Contact us at 011-29832120

Non-Resident Individual – Taxable Income in India

Non Resident Indians (NRIs) has played a significant role in the empowering of our nation either through foreign remittance, technology transfer, investment, development, etc. With the objective of promoting them,  the Government ensures to simplify and liberalize the taxation regime for NRIs and announces amendments each year during the Budget amendments for the benefit of the NRIs.

The article provides a detailed provisions for the income which are chargeable to taxation for NRIs and the amendments made in the Union Budget 2023.

Incomes which are charged to tax in India in case of NRI:

As per Income Tax Act, 1961, any income:

  • accrued or arised in India; or
  • deemed to be accrued or arised in India; or
  • received in India

Is taxable in hand of NRI in India.

Head wise Incomes liable to taxation in India in the hands of NRI:

  1. Income from Salary – If an NRI receives salary towards services rendered in India, that salary income will be taxable in the hands of Non-Resident irrespective of the place where salary is being received. Tax will be calculated as per the applicable slab rates. Where Government of India remits any salary to an Indian citizen for rendering services outside India, that income will be considered to be as accrued in India and will be chargeable to tax even if the status of individual, as per residency rules, is Non-resident.
  2. Income from House Property – Any income (such as rental income) from the NRI’s property situated in India is liable to be taxable in the hands of NRI. The benefit of standard deduction of 30%, deduction of property tax paid, and interest on a home loan is also allowed to the Non-Resident. Deduction u/s 80C for principal repayment, stamp duty and registration charges paid on the purchase can also be claimed. This income will also be taxable at applicable individual slab rates. However, tenant is required to deduct TDS @ 30% before making such payment. He is also required to file Form 15CA online to the income tax department and where total remittance exceeds Rs. 5 Lakhs in a financial year, tenant is also required to obtain certificate in Form 15CB from a Chartered Accountant before submitting Form 15CA online
  3. Income from Other Sources – Any interest received in savings account or fixed deposits held in Indian banks is taxable in the hands of Non-Resident. Similarly, interest earned in the Non-Resident Ordinary (NRO) account is also fully taxable. However, interest on Non-Resident External (NRE) account and Foreign Currency Non-Resident (FCNR) account is tax free under this act.
    • NRO account – to manage the NRI’s income earned in India
    • NRE account – to transfer NRI’s foreign earnings to India
    • FCNR account – Fixed Deposit account opened for depositing income earned overseas
  4. Income from Business & Profession – Any income earned by a Non-Resident from a business set up or controlled in India will be considered as income accrued and therefore taxable in India.
  5. Income from Capital Gains – Any capital gain arising from the transfer of capital assets situated in India, Non-Resident Indian is liable to pay tax on such capital gain in the same manner as resident.

Chapter XIIA – Special provisions relating to certain incomes of Non-Residents

  1. Special provision for computation of total income of NRI – Section 115D states that:-
    • No deduction in respect of any expenditure or allowance shall be allowed in computing the investment income* of NRI.
    • Where the gross total income consists only of investment income or income by way of long-term capital gains** or both, no deduction shall be allowed under Chapter VI-A.
    • Where the gross total income includes any income referred above, the gross total income shall be reduced by the amount of such income and the deductions under Chapter VI-A shall be allowed on that reduced income.
  2. Tax on investment income and long-term capital gains – Section 115E states that: Where total income includes

a) any income from investment or income from long-term capital gains of an asset other than a specified asset***;

b) income by way of long-term capital gains,

The tax payable by him shall be the aggregate of —

  1. the amount of income-tax calculated on the income referred to in clause (a) @ 20%;
  2. the amount of income-tax calculated on the income referred to in clause (b) @ 10%; and
  3. the amount of income-tax with which would have been chargeable after his total income been reduced by the amount of income referred to in clauses (a) and (b).

3. Capital gains on transfer of foreign exchange assets not to be charged in certain cases

Under Section 115F, an exemption can be availed on the profit when it is reinvested back in specified assets or in any savings certificates referred to in clause (4B) of section 10. The amount of capital gains would be proportionately exempt if the cost of the new asset is less than net consideration.

However, if the new asset purchased is transferred or sold within 3 years, then the profit exempted will be added to the income in the year of sale/transfer.

4. Section 115G of Income Tax Act 1961 states that NRI is not required to file income tax return u/s 139(1), if total income for the previous year consists only investment income or income by way of long-term capital gains or both and TDS has been deducted from such income.

Note – The NRI may choose to opt out of these special provisions, and in that case, the investment income and LTCG will be charged to tax under the regular provisions of this Act.

Definitions as per Sec 115C of Income Tax Act, 1961:

* Investment income means any income derived from a foreign exchange asset (any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange).

