Tax Guidelines for Foreign Nationals & NRIs in India

The Indian Taxation System levies income tax based on the residence rule, which means that as per the Income Tax Act of 1961, the tax levied depends on an individual’s residential status. Different provisions are applicable depending upon whether any individual or company is resident or non-resident as per the Income Tax Act, 1961.

Difference Between NRI and Foreign Nationals

Non-Resident Indians (NRIs) are individuals who are citizens of foreign countries but were once citizens of India or a person of Indian origin (PIO), who is not a resident of India and may or may not have any source of income in India. Thus, the need for such individuals to file income tax returns depends on various factors such as their period of stay in India, nature of income earned, etc.

Foreign nationals are citizens of foreign countries who do not have any family or business connection in India and may or may not have any source of income in India, thus, the need for them to file income tax returns depends on numerous aspects like their period of stay in India, nature of income earned, etc.
Requirements for Foreign Nationals (FIIs/NRIs/ PIOs) to Invest in India

Foreign nationals such as FIIs/NRIs/PIOs who wish to invest in India must fulfill certain requirements and comply with the regulatory guidelines prescribed by the government. A few key requirements for foreign nationals to invest in India are mentioned below.

Compliance with Foreign Exchange Management Act (FEMA)

FEMA is the regulatory body that presides over all the foreign investments in India. Foreign investors must adhere to FEMA guidelines and get the required approvals and permissions from the Reserve Bank of India (RBI) and other governing bodies before investing in India.

• FIIs, NRIs, and PIOs are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). As per this scheme, foreign institutional investors (FIIs)/NRIs can acquire shares/debentures of Indian companies through the Indian stock exchanges.
• The maximum limit for overall investments is 24% for FIIs and 10% for NRIs/PIOs of the paid-up capital of the Indian company. The limit of 10% is raised to 20% of the paid-up capital in the case of public sector banks, including the State Bank of India (SBI). The maximum limit of 10% for NRIs/PIOs can be raised to 24% by passing a resolution for it, which must be approved by the general body of the company.
• The equity shares and convertible debentures of the companies within the specified limits are available for purchase under PIS subject to:
  • Total purchase of all NRIs/PIOs, both on repatriation and non-repatriation basis, within an overall maximum limit of 24% of the company’s total paid-up equity capital and 24% of the total paid-up value of each series of convertible debenture.
  • Investment made on a repatriation basis by any single NRI/PIO in equity shares and convertible debentures not exceeding 5% of the paid-up equity capital of the company or 5% of the total paid-up value of each series of convertible debentures issued by the company.

Monitoring of Foreign Investments by Reserve Bank of India

The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceiling limits mentioned above. The cut-off point, for instance, is fixed at 8 percent for companies in which NRIs/ PIOs can invest up to 10 percent of the company's paid-up capital. The cut-off limit for companies with a 24 percent ceiling is 22 percent.

Open a Bank Account in India

Foreign investors must open a bank account in India to start investing in India. This account must be registered with the RBI and used for all the transactions related to the investments.

Requirement of PAN in India for Foreign Investors

CBDT relaxes the PAN requirement for foreign investors at GIFT IFSC by a Circular dated 10.10.2023. The CBDT has said that PAN will no longer be required for non-resident individuals and foreign companies opening bank accounts in GIFT IFSC and not having any other taxable income in India. These entities will no longer be required to quote PAN and can instead provide Form 60 [Form for the declaration to be filed who does not have a permanent account number] to the banks for their transactions. This will also take away the spectre of income tax notices that could come from acquiring a PAN.

The move will benefit overseas firms wanting to set up treasury management operations, global institutional investors as well as non-residents who want to set up family investment funds or other structures at GIFT IFSC.

Residential Status for Income Tax Purposes

The taxability of an individual in India depends upon his residential status in India, which is completely independent of  for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. As per Section 6 of The Income Tax Act, 1961, there are three categories of taxable persons – Resident, Resident Not Ordinarily Resident (RNOR), and Non-resident (NR).
Resident

An individual is deemed to be a resident if it fulfills either of the two below-mentioned conditions.

• An individual may be treated as a resident for tax purposes in India if their period of stay in India is more than 182 days in a certain financial year.
• When the period of stay in India is less than 182 days but more than 60 days and the cumulative stay in the immediately preceding four years is more than 365 days, then the individual shall be treated as a resident for tax purposes in India.

