World is a global village now. Do you need to be limited to territorial borders to make money? Absolutely not! Non residents or not, doesn’t matter. Go, travel, and earn wherever you feel best. But, just take care of tax implications thereon. You neglect it, and you can be engulfed with penalties and interests.
Which income is taxable?
If your status is ‘resident,’ your global income is taxable in India. If your status is ‘NRI,’ your income which is earned or accrued in India is taxable in India.
The following chart highlights the tax incidence in case of different persons:
|Nature of Income||Residential Status|
|Income which accrues or arises in India||Taxed||Taxed||Taxed|
|Income which is deemed to accrue or arise in India||Taxed||Taxed||Taxed|
|Income which is received in India||Taxed||Taxed||Taxed|
|Income which is deemed to be received in India||Taxed||Taxed||Taxed|
|Income accruing outside India from a business controlled from India or from a profession set up in India||Taxed||Taxed||Not Taxed|
|Income other than above (i.e., income which has no relation with India)||Taxed||Not Taxed||Not Taxed|
Incomes which are deemed to be received in India
Following incomes are treated as incomes deemed to be received in India:
- Interest credited to recognised provident fund account of an employee in excess of 9.5% per annum.
- Employer’s contribution to recognised provident fund in excess of 12%.
- Transferred balance in case of reorganisation of unrecognised provident fund.
- Contribution by the Central Government or other employer to the account of the employee in case of notified pension scheme referred to in section 80CCD.
Incomes which are deemed to accrue or arise in India
Following incomes are treated as incomes deemed to accrue or arise in India:
- Capital gain arising on transfer of property situated in India.
- Income from business connection (to be discussed in later part) in India (*).
- Income from salary in respect of services rendered in India.
- Salary received by an Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.
- Income from any property, asset or other source of income located in India.
- Dividend paid by an Indian company.
- Interest received from Government of India.
- Interest received from a resident is treated as income deemed to accrue or arise in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and is used for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.
- Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is earned in respect of funds borrowed by the nonresident for carrying on any business/profession in India.
- Royalty/fees for technical services received from Government of India.
- Royalty/fees for technical services received from resident is treated as income deemed to accrue or arise in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.
- Royalty/fees for technical services received from non-resident is treated as income deemed to accrue or arise in India if such royalty/fees is received for business/profession/other source of income carried on by the payer in India.
In case of Non Residents, being a person engaged in business of banking any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India.
Meaning of business connection
Business connection shall include following business activities carried out by a person acting on behalf of a non-resident:
- If such person has and habitually exercises authority in India to conclude contracts on behalf of the non-resident (it will not include cases where authority is limited to contract for purchase of goods or merchandise on behalf of such nonresident); or
- If such person has no authority to conclude contracts but he habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
- If such person habitually secures orders in India mainly or wholly for the nonresident or for other non-residents under the same management.
No business connection shall be deemed to have been established, if the business is carried on through an independent broker, general commission agent or other agent (i.e., a broker or commission agent who is not working mainly or wholly for such non-resident or other non-residents under same management), provided such person is working in his ordinary course of business.
Only so much of income which accrues or arises due to such business connection is deemed to be income accruing or arising from India and not the entire income of the nonresident.
Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on savings bank account are all examples of income earned or accrued in India.
These incomes are taxable for Non Residents. Income which is earned outside India is not taxable in India. Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO account is taxable for an NRI.
Am I Required to File My Income Tax Return in India?
NRI or not, any individual whose income earned or accrued in India exceeds Rs.2,50,000 (for FY ending 31st March 2017) is required to file an income tax return in India.
Non Residents must file their returns when they:
- Want to claim a refund
- Have a loss that they want to carry forward
Bhaarat lives and works in the Ireland. He checked her Form 26AS online and found out that a TDS entry of Rs 20,000 is mentioned. This TDS had been deducted at 30% on interest earned by him in his NRO account. Bhaarat has no other income in India.
