Tax Residency and becoming an NRI: An Indian citizen becomes Non Resident Indian (NRI) by staying overseas for more than 182 days in a financial year. A person is ‘Resident’ even if he has been in India for more than 60 days in the year and 365 days during the 4 years prior to that year. Hence stay in India even more than 60 days needed to be avoided to get or retain NRI status.
There is a tax status between Resident and Non Resident called Resident but not Ordinary Resident (NROR). This typically applies to NRIs returning to India and person was NRI in 9 of the last 10 financial years OR Person lived in India for 2 years or less in last 7 financial years. The NROR gets non taxability of foreign income for upto 2 years after returning to India.
Income Taxable: While an NRI is spared tax on income from outside India, a Resident of India is required to pay tax on global earnings. Overseas Citizens of India (OCI) and Persons of Indian Origin (PIO) claiming NRI status in India will be required to report the number of days stayed in India in the relevant tax year and in the previous 4 tax years.
NRI will need to file Indian tax Returns if liable to pay tax and If Taxable income in India during a financial year exceeds the Basic exemption limit of 2.5 Lakh Rupees or if there is Short term Capital Gain (STCG) or Long term Capital Gain(LTCG) from sale of property in India or claiming tax refund for TDS or to carry forward and set off losses against gains. Due date to file taxes is normally 31st July of assessment year i.e. 4 months after the financial year-end.
Income Exempt: There are some income types, mainly investments, that are exempt from tax for NRI. These are specified within section 10 of the Income Tax act. Some exemptions are noted below:
- Interest on NRE account paid or credited to individual non-residents Indian who are permitted by RBI to maintain such account. Section 10(4)(ii)
- Interest, premium on redemption or any other payment on NRNR deposit and other securities, bonds, annuity certificates, savings certificates, notified under section 10(15)(i)
- Interest on ‘NRI Bonds 1988’ and ‘NRI Bonds (Second Series), issued by SBI purchased in foreign exchange, exemption continues even after person becomes resident. Section10(15)(iid)
- Interest paid by a scheduled bank on RBI approved foreign currency deposit, FCNR & RFC A/c to Non-resident or Not Ordinarily Resident is exempt. Section 10(15)(iv)(fa).
- Any income by way of dividend referred to in section 115-O received by non-resident is exempt under section 10(34).
Income with Special Tax Rate and Surcharge for NRI: For certain types of investments, there as special lower tax rates applicable under Sections 115 of the Income Tax Act. The NRI may choose these rates or a rates as per DATT, which is favorable to NRI.
Reporting Requirements in India for NRI : The new Income Tax forms in India requires NRI and US Citizens residing in India as OCI/ PIO to give more information for claiming tax relief under DTAA (double taxation avoidance agreement). This includes disclosures such as tax identification number of their home country, assets held outside India, and providing overseas tax residency certificates for credit. Any person who is a director or shareholder in an unlisted company will need to disclose this along with details and the permanent account number of the company.
Additional reporting requirements for Indian Residents (irrespective of citizenship) include a detailed breakup of salary including directorships held, unlisted securities, mode of donation payments and agricultural land details if farm income exceeds a specified limit. The Income Tax department is scrutinizing days stayed to determine if the tax payer has correctly reported tax residence status (resident, non-resident and not ordinary resident) based on days of stay in India. This, in turn, determines the scope of income subject to tax in India, i.e., India source income or worldwide income.
For details refer income tax website https://incometaxindia.gov.in/Pages/default.aspx
