NRI Income Tax Slabs: Details on Taxable Income and Deductions
23 May 2022
NRI or Non-resident Indian income tax slabs are applicable for those who are from India but are earning income in a foreign country. The NRI rules state that a person has to stay for at least 182 days in India to be deemed an NRI. Income tax slabs for NRIs are different from the income tax slabs applicable for resident Indians.
Let’s dive in to know how NRI income tax slabs work.
What is NRI Income Tax?
The income tax Department rules that a non-resident Indian is
A citizen of India staying abroad, or,
A person of Indian origin who is not a citizen
Section 6 of the income tax Act states that a person is an Indian citizen if he/she has stayed in India for 182 days or more during the previous year also if he/she has stayed at least 60 days in the previous year and more than 365 days in 4 years preceding the previous year.
Further, section 6(1A) states that Indian citizens should earn over Rs.15,00,000 (other than from foreign sources) to be deemed a resident. Also, he/she must not be paying taxes in any other country. The Amendment Act of 2020 rules that an individual is an Indian resident if he/she stays in India for at least 120 days before leaving. An Indian resident is liable to pay taxes on his global income. However, an NRI should pay taxes according to the NRI Income Tax Slabsin India only when he/she generates income in India.
Income Tax Provisions for NRIs
The income tax schedule for non-residential Indians depends on their residential status. Simply put, an Indian resident is liable to pay taxes in India. However, an NRI is liable to pay taxes only if he/she earns a taxable income in India. Thus an NRI is liable to pay taxes on income earned in India, capital gains on asset transfers, income from fixed deposits or savings accounts, etc. In short, income earned in NRE accounts is tax-free, and that on NRO is taxable.
Section 115D of income tax essentially provides special provisions for calculating the total income of NRIs. It states that:
There are zero tax deductions for computing the investment income of NRIs.
If an individual is an NRI, he/she cannot enjoy any tax deductions for capital gains. Capital gains include investment income or long term capital gains, or both. However, deductions are applicable on total gross income deducted by capital gains.
This section states that:
A non-resident Indian is liable to taxation if his/her total income comes solely from an investment income. The tax on such total income is 20%.
A non-resident Indian is liable to taxation at 10% of his income if it comes from capital gains.
The tax liability of an NRI is charged on total income deducted from his/her capital gains and investment income.
This section rules that:
Suppose an NRI utilises his/her foreign assets to invest in other specified assets like savings certificates within 6 months. In that case, the net capital gains are subject to income tax liability under two conditions.
Firstly, if the valuation of a new asset is higher than that of the original asset, he/she is not liable to pay taxes on the entire capital gains.
Secondly, if the valuation of a new asset is minor, he/she is not liable to taxation, assuming the same proportion of acquired capital to acquisition cost.
An NRI’s foreign asset is liable to taxation if he/she liquefies it within three years of obtaining it. This excludes the short term capital assets of the previous year (if any).
According to this section, an NRI is not liable to present his/her income returns if
Total income during the previous year consisted of investment income or capital gains.
Under Chapter XVII-B, any deductible tax amount has already been deducted from the net income.
This section states that any NRI who is legally a resident following his/her total income must furnish a declaration of his income returns to the assessing officer. The provisions of the chapter will be applied henceforth, and he/she is liable to do it for every year of assessment.
This section allows NRIs to choose not to be governed by the regulations of the chapter. However, he/she must present his income returns for the current/previous year, which implies that his total income will be subject to taxation according to provisions of this Act.
Deductions Applicable for NRIs
NRIs are liable to certain deductions on their income subject to certain factors. The income tax department provisions a standard deduction of 30% for income on a property. Additionally, they can enjoy interest deduction for home loans and principal repayment under section 80C.
Capital gains also attract tax deductions of 20%. Capital gains exemption is applicable for house property investment or on capital bonds.
Exemptions for NRIs
According to India’s NRI income tax slabs, NRIs enjoy certain tax exemptions on particular interest and dividend earnings. Tax exemption items include:
Interests on NRE/FCNR accounts and government bonds and certificates.
Dividends from domestic shares and long term capital gains from equities/mutual funds.
Section 54 rules that the amount obtained from the sale of house property is liable to exemption if used to purchase other properties or deposited in PSUs/banks.
Section 54F provisions tax exemption on returns from the sale of any other type of property. However, this holds if the individual purchases a new house and uses the sales proceedings proportionately.
Section 54EC states that NRIs are liable for tax exemption if they invest long term capital gains to buy government bonds. Individuals can invest a maximum of Rs.50 lakhs for at least 3 years for the exclusion.
The income tax department makes sure that NRIs pay taxes according to the mentioned NRI Income Tax Slabs. However, it makes sure that they do not pay excess taxes. Since NRIs cannot utilize 15G/15H to avoid TDS, they must submit their tax return filing and investment proofs. The double taxation avoidance agreement makes sure that NRIs do not pay taxes twice.
FAQs on NRI Income Tax Slabs
Q1. What are the tax saving advantages for NRI mutual fund schemes?
NRIs can avail tax deductions by investing in equity linked saving schemes. In addition, it provides the benefit of tax exemption under Section 80C.
Q2. Is a Indian resident staying in Germany liable to taxation in India?
Yes, salaries earned in countries with which India has Double taxation avoidance agreement are liable to taxation.
Q3. Is the income earned in a foreign country taxable if earned abroad?
A resident of India is liable to taxation under NRI Income Tax Slabs on his/her income irrespective of where he/she has earned it.
Q4. Is it necessary to file an income tax return if an NRI is not earning any income in India?
If an individual is not earning any income in the form of capital gains or other means, he/she is not liable to file tax returns.
Q5. Do NRIs need to pay taxes on dividends earned from shares and securities?
Dividends are exempt from taxation irrespective of one’s resident status. However, it has to be reported.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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