Does Bhaarat have to pay any tax in India, and is he required to file an income tax return?
Whether your income will be taxed in India or not, depends upon your residential status.
First, let’s find out Bhaarat’s residential status. He is an Indian citizen and has gone to Ireland for his job – he will be a resident if he spends 182 days or more in India.
Bhaarat left India on 3rd July 2016 and came back to India on 15th March 2017. Therefore, in the financial year that begins on 1st April 2016 and ends on 31st March 2017, Bhaarat has spent less than 182 days in India. Since he is an Indian citizen on an employment abroad, to qualify as a resident he must spend 182 days or more in India. Therefore, Bhaarat is an NRI for the purpose of income tax in India.
For Bhaarat, only his income, which is earned or accrued in India, shall be taxable in India. His income in Ireland is not taxable in India since he is an NRI.
Interest earned in India is taxable for an NRI. (Do note that interest on NRO account is taxable whereas interest earned on NRE account is exempt from tax).
Bhaarat needs to add up all the income he has earned in India. The interest earned on the NRO account of Rs 70,000 is Bhaarat’s only income. For FY 2016-17, the minimum income which is exempt from tax is Rs 2,50,000. Bhaarat’s total income in India is less than the minimum exempt amount, and therefore he does not have to pay any tax on it. In fact, since no tax is payable by him, he must claim a refund of the TDS deducted on her interest income.
A refund can only be claimed by filing an income tax return for that financial year.
When is the Last Date to File Income Tax Return in India?
July 31st is the last date to file income tax return in India for NRIs.
Do NRIs Have to Pay Advance Tax?
If your tax liability exceeds Rs 10,000 in a financial year, you are required to pay advance tax. Interest under Section 234B and Section 234C is applicable when you don’t pay your advance tax.
Taxable Income of an NRI
Income from Salary
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. This income is taxed at the slab rate you belong to.
Income from salary will be considered to arise in India if your services are rendered in India. So even though you may be an NRI, but if your salary is paid towards services provided by you in India, it shall be taxed in India.
In case your employer is Government of India and you are the citizen of India, income from salary, if your service is rendered outside India is also taxed in India. Note that income of Diplomats, Ambassadors is exempt from tax.
Bhaarat was working in Indonesia on a project from an Indian company for a period of 3 years. Bhaarat needed the salary in India to take care of the needs of his family and make payments towards a housing loan. However, since salary received by Bhaarat in India would have been taxed as per Indian laws, Bhaarat decided to receive it in Indonesia.
Income from House Property
Income from a property which is situated in India is taxable for an NRI. The calculation of such income shall be in the same manner as for a resident. This property may be rented out or lying vacant.
An NRI is allowed to claim a standard deduction of 30%, deduct property taxes, and take benefit of an interest deduction if there is a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on the purchase of a property can also be claimed under Section 80C. Income from house property is taxed at slab rates as applicable.
Swadeshi owns a house property in Goa and has rented it out while she lives in Bangkok. She has set up the rent payments to be received directly in her bank account in Bangkok. Swadeshi’s income from this house which is in India shall be taxable in India.
Rental Payments to an NRI
A tenant who pays rent to an NRI owner must remember to deduct TDS at 30%. The income can be received to an account in India or the NRI’s account in the country he is currently residing.
Maria pays a monthly rent of Rs30,000 to her NRI landlord. She must deduct 30% TDS or Rs 9,000 before transferring the money to the landlord’s account. Maria must also get a Form 15CA prepared and submit it online to the Income Tax Department.
A person making a remittance (a payment) to a Non-Resident Indian has to submit Form 15CA. This form has to be submitted online. In some cases, a certificate from a chartered accountant in Form 15CB is required before uploading Form 15CA online. In Form 15CB, a CA certifies details of the payment, TDS rate, and TDS deduction as per Section 195 of the Income Tax Act, if any DTAA (Double Tax Avoidance Agreement) is applicable, and other details of nature and purpose of the remittance.
