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.
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.
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.
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.
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.
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.
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.
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.
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.
Income earned abroad is generally not taxed in India if you are an NRI. Here’s a closer look:
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.
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.
As long as income earned abroad is not remitted to India, it remains completely tax-free in India.
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.
The interest you earn on NRE and FCNR accounts is fully tax-free in India, providing a tax-efficient way to manage foreign earnings.
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.
How can we help? *
