTAA ensures NRIs avoid double taxation. You may receive tax relief in India or claim a credit for taxes paid abroad.

Example: If you earn interest on an Indian savings account while living in the US, both India and the US may tax it. Under the DTAA, you can claim a credit in the US for taxes paid in India.

Tax-Free Interest on NRE and FCNR Accounts (Section 10(4)(ii))

The interest you earn on NRE and FCNR accounts is fully tax-free in India, providing a tax-efficient way to manage foreign earnings.

Read More: Tax Audit and Filing Deadlines for FY 2023-24

Foreign Income Tax Benefits for Returning NRIs (Section 115H)

If you return to India and become a resident, Section 115H allows you to continue enjoying tax benefits on foreign income for a limited time.

India’s tax laws offer several advantages to NRIs, helping you save on taxes both on income earned in India and abroad. By understanding these rules, you can better manage your tax liability and grow your wealth. If you need further assistance or personalized advice, feel free to reach out—we’re here to help you navigate the complexities of NRI taxation.

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Understanding the Double Taxation Avoidance Agreement (DTAA)

Understanding the Double Taxation Avoidance Agreement (DTAA)

The Double Taxation Avoidance Agreement (DTAA) is a crucial bilateral accord between countries, designed to prevent taxpayers from being taxed on the same income in both their resident and source countries. In today’s globalized economy, where individuals and businesses often earn income from multiple countries, DTAA plays a significant role. It primarily benefits Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) who might otherwise be subject to double taxation. The agreement allows taxpayers to choose the most favorable tax regime, whether under DTAA provisions or domestic tax laws, ensuring lower tax rates for certain transactions and offering mechanisms like Foreign Tax Credit to reclaim excess taxes paid abroad.

India has established DTAAs with 94 countries, promoting international trade and investment by minimizing tax evasion and encouraging economic cooperation. Different models, such as the OECD, UN, US, and ANDEAN models, provide various frameworks for these agreements, balancing taxation rights between resident and source countries. Additionally, specific forms are required to claim DTAA benefits, ensuring transparency and compliance. Methods like Full Exemption and Foreign Tax Credit are used to eliminate double taxation, thereby facilitating cross-border economic activities.

Double Taxation Avoidance Agreement

DTAA is a financial agreement between the governments of two countries to prevent the double taxation of income earned by a taxpayer. This mechanism was introduced to avoid income being taxed twice—once in the home country (the taxpayer’s country of residence) and again in the host or source country (where the income is generated). This situation is commonly faced by NRIs and PIOs.

Objectives of DTAA

  1. Relief from Double Taxation: DTAA provides relief to taxpayers by mitigating the burden of double taxation.
  2. Encouraging International Trade and Investment: By preventing double taxation, DTAA fosters international economic activity.
  3. Promoting Economic Relations: DTAA helps in developing stronger economic ties between countries.
  4. Minimizing Tax Evasion: By clearly defining tax liabilities, DTAA reduces opportunities for tax evasion.

The Need for DTAA

In a globalized world, with modern technology making international markets more accessible, taxpayers often generate revenue from various sources worldwide. Without DTAA, income arising from international transactions could be taxed both in the taxpayer’s resident country and the source country, leading to a heavy tax burden. For instance, capital gains might be tax-exempt in countries like New Zealand, Hong Kong, Singapore, and Switzerland, while in India, such gains are taxable under the Income Tax Act, 1961. DTAA ensures that taxpayers are not unfairly taxed on the same income in multiple countries.

Features of DTAA

  • Override of Domestic Laws: According to Section 90(2) of the Income Tax Act, 1961, DTAA provisions can override domestic tax laws if they are more beneficial to the taxpayer.
  • Choice of Tax Regime: Taxpayers can choose to be taxed under DTAA provisions or domestic tax laws, whichever is more beneficial.
  • Lower TDS Rates: DTAA often provides for lower rates of Tax Deducted at Source (TDS) on certain types of income. For example, dividend income may be taxed at a lower rate under DTAA compared to domestic laws.
  • Foreign Tax Credit: Taxpayers can reclaim excess taxes paid abroad through mechanisms like Foreign Tax Credit, as outlined in Rule 128 of the Income Tax Rules, 1962, using Form No. 67.
  • Countries with DTAA: India has signed DTAA agreements with 94 countries. For countries without such agreements, taxpayers can claim limited benefits under Section 91 of the Income Tax Act, 1961.

DTAA Models

Different DTAA models have been developed to ensure consistency and comprehensiveness in tax treaties between nations:

    • OECD Model: Developed by the Organisation for Economic Co-operation and Development, this model is favored by developed countries and emphasizes the right of the country of residence to impose tax.
    • UN Model: The United Nations Model is used primarily by developed and developing countries. It gives more weight to the “Source” principle, meaning the country where the income is generated has a greater right to tax it. Most of India’s treaties are based on the UN Model.
    • US Model: This model differs significantly from the OECD and UN models and is specifically designed by the United States.
    • ANDEAN Model: Favored by underdeveloped countries like Bolivia and Colombia, this model supports taxation in the source country.

Forms Under DTAA

To claim benefits under DTAA, taxpayers must submit specific forms:

  1. Form No. 10FA: Application for a certificate of residence for the purposes of Section 90 and 90A of the Income Tax Act, 1961.
  2. Form No. 10F: Provides details such as the assessee’s status, PAN, nationality, etc.
  3. Form No. 10FB: Certificate of residence issued by the government after the submission of Form No. 10FA.
  4. Form No. 67: Statement of income earned from a country outside India and Foreign Tax Credit.

Read More: ITR Reassessment: Who Might Receive a Tax Notice Under Section 148 by August 31, 2024?