Form 15CB is not required when:
- Remittance does not exceed Rs 50,000 (single transaction) and Rs 2,50,000 (in total in a financial year). Only Form 15CA has to be submitted in this case.
- If lower TDS has to be deducted and a certificate is received under Section 197 for it or lower TDS has to be deducted by order of the AO.
- Neither is required if the transaction falls under Rule 37BB of the Income Tax Act, where it lists 28 items. Check out the entire list here.
In all other cases, if there is a remittance outside India, the person who is making the remittance will take a CA’s certificate in Form 15CB and after receiving the certificate submit Form 15CA to the government online.
Income from Other Sources
Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable in India. Interest on NRE and FCNR account is tax-free. Interest on NRO account is fully taxable.
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.
Income from Capital Gains
Any capital gain on transfer of capital asset which is situated in India shall be taxable in India. Capital gains on investments in India in shares, securities shall also be taxable in India.
If you sell a house property and have a long-term capital gain, the buyer shall deduct TDS at 20%. However, you are allowed to claim capital gains exemption by investing in a house property as per Section 54 or investing in capital gain bonds as per Section 54EC.
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.
What are the Investments that Qualify for Special Treatment?
Income derived from the following Indian assets acquired in foreign currency:
- Shares in a public or private Indian company
- Debentures issued by a publicly-listed Indian company (not private)
- Deposits with banks and public companies
- Any security of the central government
- Other assets of the central government as specified for this purpose in the official gazette.
No deduction under Section 80 is allowed while calculating investment income.
Special Provision Related to Long-Term Capital Gains
For long-term capital gains made from the sale of transfer of these foreign assets, there is no benefit of indexation and no deductions allowed under Section 80. But you can avail an exemption on the profit under Section 115 F when the profit is reinvested back into:
- Shares in an Indian company
- Debentures of an Indian public company
- Deposits with banks and Indian public companies
- Central Government securities
- NSC VI and VII issues
In this case, capital gains are exempt proportionately if the cost of the new asset is less than net consideration. Remember, if the new asset purchased is transferred or sold back within 3 years, then the profit exempted will be added to the income in the year of sale/transfer.
The benefits above may be available to Non Residents even when he/she becomes a resident – until such an asset is converted to money, and upon submission of a declaration for the application of the special provisions to the assessing officer by the NRI.
The NRI may choose to opt out of these special provisions and in that case the income (investment income and LTCG) will be charged to tax under the usual provisions of the Income Tax Act.
How are You Taxed When You are a…
Resident Individual on a Temporary Foreign Assignment
Rahul worked out of Singapore on a temporary assignment for 4 months and earned in Singaporean Dollars during that time. He got this income credited to a bank account here in India. He has returned back home now. How should he file his income tax return?
Rahul’s taxes for this year will depend on his residential status. Since Rahul has not been outside of India for more than 182 days, he will be considered a resident.
He will be required to file his income taxes in India this year. This will also include his salary earned during the foreign assignment in Singapore.
If the assignment extends to more than 182 days, Rahul’s residential status will change and he will be required to pay taxes only on the Indian income earned thus far. Here, note that Rahul’s foreign income credited to an Indian bank account is taxable in India.
Resident Individual recently moved abroad
Prashant moves to the US on a new assignment. He gets his US income credited to an NRE account in India. He continues with his FD investments and has some money put away in a savings account in India. He just received Form 16 from his Indian employer. Should he file his returns this year in India?
