For non-resident Indians (Indian citizens or Persons of Indian Origin (‘PIO’) who have been residing outside India), until March 31, 2020, NRIs who visited India could stay in India up to 181 days in a financial year and still could maintain “Non-resident” status in India. The Finance Act, 2020 and the Finance Act 2021 (assented by the President on 28 March 2021) have made far reaching changes regarding the determination of residential status of NRIs for financial year ended March 31, 2021 and March 31, 2022. This change will directly impact the NRI community.
Till end of FY 2019-20, NRIs (covers Indian citizens and Persons of Indian Origin) included those individuals who visited India for less than 182 days in a financial year. Finance Act 2020 reduced this period to 120 days for all NRIs.
RNOR Criteria Liberalized
Till and in FY 2019-20, an individual was treated as ‘Resident but Not Ordinarily Resident’ (RNOR) if any of the following conditions are satisfied:
(a) an individual who has been a non-resident in India in 9 out of 10 previous financial years preceding that year, or
(b) has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less.
The above 2 additional conditions have been retained as per the current law. Further, we have noted above that due to the amendment made, an individual whose taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual will still be treated as “Resident but Not Ordinarily Resident (RNOR)”.
In case of RNOR individuals, the foreign income (i.e., income accrued outside India) shall not be taxable in India. Foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Indian Citizens and Global Non-Resident -Deemed Residential Status Relaxed based on Indian income criteria & RNOR Widened
Types of NRI incomes that are Taxable
Your salary income is taxable when you receive your salary in India or someone does on your behalf. Therefore, if you are an NRI and you receive your salary directly to an Indian account it will be subject to Indian tax laws.
Income from salary received in India or income for services rendered in India shall be subject to Indian tax laws. Hence if an NRI receives a salary towards services rendered in India, the income shall become taxable irrespective of the place of receipt. The rate of tax will be as per the slab rate applicable in the particular financial year.
In case the Government of India remits any salary or income to a citizen of India towards services rendered outside India, it will still be considered as income accrued in India and will be chargeable to tax even if the status of the individual is ‘Non-resident’ as per residency rules.
House Property Income
Rental income from the house located in India is taxable for an NRI owner of the house property. The determination of the taxable house property income shall be in similar lines as the resident. The benefit of standard deduction of 30%, deduction of property tax paid, and interest on a home loan is also allowed to the NRI. Section 80C deduction for principal repayment, stamp duty and registration charges paid on the purchase can also be claimed. House property income will also be taxable at individual slab rates applicable.
Here it is to be noted that the person making rental payment to NRI is responsible for TDS deduction at 30% under section 195. Also, the tenant is required to fill the form 15CA and submit it online to the income tax department. Form 15CB from a chartered accountant is required on a conditional basis wherein details like the amount of payment, TDS rate, TDS deduction as per Section 195,rules of DTAA (Double Tax Avoidance Agreement) if any applicable are certified.
Income from Other Sources
Other sources income like interest received in saving account and fixed deposits held in Indian banks shall be taxable in the hands of NRI. Interest on NRE and FCNR account is not liable for tax in India. However, interest earned in the NRO account is fully taxable. NRO account is opened in the name of NRI to manage income earned in India.
Special Provision Related to Investment Income
When an NRI invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the NRI has during the financial year, and TDS has been deducted on that, then such an NRI is not required to file an income tax return.
Income from Business & Profession
Any income earned by a Non-resident Indian from a business set up or controlled in India will be considered income accrued and therefore taxable in India.
Capital gains Income
Capital assets like house property, shares and securities, gold etc. which are of Indian origin, shall be taxable in India. If an NRI transfers any capital asset situated in India, he shall be liable to pay capital gain tax; the rules are the same as a resident.
If NRI sells a house property having more than 2 years of holding period, then the buyer is responsible for deducting TDS at the rate of 20%, and if the holding period is less than 2 years, then the TDS deducted will be at 30%. However, NRI can claim capital gains exemption under Section 54 by investing in house property or under section 54EC by investing in capital gain bonds.
In the case of capital gains arising on the sale of listed Indian stock and securities, the taxation rules are also the same as for resident Indians. If the holding is more than 12 months, it will be considered long term capital gains taxable at 10% exceeding Rs 1 lakh gains; for a holding period of less than 12 months, 15 % tax will be payable. For debt mutual funds, the holding will be considered to be 36 months for treatment as long term capital gains and taxed at 20% after indexation whereas gains with less than 36 months of holding period will be taxed as short term capital gains at individual slab rate applicable.
NRIs cannot adjust their capital gains income from the basic exemption limit of Rs 2.5 lakhs, as can be done by the resident citizens for tax purposes.
Double Taxation Relief
In case NRI income is taxed in both the countries, India and the country of residence, tax relief from a DTAA (Double Tax Avoidance Agreement) between the two countries can be sought. Tax relief under DTAA can be claimed in two ways (i) Exemption method and (ii) Tax credit method. With the exemption method, NRI will be taxed in only one country and exempted in another. Whereas in the tax credit method, where the income is taxable in both countries, tax relief can be claimed in the land of current residence.
Income from Business and Profession
Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.