If you are a Non-Resident Indian, you should always be aware of when to pay taxes, how taxes are levied on your income that is earned in India, the deductions you get and how your income tax returns work.
When a person becomes a Non-Resident?
Section 2(30) of the Income Tax Act defines Non-Resident as anybody who is not a resident. Section 6 of the Act provides the test of residency for assesses as under:
- Individual assessee:
An individual becomes a non-resident in India if he is not a resident in the country. An individual becomes a resident in India if he fulfills the following conditions:
- If he is in India for 182 days or more during the year before; or
- If he is in India for 60 days or more during the year before and 365 days or more during 4 years immediately preceding the year before.
However the second condition is not taken into consideration in the following cases:
a) If an Indian citizen leaves the country in the previous year for getting employment outside India;
b) If an Indian citizen leaves the country during the previous year as a crew member of an Indian ship; or
c) If a person of Indian origin visits India during the year before.
It has been provided that a person is considered to be of Indian origin if his parents or grand-parents were born in undivided India.
From the Assessment Year 2015-16, in the case of an individual, the period of stay in India for the purpose of a voyage, shall be determined in the way and subject to such conditions as may be provided.
- Partnership firm:
A partnership firm is considered as Non-Resident Indian if the control and management of the firm are totally outside the territories of India.
An Indian company is a resident in the country. A foreign company is considered as a resident if, in the previous year, the control and management of its matters are totally in India. But if the control and management of the affairs of a company are wholly or partly outside India, such company is treated as non-resident.
From Assessment Year 2017-18, a company is treated as a resident in any previous year, if:
(i) The company is an Indian one;
(ii) Its place of control or management is in India.
For this purpose, the “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.
When income tax is levied upon NRIs?
Income tax is payable by all individual citizens of India. But residential status is a factor that determines if at all one is required to pay taxes or not.
What Incomes of a NRI are taxed in India? The earnings made abroad do not come under the scope of Indian Income Tax Act, as such NRIs are not be taxed in India for the same. Earnings of an individual while abroad are totally tax free as long as they maintain the non-resident status.
However if any income or capital gains arises in India, NRIs are liable to pay taxes for the same.
Taxable incomes for NRIs:
Taxable incomes for NRIs include the following heads:
- Salary – Income earned from salary of a NRI in India or any income that is received on behalf of a NRI in India is taxable.
- Property – Any capital gain that a NRI derives out of the sale or rent of a property which is based in India is taxed as per the normal Income Tax rules.
- Securities and Investments – Income or capital gains from investments whether long-term or short term of a NRI are liable to be taxed.
If you are an NRI having an income sourced in India, you have to file your income tax returns.
According to Income Tax Act, 1961 and Foreign Exchange Management Act, to pay taxes a NRI has to fulfill either of the following two conditions:
- His taxable income in India in a particular financial year is more than Rs. 2 lakh.
- He has earned a short-term or a long term capital gain from the sale of any investment or property, even if they are less than the exemption limit.
Tax exemptions for NRIs:
NRIs are taxed according to the rate and slabs provided for resident Indians below 60 years no matter whether the assessee is a senior citizen or not. All NRIs have to pay taxes to avail credit of TDS.
NRIs do not require filing returns in the following circumstances:
- If taxable income comprises of only income from an investment or long term capital gains.
- When the TDS has been deducted for such income.
When NRIs must file their returns?
NRIs must file their income tax returns when they:
- Want to claim a refund from the department; or
- They have a loss which they intend to carry forward.
Activities that do not constitute business connection in India:
Section 9A, inserted by the Finance Act, 2015, provides that in the case of an eligible investment fund, the activity of fund management that is done by an eligible fund manager working on behalf of such fund shall not be considered as a business connection in India of the said fund provided certain conditions are fulfilled.
Provisions in the Act for tax ability of Non-residents:
The following are the special provisions for tax advantages available to NRIs amongst others
Income that is not chargeable to tax –
- Section 10(4) (i): the section deals with the Interest on bonds or securities notified prior to 1.6.2002 by the Central Government including the premium on its redemption. It has been provided that the interest amount is exempted for NRIs.
- Section 10(4) (ii): the section deals with the Interest in a NRI account in India. It has been provided that the interest amount is exempted for a person resident outside India under the FEMA Act.
- Section 10(4B) (ii): the section deals with the Interest on specified savings certificates issued before 1.6.2002 by the Central Government. It has been provided that the interest amount is exempted for a person of Indian Origin if he is a non resident.
- Section 10(6)(ii): the section deals with the remuneration received by Foreign Diplomats . It has been provided that the remuneration amount is exempted from taxes for NRIs.
- Section 10(6)(viii): the section deals with the salary received for services rendered for an employment on a foreign ship. It has been provided that the salary amount is exempted for NRIs.
- Section 10(6 A): the section deals with the Tax paid by Government on royalty from a Government or Indian concern under agreement before 1.6.2002. It has been provided that the tax liability of foreign company is exempted for foreign companies.