Exceptions to Residential Status:

• If the individual is a citizen of India, who leaves the country in any financial year as a crew member of an Indian ship or for employment purposes outside India will qualify as a resident of India only if the period of stay in India for 182 days or more and the cumulative stay in four years preceding the financial year in question is more than 365 days.
• If an individual is a citizen of India or a PIO, who, being outside India, comes on a visit to India in any year and if the period of stay in India for 182 days* or more and the cumulative stay in the four years preceding the financial year in question is more than 365 days.

* If the individual has income from Indian sources exceeding INR 15 lakhs, instead of 182 days, the period shall be 120 days.

• If an individual is a citizen of India and has income from Indian sources of more than INR 15 lakhs and is not liable to pay tax in any other country, they shall be deemed to be a resident under the tax laws.

Resident Not Ordinarily Resident (RNOR)

If an individual qualifies as a resident, the next step is to determine whether they are a Resident Ordinarily Resident (ROR) or Not Ordinarily Resident (NOR). They shall be an ROR if they meet both of the following conditions:

• Has been resident in India for at least 2 of the 10 immediately preceding years.
• Has stayed in India for at least 730 days in 7 immediately preceding years.
• If any individual fails to satisfy either of the above-mentioned conditions, they shall be deemed as a Resident Not Ordinarily Resident (RNOR).

Non-Resident (NR)

An individual is a non-resident in India in any financial year if they do not fulfill any of the above-mentioned conditions mandatory for a resident but not ordinarily resident. Thus, an individual must know the residential status as per the Income Tax Act, of 1961 before calculating their tax liability.

Taxability

Resident: A resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned outside India.

NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need not pay any tax in India on their foreign income. Also note that in a case of double taxation of income where the same income is getting taxed in India as well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India would have entered into with the other country to eliminate the possibility of paying taxes twice.

Tax Rates for NRIs and Foreign Nationals

Unlike residents for whose tax rates are classified on the basis of age, no such classification is available for Non-Residents. Hence, for Non-Residents, all are taxed uniformly.

The tax slab rates for Non-resident NRIs and foreign nationals are:

Old Tax Regime

New Tax Regime u/s 115BAC

Income Tax Slab	Income Tax Rate	Income Tax Slab	Income Tax Rate
Up to INR 2,50,000	Nil	Up to INR 2,50,000	Nil
INR 2,50,001 - INR 5,00,000	5% above INR 2,50,000	INR 2,50,001 - INR 5,00,000	5% above INR 2,50,000
INR 5,00,001 - INR 10,00,000	INR 12,500 + 20% above INR 5,00,000	INR 5,00,001 - INR 7,50,000	INR 12,500 + 10% above INR 5,00,000
Above INR 10,00,000	INR 1,12,500 + 30% above INR 10,00,000	INR 7,50,001 - INR 10,00,000	INR 37,500 + 15% above INR 7,50,000
		INR 10,00,001 - INR 12,50,000	INR 75,000 + 20% above INR 10,00,000
		INR 12,50,001 - INR 15,00,000	INR 1,25,000 + 25% above INR 12,50,000
		Above INR 15,00,000	INR 1,87,500 + 30% above INR 15,00,000

Surcharge: If the total taxable income is more than a certain amount, a surcharge shall be levied on all foreign individuals. The surcharge is charged on basic tax calculated as per the tax slabs. Rates of the surcharge are as follows:

• 10% if taxable income exceeds INR 50 lakhs.
• 15% if taxable income exceeds INR 1 crore.
• 25% if taxable income exceeds INR 2 crore.
• 37% if taxable income exceeds INR 5 crore.

A cess of 4% is chargeable on the tax calculated as per the above calculations.

Should NRIs & Foreign Nationals File Income Tax Returns in India?

Once the individual is clear about their residential status as per the above-mentioned structure, NRIs and foreign nationals should file their income tax return in India if they have any earned income or income that accrues in India.

What does the term ‘Earned’ in India mean?

Any income received in India or the law deems it to be received in India by you or on your behalf or Any income that accrues or arises in India or income that the law believes accrues or arises in India.

What does ‘Accrues in India’ mean?

