NRIs have to pay tax in India on capital gains from shares, mutual funds, term deposits, and property rentals even if their income earned abroad is not taxable.
Taxation is a crucial element of the Indian economy. Services and products availed by Indian citizens are taxed in various ways. Consumption taxes are meant to make products and services more attractive to consumers. Tax deducted at source, income tax, service tax, and property tax are some of the common forms of taxation that most Indians are familiar with. Taxation in India affects people who are not residents of India, but are of Indian origin, so we have to ask how it impacts non-resident Indians.
Non-resident Indians must also pay appropriate taxes when they fall under the Income Tax Act of 1961. This category covers how NRI taxes should be handled and what they are. The taxation of NRIs encompasses aspects such as income taxes, wealth taxes, and property taxes. Read more to know about nri taxation in india.
Income Tax for NRIs:
NRIs should understand clearly how they become liable to pay tax in India. As defined by the FEMA (Foreign Exchange Management Act), a citizen of Indian origin can only be considered an NRI if he or she has spent a specified number of days abroad and maintained a relative absence from the country.
India does not tax the income earned by an NRI abroad by default. In contrast, if NRIs earn income in India through investments in shares, mutual funds, rental properties, and term deposits that exceed the basic exemption limit, they would have to file a tax return.
Because TDS is levied at the highest rate on capital gains earned from term deposits, shares, and mutual funds, NRI income from India is taxed at the highest rate. In most cases, no tax returns are required. On the other hand, TDS can sometimes exceed the NRI’s basic tax liability. The only way to claim a tax refund is to file tax returns.
Taxation Rules for NRIs:
There is a significant difference between the taxation rules in India for NRIs and the rules for resident Indians. The following are some important points to note:
- There are no gender, age, or other specifics involved in the income tax slabs for NRIs
- NRIs are charged TDS regardless of any threshold value for their incomes
- Except in certain circumstances, no nominal deductions are allowed on investment income
- In general, NRIs do not need to file their taxes if their income falls under Section 115G.
NRIs are covered under the following sections of the Income Tax Act:
Computation of Tax (Section 115D) –
Investment income of an NRI is not deducted
If the assessee is an NRI
A deduction is not allowed on gross total income (including investment income and long-term capital gains).
Investment and long-term capital gains income will be reduced, and the remaining amount might be eligible for deductions under Chapter VI-A if it only accounts for a portion of the gross total income.
Income tax on investment and long-term capital gains (Section 115E) -If the total income of an NRI includes
Any investment income or long-term capital gains derived from any asset other than shares in an Indian company, debentures issued by or deposits with a non-private Indian company, or any security of the Central Government or assets specified by the Central Government.
In the case of capital gains earned over a long period of time, the NRI will have to pay tax on the aggregate of the following –
In 2(a), the investment income portion is taxed at a rate of 20%
Income tax calculated at the rate of 10% on the long-term capital gains income portion as mentioned in 2(b)
If clauses 2(a) and (b) had been reduced from the total income, income tax would have been charged
In certain cases, foreign exchange assets are not liable to capital gains taxes (Section 115F) – This entails the exceptions where foreign exchange assets will not be taxed when transferred
In cases where an NRI has invested part or all of the capital gains resulting from the transfer of a foreign exchange asset into assets specified by the Central Government within 6 months and the cost of acquiring the new asset is equal to its value, such capital gains are not taxable.
The capital gain not charged from the transfer of an asset will be a chargeable income if the asset is transferred or converted into money within 3 years of acquisition
Non-filing of returns of income in specific cases (Section 115G) –
During the previous year, only capital gains and/or investment income contributed to total income
TDS has been deducted from the above mentioned income
Taxation benefits of NRIs who become residents (Section 115H) – This relates to the requirement to declare a return of income from investments in foreign exchange assets if an individual is an NRI in the previous year and becomes a resident in the following year, which changes how he is assessed under tax laws. Tax provisions will remain in effect until the asset has been converted into money
Non-application of provisions for NRI taxation (Section 115I) – This is an exclusion rule that allows an NRI to choose whether or not to consider their income as investment income or capital gains. In the absence of such a choice, all income derived from sources in India is taxable
In addition, the above rules are subject to change at the discretion and direction of the Central Government and the Income Tax Department of India.