Residential Status is an important aspect when it comes to taxation. The Income Tax Act has laid down the definition for determining the residential status of an assesse, and as per that, the income tax rules and rates for tax deduction are determined.
Basically an individual can be a resident or a non-resident. Income tax rules for the Non-Resident Indians differ from that of the resident citizens.
How is the Residential Status Determined
The residential status is determined based on an individual’s stay in the country in the relevant previous year. It’s not a blanket status; this means that a person can be a resident in one year and a non-resident in another year. The rule says a person will be an NRI if the following conditions are met:
- The person resides out of India for a period of more than or equal to 182 days in the relevant previous year.
- The person is not present in India for 60 days or more during the previous year and also for a combined total of 365 or more in the 4 previous years before the relevant previous year.
Thus based on the above the individual will have to pay or not pay tax under various situations.
Do NRIs need to file Returns
The first thing a NRI might want to know is – does he need to file returns in India? In case a NRI satisfies the following two conditions he is not required to file a return as per Section 115G:
- If the income earned in India consists only of long term capital gains and investment income; and
- TDS (Tax Deduction at Source) was deducted on the above income.
The basic exemption limit for a NRI is Rs. 200,000 and Rs. 250,000 for those above 60. If the income exceeds the limit mentioned, then you will have to file returns. If an NRI wants to claim any refunds then it will be necessary for him to file returns. Similarly in case he has availed of a home loan or has income from capital gains or rent.
Income Tax Rules for NRIs
Below we look at various tax rules pertaining to NRIs. The basic premise is that for income that is not earned in India or deemed to be earned in India; the NRI is not liable pay any tax. Being an NRI means that the individual can earn under all income heads other than salary head since he is employed abroad.The rules are different when compared to the residents and so do the tax rates in some conditions.
1. TDS on Deposits: For residents, the threshold limit for TDS (Tax Deduction at Source) on fixed deposit interest is Rs. 10,000. Thus interest beyond 10,000 in a financial year will attract TDS as per the individual tax slab. However for NRIs, the TDS on interest on NRO deposits is deducted irrespective of the amount of interest at the flat rate of 30.9%.
NRE and FCNR accounts do not attract any TDS. NRO (Non-Resident Ordinary) accounts are opened to deposit money from within the country. The funds in them are not fully repatriable. In NRE (Non Resident External), the money is fully repatriable and only foreign remittances are allowed. FCNR are deposits in certain allowed currencies.
2. Income from Rent: Since income from rent originates in India, the NRI is liable to pay rent. If the rent is deposited into a NRE or a NRO account then things are simple. However if the remittance mode is opted then a Chartered Account will have to certify that the relevant taxes as per the rules have been paid on the amount to be remitted.
Here also TDS is deducted at the rate of 30.9% before making the payment. The responsibility to deduct tax lies with the payer of rent.
3. No Deductions are allowed: Resident Indians can invest in certain prescribed investment option like NSC, PF, ELSS or claim deductions on insurance premium under Section 80C, 80U etc. However no such relief is available to NRIs. Also NRIs are not allowed to adjust the capital gains against the basic exemption limit (so even if the gains are less than or equal to 2/2.5 lakh, you will have to pay tax on them.) The residents can adjust their capital gains against the basic exemption limit.
What is DTAA?
Double Taxation Avoidance Agreement or (DTAA) are treaties entered by the government of India with various other countries that can help NRIs in paying double taxes. These agreements as the name suggests are beneficial for NRIs as if the government has a DTAA with the country in question the individual is saved from paying tax on the same income in both countries.
There are concessional rates for TDS or a complete waiver if the income is below the exemption level. Knowing the income tax rules well can help NRIs in tax planning. However it is important to keep yourself updated about the various changes in rules and laws time. Filing returns or getting the required information is a simply a click away.