This is laid out in Section 9 of the Income Tax Act (note that this applies to everyone while considering the income that accrues or arises to them irrespective of what their residential status is).

The law considers these incomes to have accrued in India:

• Income from a business connection in India.
• Income from any property, asset, or source of income in India.
• Capital gain on the transfer of a capital asset situated in India.
• Income from salary if the services are rendered in India.
• Income from salary which is payable to you by the Government of India for services rendered outside of India when you are an Indian citizen.
• Dividend paid by an Indian company even though this may have been paid outside India.
• Interest, royalty, or technical fees received from the Central or the State Government or specified persons in certain circumstances.

Further, we have listed a few income heads along exceptions for your reference below:

Income under Head Salary

If an individual earns a salary from any Indian entity and has a total income of more than INR 2,50,000, it is compulsory to file an ITR under Section 139 (1) of The Income Tax Act, 1961.

Income under House Property

If an NRI earns income from a property that is situated in India, it is taxable in India. The calculation of such income shall be in the same manner as applicable to a resident. This property may be rented out or lying vacant.

An NRI can claim a standard deduction of 30%, deduct property taxes, and benefit from an interest deduction from a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on purchasing a property can also be claimed under Section 80C.

A tenant who pays rent to an NRI owner has to deduct TDS at 30% while paying rent. The income can be received in an account in India or the NRI’s account in the country they are currently residing in.

Income under Other Sources

If an NRI earns Interest income from fixed deposits and savings accounts held in Indian bank accounts, it is taxable in India.

Interest on NRE and FCNR accounts is tax-free. Interest on NRO accounts is fully taxable. If the taxable income is more than INR 2,50,000, they shall be liable to furnish ITR under Section 139 (1).

Exceptions:

1.    Dividend under Section 115A: If the total income of any NRI comprises only dividend income or dividend income along with the income mentioned in (2) & (3) below and the tax-deductible at source (TDS) has been deducted from such income, it shall not be mandatory for them to file an ITR.

2.    Interest Income (under Section 115A): If the total income of any NRI comprises only income from investments or interest along with the income mentioned in (1) & (3) and TDS has been deducted from such income, it shall not be mandatory for them to file an ITR.

3.    Royalty or Fees for Technical Services (under Section 115A): If the total income of any NRI comprises only royalty or fees for technical services or royalty along with the income stated in (1) & (2) above and TDS has been deducted from such income, it shall not be mandatory for them to file an ITR.

4.    Investment Income (under Section 115E): If the total income of any NRI comprises only income from investments or income by way of long-term capital gains or both, and TDS has been deducted from such income, it shall not be necessary for them to file an ITR.

Advance Tax

If the tax liability of NRIs exceeds INR 10,000 in a financial year, they are required to make advance tax payments. Failure to do so will result in the application of interest under Section 234B and Section 234C.
Due Date to File ITR for NRIs

As per Section 139, NRIs must file ITRs on or before 31st July of the year following the financial period ending in the month of March.

For example, if an NRI has earned any investment returns on 31st October 2023, they must file the ITR on or before 31st July 2024.

ITR Filing Procedure

• First, NRIs need to obtain a valid Permanent Account Number (PAN) by applying Form-49A.
• After receiving a valid PAN, they must register themselves on the e-filing portal using the link https://eportal.incometax.gov.in/iec/foservices/#/pre-login/register
• Considering ITRs can be readied online on the portal itself, you need to log in and go to the ITR tab under the tab ‘e-File’.
• Once you have filled in all the details of income and deductions, ITR must be submitted on the income tax e-portal itself.
• Finally, after filing, it must be verified. You may verify the ITR through e-verify, where an OTP shall be received on the mobile number linked with the Aadhar or with the bank account, or you can verify the same through digital signatures or Speed Post, where you need to download and acknowledge in the ‘Form-ITR V’, sign it and send it to the Central Processing Unit (CPC) of the income tax department within 30 days of the filing of return online.

Conclusion

NRIs and foreign nationals must familiarize themselves with the rules and regulations associated with Income Tax and Financial Investments in India if they plan to earn money in this Indian economy. The government has prescribed a range of guidelines for foreign nationals and NRIs that have some form of income in India, making it imperative to adhere to them.

Failing to comply may lead to severe consequences and result in significant fines that might be tedious to deal with.

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