Tax planning for Non-Resident Indians (NRIs) involves navigating the complexities of both Indian tax laws and the tax laws of the country where the NRI resides. NRIs are individuals who are Indian citizens or persons of Indian origin, living outside India for a specified period, and they are subject to specific tax regulations based on their residency status in India. Here's a breakdown of the key considerations for NRIs when it comes to managing their global income and Indian assets:
Non-Resident Indians (NRIs) often face concerns about double taxation, where income earned in one country may be taxed both in the foreign country and in India. To reduce or avoid the problem of double taxation NRI’s takes benefit of various provisions under the international tax treaties and Indian tax laws. Here’s how NRIs can solve the problem of double taxation issues:
Residential Status
Understanding and maintaining the correct residential status is crucial for NRIs as tax liability in India is based on the residential status of Individuals. NRIs are generally not taxed on income earned outside India, but they may still be taxed on income earned within India.
- Resident: Individuals who stay in India for more than 182 days in a financial year (April–March).
- Non-Resident: Individuals who stay in India for less than 182 days during the financial year.
- Resident but Not Ordinarily Resident (RNOR): Individuals who qualify as residents but have not been in India for 9 out of the 10 previous years or for 730 days or more during the 7 preceding years.
Double Taxation Avoidance Agreements (DTAA)
1. As per
Sec.90 Agreement with Central Govt mat be entered into agreement with foreign counties or specified territory outside India:
A. For granting relief for doubly taxed income, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining relief provided in the said agreement for the indirect benefit to residents of any other country or territory).
B. Exchange of information with each other for prevention of tax evasion transactions, investigation of such cases and co-operation with each other for recovery of taxes.
C. As per Sec.90(4), NRI to whom DTAA applies shall not be entitled to claim any relief under DTAA unless Tax Residence Certificate (TRC) of his being resident in any foreign country is obtained by him from foreign govt.
2. India has signed Double Taxation Avoidance Agreements (DTAA) with several countries. These treaties provide mechanisms to avoid or reduce double taxation on the same income. Key provisions of DTAA include:
A. Bilateral Relief:
i. Exemption Method: Under this method, income earned in a foreign country is exempt from tax in India.
• The exemption method is available only for income that has been taxed in the source country. If the income is not subject to tax in the source country, the exemption may not apply.
• The exemption method may apply to specific categories of income like business profits, pensions, and income from real property.
• NRIs need to provide documentation, such as a Tax Residency Certificate (TRC), to prove their tax residency in the foreign country. This is required to claim the benefits under the DTAA.
ii. Tax Credit Method:If the income is taxed in both countries, India allows NRIs to claim a tax credit for the taxes paid abroad, reducing the amount of tax they need to pay in India.
• To claim the benefits under the DTAA and the tax credit, NRIs must provide a Tax Residency Certificate issued by the tax authorities of the foreign country, certifying their status as a resident in that country.
• NRIs must provide proof of taxes paid in the foreign country (such as tax returns or official documents from the foreign tax authority).
• The credit is only available for income that has been taxed in the source country. If the income was not taxed in the source country, the taxpayer cannot claim a credit.
B. Unilateral Relief: This method provides for double taxation relief unilaterally by a country to its residents for the taxes paid in the other country, even where there is no DTAA has been entered into with that country. India grants unilateral relief through credit method under section 91 to its residents for the taxes paid in the country, with which India has not signed DTAA.
C. Reduced Tax Rates: Some treaties provide reduced tax rates on income like dividends, royalties, and interest. NRIs can take advantage of these lower rates by providing the required documents (e.g., Tax Residency Certificate).
Foreign Tax Credit (FTC)
India allows NRIs to claim a Foreign Tax Credit (FTC) under Section 91 of the Income Tax Act, which is applicable when there is no DTAA between India and the foreign country. The credit allows NRIs to reduce their Indian tax liability by the amount of tax already paid in the foreign country, subject to certain limits.
Special Provisions for Certain Income Types
There are specific provisions for certain types of income that NRIs earn, which may be taxed differently to avoid double taxation:
1. Interest Income from NRE/NRO Accounts: Many DTAAs provide for a
reduced tax rate on interest income. The withholding tax on interest paid to NRIs is often reduced under the treaty. For example, India may have a 10% tax on interest paid to an NRI from India under some DTAAs, while the domestic rate might be higher.