**   Long-term capital gain means income chargeable under the head “Capital gain” relating to a capital asset, being a foreign exchange asset, which is not a short-term capital asset.

***   Specified assets include:

  • Shares in an Indian company
  • Debentures issued by a public-listed Indian company (not private)
  • Deposits with banks and public companies
  • Any security of the Central Government
  • Other assets of the CG as specified for this purpose in the official gazette.

Deductions and Exemptions for NRI – Some of the deductions available to an NRI are:

  1. Deductions under Section 80C – Following deductions are allowed u/s 80C of Income Tax Act, 1961 to an NRI, subject to a maximum deduction upto Rs. 1.5 lakh
    • Life Insurance Premium Payment – Policy must be in the name of Non-Resident or their spouse or children (dependent/ independent, minor/ major, married/ unmarried) and premium must be less than 10% of the sum assured.
    • Children’s tuition fee paymentTuition fees paid to any Indian school, college, university or educational institution for full time education of any 2 children.
    • Principal repayments on loan to purchase house property – Deduction is allowed to repay the loan taken for buying or constructing residential house property as well as for stamp duty, registration fees and other expenses to transfer such property to the NRI.
    • Unit-Linked Insurance Plan – ULIP is sold with life insurance cover for deduction under Section 80C. It Includes contribution to the unit-linked insurance plan of LIC mutual fund.
    • Investments in Equity Linked Saving Scheme
  2. Deduction under section 80D – Deduction is available up to Rs 25,000 in the case for insurance of self, spouse, and dependent children and up to Rs 50,000 for senior citizens. Additionally, an NRI can also claim a deduction for parents’ insurance (father or mother or both) up to Rs 50,000 if their parents are senior citizens and Rs 25,000 if the parents are not senior citizens. Within the existing limits allowed, a deduction of up to Rs 5,000 for preventive health check-ups is also available.
  3. Deduction under section 80E – Deduction is available on interest paid on an education loan, taken for higher education for the NRI, NRI’s spouse, children, or a student for whom the NRI is a legal guardian, for a maximum of 8 years or till the interest is paid, whichever is earlier. There is no limit on the amount which can be claimed as a deduction under this section.
  4. Deduction under section 80G – NRIs are allowed to claim a deduction for donations for social causes under this section.
  5. Deduction under section 80TTA –Deduction upto a maximum of Rs 10,000 is available on income from interest on savings account with a bank, post office or cooperative society.

Amendments in Finance Bill, 2023 which affects taxability of NRI:

  1. Surcharge has been restricted to maximum of 25% for those who will opt New Tax regime u/s 115BAC w.e.f. A.Y. 24-25.
  2. Scope of Section 9 is proposed to be extended to Resident but Not Ordinarily Resident as well. Accordingly, any sum of money exceeding INR 50,000 received by either a ‘non-resident’ on or after 5th July, 2019 or ‘resident but not ordinarily resident in India’ on or after 01st April, 2023 from a person resident in India without any consideration shall be deemed to accrue or arise in India. This amendment is proposed to come w.e.f. 1st April, 2024 and will accordingly apply in relation to AY 2024-25 and thereafter
  3. Section 10(4E) exempt the income of non-residents on transfer of ODI. However, such ODI also results in generation of income in the form of interest, dividend, etc. in the hands of the ODI holders, earned by the IFSC Banking Unit from downstream investments. Such incomes in the nature of interest, dividend, etc. even though being taxed in the hands of IFSC Banking Unit were not exempt in the hands of the ODI holders. Section 10 (4E) is now being amended to exempt such income distributed to the holders of offshore derivative instruments. This amendment is proposed to come w.e.f. 1st April, 2024 and would apply in relation to AY 24-25 and thereafter.
  4. Section 196A provides for TDS @ 20% on payment of income (in respect of units of a Mutual Fund specified under Section 10(23D) or from the specified company referred to in the Explanation to Section 10(35)) to a non-resident (not being a company) or a foreign company.
  5. Now, it is proposed to add a proviso to Section 196A, stating that the tax deductible would be at 20% or the rate(s) provided in the agreements referred to in Section 90(1) or Section 90A(1) of the Income Tax Act, whichever is lower. This would be applicable to payees to whom such agreement applies and upon submission of a tax residency certificate. This proposed amendment would come into effect from 1st April, 2023.
  6. An amendment is proposed to Section 195(1) to include Section 194LBA within its scope as an eligible section for issuance of Nil/ Lower deduction certificate. Section 194LBA provides that a business trust shall deduct and deposit tax @ 5% on interest income of non-resident unit holders. This proposed amendment would come into effect from 1st April, 2023.

In case of any clarification or issues, feel free to contact us at connect@osganconsultants.com

Leave a Reply