A resident Indian as well as a non-resident Indian (NRI), whose annual income exceeds 2.5 lakh must file an income tax return in India under section 139(1) of Income Tax Act 1961. To understand how much tax is payable by the person in India, identification of residential status is important. It is critical to check the residential status every financial year and the definition of residential status might differ as per the provisions of the RBI and Income Tax Act. The income Tax liability is defined by the residential status.
Income earned by an NRI in India is taxable in India while the income earned outside India is not taxable. The income earned in India includes any income earned or deemed to be earned in India as per the laws of the country by an NRI or on his behalf, any income that is accrued or arose inside the territory of India in the eyes of law.
This includes income from a business or business connection in India, income earned from any property or asset, capital gain on the transfer of any capital asset based in India, income in the form of salary from the services rendered in India, salary paid by the government of India for the services rendered outside India only if presently the person is an Indian citizen, dividend received from an Indian company and interests earned from any investments in India.
An NRI can get taxed on the capital gains earned by selling shares that are listed on a stock exchange in India. He can even be brought under the tax net based on the salary earned in India under a deputation or any other arrangement. The income earned in India in the form of rent also falls under the taxable entity. An NRI or a foreign company can claim the foreign tax credit in their country of residence.
By the end of the financial year 2019-2020, NRIs were defined as individuals who visited India for less than 182 days in a financial year, however, Finance Act 2020 reduced this period to 120 days for NRIs. An NRI must keep a track of all his income earned from India. Dividends distributed to shareholders by the companies would form a part of taxable income in India. But interest on FCNR and NRE deposits are exempted. It will not form part of a taxable income.
If an NRI with a taxable income exceeding 15 lakh stays in India for 120 days or more, then he needs to check whether his stay in India is 365 days or more in the next 4 years. In this situation, he will be treated as a resident citizen for income tax purposes.
Tax returns can be claimed by NRIs in India under specific regulations. They can file their refunds when they need refunds or when they face a financial loss that must be carried forward. Tax might be payable twice for NRIs as they reside in two countries. This can be avoided due to tax treaties. These treaties make sure that the tax is paid only once and also assure that the tax is collected from the country where the income is generated from.
NRI can get an NRE or FCNR account to get an exemption from taxes. For NRIs, it is easier to hold an NRI account as they have to worry about taxes being applicable on it. In the case of TDS, all incomes of NRIs are charged irrespective of any value. Tax filing isn’t usually required for NRIs if the income is subject to clauses under section 115G of the Income Tax Act.
Taxation in India is a crucial element in the economic sector of the state. These taxes are used to enhance the services provided to consumers. NRIs also need to pay taxes applicable to them as per the jurisdiction of the Income Tax Act 1961.
