Tax Compliance for NRIs Under the Income Tax Act, 1961: A Guide

Non-Resident Indians (NRIs) are defined under the Foreign Exchange Management Act (FEMA) as Indian citizens residing abroad for employment, business, or other reasons, with the intention of an indefinite stay. For tax purposes under the Income Tax Act, 1961, an individual’s residential status is determined based on physical presence in India, resulting in three classifications: Resident, Not Ordinarily Resident (NOR), and Non-Resident (NR). Each classification carries unique tax implications for income earned in India and abroad.

1. Determining Residential Status Under the Income Tax Act

  • Resident: Individuals who stay in India for 182 days or more in a financial year qualify as Residents and are taxed on their global income.
  • Not Ordinarily Resident (NOR): Individuals who have been non-resident for 9 of the last 10 years or have stayed in India for less than 730 days in the preceding 7 years. NOR status incurs tax on Indian income and partly on foreign income if connected to a business in India.
  • Non-Resident (NR): Those who do not meet Resident criteria and are taxed only on income accrued or received in India.

2. Taxable Income Based on Residential Status

  • Global Income: Resident individuals are taxed on worldwide earnings.
  • Indian Income: NORs and NRs are taxed on income that accrues or is received in India, including gains from business activities controlled from India

3. Deemed Residency for High Earners

Indian citizens earning over INR 15 lakh (excluding foreign income) are deemed residents if not taxed elsewhere. This applies since FY 2021-22 and includes Indian residents in tax-exempt jurisdictions.

4. Categories of Taxable Income for NRIs

  • Salary Income: Salary for services rendered in India is fully taxable, regardless of where it is received.
  • Income from House Property: Taxable if property is located in India, with allowable deductions for property maintenance and loan interest.
  • Rental Income: NRIs renting out Indian property face a 30% TDS, and tenants must submit Form 15CA and, in some cases, Form 15CB.
  • Business Income: Income from an India-based business or profession is taxable.
  • Capital Gains: Gains from selling Indian assets, such as real estate or shares, are subject to capital gains tax, with potential deductions for reinvestment under Sections 54 and 54EC.

5. Exempt Income for NRIs

  • NRE Account Interest: Interest on Non-Resident External (NRE) accounts is tax-free.
  • Specified Bonds and Deposits: Certain bonds and foreign currency deposits with scheduled banks enjoy tax exemptions.
  • Offshore Banking Unit Interest: Interest from deposits in Offshore Banking Units is also tax-exempt.

6. Deductions and Exemptions Available to NRIs

  • Section 80C Deductions: NRIs can claim deductions for life insurance, principal repayments on home loans, children’s tuition, ULIPs, and ELSS investments.
  • Section 80D for Health Insurance: Deductions for health insurance premiums, including policies covering family and dependents.
  • Section 80E for Education Loans: NRIs can claim interest deductions on loans for higher education for themselves or dependents.

Read More: Understanding the New Income Tax Regime’s Impact on Salaried Employees

7. Special Provisions and Considerations for NRIs

  • TDS on Property Sales: TDS applies at 20% for long-term gains from property sales, with possible exemptions for reinvestment.
  • Eligible Bond Investments: Certain government bonds allow capital gains exemptions under Section 54EC.
  • Restrictions on Investments: NRIs cannot invest in Public Provident Fund (PPF) or National Savings Certificates (NSC).

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