Aug 31, 2009

NRIs - Tax Planning

Photo by FredMikeRudy

I know that my NRI (non-resident Indian) friends are looking forward to ‘The Money Quest’ to provide them proper guidance regarding their Indian finances particularly tax planning and investment planning. Although there is plethora of online information available on the subject of taxation, investments and foreign exchange management—as you must be quite aware—most of it is either outdated or incorrect.

So, starting with this post, Fisher promises to write at least one post every month to help NRIs (non-resident Indians) to plan and manage their investments, insurance and tax in India. Let’s start with tax planning for NRIs.


NRIs – Tax Planning
As a NRI, you already know that settling abroad doesn’t absolve you from tax liability under the Indian Income Tax Act. However, while it is not possible to completely escape the tax net, there are ways to minimize your tax liability under Indian tax laws.

While planning for your taxes as a non-resident Indian (NRI), you’re concerned with following basic questions:

1.Who is a non-resident Indian (NRI)? How to determine the NRI Status under various Indian Laws?

2. When is an NRI liable for tax in India?

3. When the tax is deducted at source (TDS) from the Indian income of an NRI? Or, what are the withholding tax provisions under Indian tax laws? Is it possible for NRIs to avoid TDS from their Indian Income?

4. If there’s no taxable income in India or if it is below exemption limit, do NRIs still require a PAN (Permanent Account Number) card?

5. What is the procedure for applying PAN card in India?

6. Is there any special tax concessions available to NRIs under the IT Act?

7. What are Tax Treaties or DTAAs? How do NRIs avoid double taxation of Income?

8. If Indian income of an NRI is taxable, is it mandatory to file tax returns in India?

9. How do NRIs file IT returns in India?

10. How to plan residential status of NRIs to minimize tax liability in India?



So, starting with next post, I’ll try to answer the above questions regarding NRI taxation. In next post, I’ll talk about the residential status under Indian tax laws with particular relevance to Indian citizens or persons of Indian Origins (PIO) working abroad.

Stay tuned!


Also see:

1. NRI Bank Accounts – Difference between NRO & NRE

2. NRI Tax Planning - Residential Status (#1)

8 comments:

  1. Thanks for this article.

    ReplyDelete
  2. What are the tax implications for a returning OCI with US citizenship? As a US citizen, he is obligated to file tax return for the income sourced from USA, like pension, social security, interest income.
    As a RNOR, is he not required tax return for the Indian income?
    After 3 years, he will be a ROR, then is he required to file tax returns both for US for US income and India for Indian income?
    What is the impact to Indian tax return from "global income"?
    kc.

    ReplyDelete
  3. KC: Under Indian tax laws, RNOR (resident but not ordinarily resident) is required to file his tax return for the Indian Income (foreign income is exempt except in a few cases as mentioned in another post: Residential Status of Returning Indians). After becoming ROR (ordinary resident), entire world income becomes taxable in India.

    Sorry, I can’t answer your question regarding taxation under US tax laws. Anyhow, in case of double taxation you can take tax credit as per DTAA (Double Taxation Avoidance Agreement) between India and US.

    ReplyDelete
  4. Thank you, Fisher. Your articles are thorough and clear and so is your answer to my question.

    I just concluded OCI/USA Citizen question must be addressed consulting a Chartered Accountant/Tax Auditor. However, out of mere curiosity, I spent a good 2 hours! studying DTAA on the web, after receiving your answer above.

    This is my conclusion of course subject to correction by my CA/Auditor.

    I found an example given in the DTAA by the white house, which is the easiest to grasp.
    The following is an extractfrom DTAA,Article 4:

    " ...Thus, for example, an Indian consular official in the United States, who may be subject to U.S. tax on U.S. source investment income, but is not taxable in the United States on non-U.S. income, would not be considered a resident of the United States for purposes of the Convention. Similarly, an Indian enterprise with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise is subject to U.S. tax only with respect to its income which is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as is a U.S. resident."

    In english this means, a OCI returning to India has to pay his US Taxes on US sourced income and has to pay Indian Taxes on Indian sourced income. To be clear, a returned OCI does not pay Indian Taxes on US sourced income
    and nor US Taxes on Indian sourced income.
    This I hope would help settle this worldwide/global income concept and confusions arising out of it. kc.

    ReplyDelete
  5. KC: Please don't draw conclusions until you know all the facts.

    No further comment!

    ReplyDelete
  6. Hi,
    I am working in dubai since December 2009, as far as I know, my status will be resident for PY 2009/10, now in PY 2010/11 if I fulfill 180 days term, I will be NRI.
    Now My concern is that from April 1, 2010, if I open NRI bank account and transfer my salary to India, than will it be taxable in India. and more of this If I send some black money to India (which I received through hawala from India only) then will it be treated as my white money.
    Also guide me if I opt this way to convert black money into white, than Income tax department can raise any query......

    I will be highly oblized for your answer.


    Regards,,,

    Subhash Sharma

    ReplyDelete
  7. Ajay / Subhash,

    In my view, the only sure-shot way of converting your black money into white is to apply white color Nerolac paint.

    ReplyDelete
  8. Hi,

    Am an Nri based in the mid east (kuwait). I wud like to know if i am liable to pay more tax from interest earned on Nro fds. As per the DTAA between india and kuwait TDS is 10%. Now if interested is more than 10lacs pa do i fall into the slab of 30% and liable to pay additional tax. Also is it possible to claim refunds for an NRI

    i shall appreciate ur guidance in this regards

    rgds

    sameer

    ReplyDelete

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