2. Interest on NRE (Non-Resident External) accounts is exempt from tax in India under the Income Tax Act, while interest on NRO (Non-Resident Ordinary) accounts is subject to tax, but it may be reduced under the DTAA.
3. Dividends and Capital Gains: Most DTAAs provide
reduced tax rates on dividends, either by exempting them entirely from tax in the source country or by applying a lower tax rate than the standard domestic tax rate. For example, India has agreements with several countries (like the US, UK, etc.) where the withholding tax on dividends is reduced, often to 10-15%.
4. Short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG) are typically taxed in the source country where the property is located, but some treaties provide relief by allowing the tax to be limited or exempted in certain cases. For example, under the India-United States DTAA, the taxation of capital gains on the sale of shares may be reduced to 15% for NRIs.
5. In India, if an NRI receives dividends from an Indian company, the Indian government imposes a withholding tax (TDS), but under the DTAA, the rate may be reduced.
Investment in India
If NRIs invest in Indian assets such as stocks, mutual funds, or property, they need to be aware of how the income from such investments will be taxed:
1. Short-term/Long-term Capital Gains Tax: The tax treatment of capital gains in India depends on the holding period and the nature of the asset. NRIs can take advantage of tax treaties to minimize capital gains tax. Under the DTAA, capital gains on the sale of securities (stocks, mutual funds, etc.) may be taxed at
reduced rates. For example, under the
India-US DTAA, the tax rate on long-term capital gains from the sale of listed Indian securities can be
15%.
If capital gains are taxed in both the source country (India) and the country of residence of the investor, the investor may be eligible for tax relief in the form of a
tax credit in their home country, effectively reducing the total tax burden.
2. Rental Income: NRIs earning rental income from property in India are subject to tax in India, but they can deduct expenses like property taxes, maintenance, and depreciation.
3. Business profits are typically taxed in the country of residence of the investor, except when the business is carried out through a
permanent establishment (PE) in India. If the investor has a PE in India, business profits are taxed in India.
4. The DTAA often provides mechanisms to allocate profits between the countries in a manner that avoids double taxation.
5. Some DTAAs provide for exemptions or relief on
pensions and social security payments. For example, India may exempt pensions paid by the government to a foreign resident, or the tax may be limited to a reduced rate.
6. The tax rate on royalties and technical services fees can be reduced under the provisions of the applicable DTAA. For example, the
India-US DTAA provides a reduced tax rate of
10% on royalties and fees for technical services.
Tax Planning and Managing Indian Assets
1. NRIs can engage in tax planning by:
A. Utilizing exemptions available under the Indian Income Tax Act, such as Section 10 (Exempt Income), for income that is exempt from Indian tax.
B. Properly declaring all income and claiming deductions to reduce the overall tax liability. Many NRIs continue to own property and other assets in India. These assets must be managed carefully to ensure compliance with Indian tax laws and to optimize tax liability.
2. Tax Saving Instruments for NRIs
NRIs can take the advantage of various investment options in India. Many of the options provide tax exemptions or deductions under the Income Tax Act.
- Section 80C: Investments like Life Insurance Premiums, Public Provident Fund (PPF), National Savings Certificates (NSC), and 5-year Fixed Deposit with banks qualify for tax deductions under Section 80C.
- Section 80D: Premiums paid for Mediclaim (Health) Insurance for self and family can also be deducted.
- National Pension Scheme (NPS): NRIs can invest in NPS for long-term retirement planning, with tax benefits under Sections 80C and 80CCD.
- Tax-Free Bonds: Certain bonds such as those issued by government or public sector undertakings are exempt from tax on interest.
- Consider the tax implications on the sale of assets like property and shares. Reinvesting capital gains in a new property can help reduce tax liabilities under Section 54.
- Section 80E: Interest paid on loans taken for higher education in India is eligible for deduction.
Filing Tax Returns
1. NRIs must ensure they are compliant with tax regulations in both the home country and India. Filing tax returns in both countries may be required to claim any tax credits under DTAA, and to report any income that is taxable in India. Failure to file returns or declare foreign income can lead to penalties and tax issues.
2. Other Considerations
A. Foreign Income Disclosure: NRIs are not required to disclose foreign income or assets in India unless they have a specific income source in India or are earning above the exemption limit.
B. Foreign Assets and Income Reporting (Schedule FA): NRIs who have foreign assets and income are required to disclose them in the income tax return if they are filing returns in India.
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