Tax on an individual’s income depends on its source and the residential status in India. The residential status of an Indian citizen needs to be determined individually for every financial year which may vary from year to year.
As per the residency rules laid down in the Income Tax Act, if an individual is determined to be a ‘Non-resident’, then they are liable to pay tax only on the income earned or accrued in India. In short, if any income received has a direct or indirect source of origination from India, then the income will be considered as accrued in India.
Till FY 2019-20, NRIs would include individuals of Indian origin who have visited India for less than 182 days in a particular financial year. However in Budget 2020, the residency period was reduced to 120 days for the NRIs whose Indian income is more than Rs 15 lakhs.
Finance Bill 2020 introduced an amendment stating that a person of Indian origin will be ‘deemed to be a resident in India’ if his income from Indian sources is more than Rs 15 lakhs, and his other income is not liable to tax in any other country. The residency period of such individuals has been reduced to 120 days.
The individuals qualifying as ‘deemed residents’ due to the reason that they are not liable to tax in any other country will be considered as ‘ Residents but Not Ordinary Residents’ if their stay in India is more than 120 days but less than 182 days. In case of RNOR, only Indian sourced income is subject to tax. Indian sourced income also includes income derived from any business /profession controlled or set up in India.
The individuals who were taking the benefit previously, shall find themselves coming within the purview of these new provisions. Hence its is important for an Indian citizen to evaluate the residential status beforehand to assess the tax liability.
Here are the incomes that are liable to tax in India…
Salary Income: Income from salary received in India or income for services rendered in India shall be subject to Indian tax laws. Hence if an NRI receives a salary towards services rendered in India, the income shall become taxable irrespective of the place of receipt. The rate of tax will be as per the slab rate applicable in the particular financial year.
In case the Government of India remits any salary or income to a citizen of India towards services rendered outside India, it will still be considered as income accrued in India and will be chargeable to tax even if the status of the individual is ‘Non-resident’ as per residency rules.
House property income: Rental income from the house located in India is taxable for an NRI owner of the house property. The determination of the taxable house property income shall be in similar lines as the resident. The benefit of standard deduction of 30%, deduction of property tax paid, and interest on a home loan is also allowed to the NRI. Section 80C deduction for principal repayment, stamp duty and registration charges paid on the purchase can also be claimed. House property income will also be taxable at individual slab rates applicable.
Here it is to be noted that the person making rental payment to NRI is responsible for TDS deduction at 30% under section 195. Also, the tenant is required to fill the form 15CA and submit it online to the income tax department. Form 15CB from a chartered accountant is required on a conditional basis wherein details like the amount of payment, TDS rate, TDS deduction as per Section 195,rules of DTAA (Double Tax Avoidance Agreement) if any applicable are certified.
Income from Other Sources: Other sources income like interest received in saving account and fixed deposits held in Indian banks shall be taxable in the hands of NRI. Interest on NRE and FCNR account is not liable for tax in India. However, interest earned in the NRO account is fully taxable. NRO account is opened in the name of NRI to manage income earned in India.
Income from business & profession: Any income earned by a Non-resident Indian from a business set up or controlled in India will be considered income accrued and therefore taxable in India.
Capital gains income: Capital assets like house property, shares and securities, gold etc. which are of Indian origin, shall be taxable in India. If an NRI transfers any capital asset situated in India, he shall be liable to pay capital gain tax; the rules are the same as a resident.
If NRI sells a house property having more than 2 years of holding period, then the buyer is responsible for deducting TDS at the rate of 20%, and if the holding period is less than 2 years, then the TDS deducted will be at 30%. However, NRI can claim capital gains exemption under Section 54 by investing in house property or under section 54EC by investing in capital gain bonds.
In the case of capital gains arising on the sale of listed Indian stock and securities, the taxation rules are also the same as for resident Indians. If the holding is more than 12 months, it will be considered long term capital gains taxable at 10% exceeding Rs 1 lakh gains; for a holding period of less than 12 months, 15 % tax will be payable. For debt mutual funds, the holding will be considered to be 36 months for treatment as long term capital gains and taxed at 20% after indexation whereas gains with less than 36 months of holding period will be taxed as short term capital gains at individual slab rate applicable.
NRIs cannot adjust their capital gains income from the basic exemption limit of Rs 2.5 lakhs, as can be done by the resident citizens for tax purposes.
Double taxation relief: In case NRI income is taxed in both the countries, India and the country of residence, tax relief from a DTAA (Double Tax Avoidance Agreement) between the two countries can be sought. Tax relief under DTAA can be claimed in two ways (i) Exemption method and (ii) Tax credit method. With the exemption method, NRI will be taxed in only one country and exempted in another. Whereas in the tax credit method, where the income is taxable in both countries, tax relief can be claimed in the land of current residence.