Tax Planning for NRIs: Managing Global Income and Indian Assets

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. The persons of Indian origin or Indian citizens living outside India for a specific duration are known as NRIs. They are put through specific tax regulations based on the status of their residency in India. Here's a list of the important considerations for NRIs to manage their global income and Indian assets:

 

1. Understanding NRI Taxation in India

India has a system of taxation based on the individual's residential status, which can be categorized as:

• 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.

Tax Implications for NRIs:

• Global Income: NRIs are taxed only on income that is earned or accrued in India. This means that their foreign income (e.g., income from foreign salary, foreign business, etc.) is not taxable in India.
• Indian Income: NRIs are taxed on income earned in India, such as:
• Income from Indian properties (rent, capital gains from sale)
• Income from investments (interest, dividends)
• Income from Indian businesses or professional services
• Tax Rates: Income earned in India by NRIs is taxed at the same rates as for residents, but they are eligible for certain exemptions and deductions like Section 80C, Section 80D, etc.

 

2. Tax Treaties (Double Taxation Avoidance Agreement - DTAA)

India has signed Double Taxation Avoidance Agreements (DTAA) with many countries. These treaties prevent NRIs from being taxed on the same income in both India and their country of residence. Key aspects to consider:

• Tax Credit: The NRI can claim a credit for taxes paid in the foreign country against their Indian tax liability (under the provisions of DTAA).
• Exemption: Certain types of income may be exempt in one of the countries, according to the treaty.

To avoid being taxed twice, it's important to understand the functioning of tax treaties for your specific country of residence.

 

3. Managing Indian Assets

Many NRIs have ownership of property and other assets in India. These assets must be managed carefully to ensure compliance with Indian tax laws and to optimize tax liability.

Key Asset Types and Their Tax Implications:

• Property in India:
  • Rental Income: Rental income from properties in India is subject to tax as income from house property. NRIs can claim deductions for municipal taxes paid and standard deductions of 30% on rental income and be liable for TDS.
  • Interest Income: Interest earned on Fixed Deposits (FDs), savings accounts, and other investments in India is subject to TDS at 30% for NRIs. However, NRIs can:   
    • File for a tax refund if excess TDS is deducted.
    • Open NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) accounts, where the interest earned is tax-free in India.
  • Capital Gains: If the property is sold, capital gains tax is applicable. Short-term capital gains (STCG) are taxed at 30% (plus surcharge and cess) if the property is sold within 2 years of purchase. Long-term capital gains (LTCG) are taxed at 20% (with indexation benefit) if held for over 2 years.

• Fixed Deposits (FDs) and Bank Accounts:
  • Interest on FDs and savings accounts in India is subject to TDS (Tax Deducted at Source) at 30%. However, NRIs can claim a refund of excess TDS through filing returns.
  • NRIs may also qualify for tax exemption on interest under certain conditions like for NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) accounts.

4. Tax Saving Instruments for NRIs

NRIs can benefit from various investment options in India, many of which offer 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.

 

5. Repatriation of Funds

NRIs can repatriate funds from India to their foreign bank accounts. However, repatriation is subject to certain rules:

• NRE Accounts: Repatriation of funds from NRE accounts is unrestricted and tax-free.
• NRO Accounts: For funds in NRO accounts, repatriation is allowed up to USD 1 million per financial year, after payment of applicable taxes (like TDS).

 

6. Planning for Inheritance and Estate Tax

NRIs with assets in India must plan for succession and inheritance. India does not levy an estate tax, but:

• Inheritance of assets is subject to Indian laws of succession (Hindu Succession Act, Indian Succession Act, etc.).
• Property transfer through a will or without a will (intestate succession) may involve stamp duty and other charges, depending on the state laws.
• Foreign nationals (or NRIs) inheriting assets in India should consider the tax implications in their country of residence as well.

 

7. Filing of Tax Returns

NRIs must file their tax returns in India if they have taxable income in India. Filing tax returns ensures that:

• Excess tax deducted at source can be refunded.
• Any applicable exemptions or deductions can be claimed.
• NRIs can apply for tax refunds, if applicable.

 

8. Special Considerations

• 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.
• 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.