NRI or not, every individual must file a tax return if their income exceeds Rs 2,50,000. But note that NRIs are only taxed for income earned/collected in India. So, Rahul will pay taxes on income earned while in India, and income accrued from FDs and savings account.
|Prashant’s income from India|
|Income from Indian employer||Rs 3,00,000|
|Interest income from FDs||Rs 25,000|
|Bank account savings interest||Rs 4,500|
|Gross total income||Rs 3,29,500|
|Section 80C – PPF investments||Rs 20,000|
|Section 80TTA exemption||Rs 4,500|
|Taxable income||Rs 3,05,000|
|Tax slab at 10%||Rs 5,500|
|Cess at 3%||Rs 165|
|TDS deducted by employer||Rs 4,000|
|TDS deducted by bank||Rs 4,500|
|Tax Refund||Rs 2835|
Living in a Foreign Country
It’s been 3 years since Arjun moved to the US. He is paid in US dollars. He has his money invested in a savings account and FDs in India. He has bought an apartment and gave it on rent for Rs.35,000 per month. He gifts his parents a car and transfers Rs.10,000 every month to their account to help with their household expenses during the year. He also transfers Rs 20,000 in his father’s account to meet the cost of the insurance policy he has purchased for his parents. 1
|Rental Income||Rs 4,20,000|
|Less: Standard 30% deduction under Section 24||Rs 1,26,000|
|Income from house property||Rs 2,94,000|
|Income from FDs and bank account||Rs 30,000|
|Gross total income||Rs 3,24,000|
|Deduction under Section 80D||Rs 20,000|
|Taxable income||Rs 3,04,000|
1 Arjun’s gift to his father and money transfer of Rs 10,000 to his mother are exempt from tax. Regarding the insurance expenses on his parents, Rahul can claim a deduction under Section 80D of Rs 20,000, since his father is over 65 years of age.
He will be required to file a ax return in India as his gross income exceeds Rs 2,50,000.
NRI Recently Moved Back to India
Returning Non Residents assume RNOR status when:
- You have been an NRI in 9 of the 10 financial years preceding the year of your return
- You have lived in India for 2 years or less (729 days or less) in the last 7 financial years
The IT Department allows RNORs to continue to enjoy exemptions available to NRIs for a period of 2 years after their return. Therefore, deposits held in foreign currency, which are exempt for an NRI, shall be exempt to returning NRIs for 2 years.
After these 2 years, returning Non Residents are treated as resident individuals.
Resident with Global Income
If you are a resident Indian, your global income is taxable in India. This income may have been earned or received outside – but it shall be taxed in India. In case this income is also taxable in another country, you can take benefit of DTAA (Double Tax Avoidance Agreement).
Shreya returned to India in 2010 after living in London for more than 5 years. The French company she worked for has retained her as a consultant and sends her fees in pounds. Her salary is credited to a bank account there, and Shreya pays tax on it in the UK.
Does Shreya Have to Pay Tax on this Income or Include it in Her Income Tax Return in India?
Shreya is a resident in India. Taxability of income in India depends upon residential status. A resident has to pay tax on their global income. The resident must disclose all the income earned by them from all sources and all countries in their income tax return and pay tax on it in India. (An NRI pays tax only on income earned or accrued in India).
Therefore, all of Shreya’s income, including the fee that she earns in foreign currency will be taxable in India.
Her income in pounds shall be converted to Indian rupees for the purpose of income tax calculation and added to her total income, which will be taxed at slab rates prescribed by the tax department.
If Shreya has already paid tax on the foreign income in the UK, she can claim the benefit under DTAA. Based on the relevant provisions of the DTAA between the two countries, Shreya will be saved from getting taxed twice.
If you are a resident and have earned any income from abroad, remember to disclose it in your income tax return.
Income Tax Filing for Foreign Nationals
An expatriate in India is someone who comes to live in India but is not a citizen of India.
How can NRIs Avoid Double Taxation?
NRIs can avoid double taxation (meaning: getting taxed on the same income twice in the country of residence and India) by seeking relief from DTAA between the two countries.
Under DTAA, there are two methods to claim tax relief – exemption method and tax credit method.
By exemption method, NRIs are taxed in only one country and exempted in another. In tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.