Methods of Eliminating Double Taxation

  • Full Exemption Method: Under this method, foreign income is completely excluded when calculating the resident country’s taxable income.
  • Exemption with Progression: While foreign income is exempted, it is still included for determining the applicable tax rate, ensuring that higher foreign income results in a higher tax rate.
  • Foreign Tax Credit: Taxpayers can claim credit for taxes paid in the source country, reducing their tax liability in the resident country. However, the credit is only available for tax, surcharge, and cess, not for penalties or interest. Tax credit can only be claimed if the tax is not disputed.

DTAA is a vital tool for managing the complexities of international taxation, ensuring that taxpayers do not face the undue burden of being taxed on the same income twice, and promoting economic cooperation between nations.

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Understanding Form 10F: Purpose, Scope, and Mandatory Conditions

Form 10F

Understanding Form 10F: Purpose, Scope, and Mandatory Conditions

Form 10F is a self-declaration tax form for non-resident (NR) taxpayers to claim DTAA benefits when their Tax Residency Certificate (TRC) is incomplete.

Form 10F

Earn income from India while living abroad? You might qualify for lower tax rates through a Double Taxation Avoidance Agreement (DTAA). Non-residents can benefit from DTAA, where income is taxed only once. India has these treaties with many countries, helping dual citizens avoid double taxation. But to claim these benefits, you need Form 10F.

Form 10F

Form 10F is a self-declaration tax form used by non-resident (NR) taxpayers to claim benefits under DTAA (Double Taxation Avoidance Agreement) when their Tax Residency Certificate (TRC) lacks essential details required for this purpose.

  • NR taxpayers: Individuals or entities whose main income source is not from India.
  • Double Taxation Avoidance Agreement (DTAA): Agreements between India and other countries to prevent double taxation on income earned in both jurisdictions.
  • Tax Residency Certificate (TRC): A document issued by the NR taxpayer’s home country confirming their tax residency status, which is essential for claiming DTAA benefits.

Purpose of Form 10F

If the Tax Residency Certificate (TRC) lacks necessary information required by the Double Taxation Avoidance Agreement (DTAA), non-resident (NR) taxpayers must provide additional details using Form 10F.

Form 10F

To benefit from a tax treaty, NR taxpayers are required to submit both the TRC and Form 10F (if specific details are missing from the TRC) under Section 90(5) of the Income Tax Act. The TRC should include essential information such as the taxpayer’s name, foreign address, Tax Identification Number (TIN), and taxpayer status. If the TRC lacks these details, the taxpayer must electronically file Form 10F.

The requirement of Form 10F also enables Non-Resident Indians (NRIs) to claim tax exemptions and deductions on their income earned in India.

Requirements for Form 10F

To benefit from DTAA advantages, individuals must submit a self-declaration using Form 10F along with their Tax Residency Certificate (TRC) from their country of residence. Form 10F is mandatory for non-resident Indians (NRIs) who lack complete TRC details.

Submitting Form 10F enables NRIs to avoid Tax Deducted at Source (TDS) on their income earned in India, which is particularly beneficial since all their Indian income is subject to TDS. Furthermore, without a PAN (Permanent Account Number), TDS is deducted at a higher rate.

Previously, NRIs without a PAN had to file Form 10F online. This necessitated PAN registration for all taxpayers, as access to the income tax filing portal was unavailable without a PAN. However, for the fiscal year 2023, the Central Board of Direct Taxes (CBDT) granted one-time relief to taxpayers without a PAN. They were permitted to file the form manually by March 31, 2023.

Documents Needed for Submitting Form 10F

Below is a comprehensive list of documents required for filing Form 10F:

  • Permanent Account Number (PAN) card
  • Proof of residential address in your country of residence
  • Period of residential status as mentioned in the Tax Residency Certificate (TRC)
  • Taxpayer status (e.g., individual, company, firm, trust, etc.)
  • Proof of nationality (for individuals) or territory of incorporation/registration (for companies and firms)
  • Tax Identification Number (TIN) or any other unique tax identification number in your country of residence
  • Digital signature certificate to validate the information provided in Form 10F

Consequences of Non-Compliance

  • Failure to file Form 10F may result in the withdrawal of DTAA benefits.
  • Non-compliance leads to higher TDS rates.
  • Non-filing may categorise non-residents as ‘assessee in default’, complicating remittances.

Benefits of Filing Form 10F

  • Lower Tax Deduction at Source (TDS): Avoid higher tax rates on income like dividends, interest, and royalties.
  • Compliance with Indian Tax Regulations: Fulfills legal requirements to claim DTAA benefits.
  • Faster Processing of Tax Returns: Ensures accurate tax assessment and avoids delays.

How to File Form 10F Online?

Step 1: Log in to the official e-filing portal with with your PAN or the user ID. Register if you do not have an account. 

Step 2: On the dashboard, navigate to the ‘e-File’ menu and select ‘Income Tax Forms’. 

Step 3: Click on ‘File Income Tax Forms’.

Step 4: On the next page, select the 3rd tab ‘Person not dependent on any source of income’. 

Step 5: You will find the option to file Form 10F in the last column on this page. Click on ‘File Now’.

Read More: What is a mutual fund? Why invest in mutual funds?

Step 6: Enter your PAN and select the assessment year from a dropdown menu. Click on ‘Continue’.

Step 7: Go through the given instructions and click on ‘Lets get started’.

Step 8: Enter the required details, including your name, father’s name, Section 90/90A, country of registration/residence, TIN, etc.

Step 9: Next, select the period for which you obtained the TRC and your address outside India.

Step 10: After filing the other details, you need to attach a copy of your tax residency certificate. 

Step 11: Signing of the form can be done via digital signature or electronic verification code.

Step 12: Click on ‘Preview’ to review the details and submit the form. 

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