Jan 20, 2010

NRIs Taxation (#3): How to Calculate Taxable Income of NRI

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This is part three of tax planning for non-resident Indians (NRIs). After determining residential status, the next part of NRIs taxation is determining the taxable income under Indian Income Act, 1961. Thus, this post is about how to determine the taxable income of NRI under the IT Act.

Calculating Taxable Income of NRI

1.Only Indian income taxable unlike taxation of global income in case of resident individuals
The major difference between the tax on the income of resident Indians and non-resident Indians is that a non-resident pays tax only on ‘Indian Income’ and his foreign income (income earned and received outside India) is totally exempt from income tax in India.

Indian income means income which accrues /arises (or deemed to accrue or arise) in India OR which is received (or deemed to be received in India) though it accrues/arises outside India and is taxable in the hands of non-resident.

Put simply, in order to qualify as
‘foreign income’, it should satisfy both the conditions: accrue or arise (or deemed to accrue or arise) outside India AND received (or deemed to be received) outside India.


2.Heads of Income
Like resident Indians, non-resident Indians are also required to calculate the taxable income separately under five different heads. These ‘heads of Income’ are

1. Income from Salary
2. Income from house property
3. Income from business / Profession
4. Income from Capital Gains
5. Income from Other sources


3. Exempt / Tax-free Income
In addition to incomes such as agricultural income, dividend income and specified capital gains (e.g. long term capital gains u/s 10(38) arising out of sale of equity shares on stock-exchange on which STT is paid and also LTCG on sale of mutual fund units) which are exempt in case of all tax payers, there are certain other incomes which are exempt only in the hands of NRIs. The two most common incomes exempt in the hands of NRIs are as follows:

a.) Interest income of NRIs from NRE accounts is exempt from income tax u/s 10(4) of IT Act, 1961.

b.) Interest payable by a scheduled bank on FCNR deposits is also exempt u/s 10(15) of IT Act, 1961.


4. Availability of various deductions (Tax Saving Options for NRIs)
NRIs are allowed following deductions under the IT Act, 1961:

a. Home Loan Interest Deduction u/s 24: NRIs are eligible to avail home loan interest deduction u/s 24(b) for the interest portion of the EMI paid towards the repayment of home loans. The deduction for principal part of the EMI is available u/s 80C.

b. Savings Deduction u/s 80C, 80CCC & 80CCD: Available. For details about various tax saving options and investment avenues available u/s 80C, see Section 80C Tax Saving Avenues. However, following investments are not allowed:

i.) NRIs not allowed to open a PPF account. An existing PPF account can be continued till maturity.

ii.) NRIs are also barred from investing in National Saving Certificates (NSC), Senior Citizens Savings Scheme (SCSS) and Post Office Time Deposits (POTD). Existing investments (i.e., those that were purchased before becoming an NRI) can be continued till maturity.

c. Health Insurance Premium Deduction u/s 80D
Non-residents Indians can also claim deduction under section 80D for premium paid on mediclaim / health insurance policy of self and family (Rs 15,000 / Rs 20,000 as the case may be) and another Rs 15,000 (Rs 20,000 if either of parents is a senior citizen) premium paid to insure the health of parents.

d. Other Deductions u/s 80
There are many other deductions available to resident Indians under section 80. Let’s see whether NRIs also qualify for these deductions:

i.) Deduction for medical treatment of disabled dependent u/s 80DD: Not available
ii). Deduction for medical treatment of certain specified ailments u/s 80DDB: Not available

iii). Deduction for interest paid on educational loan u/s 80E: Available

iv). Deduction u/s 80G for certain specified donations: Available

v). Deduction u/s 80U for a handicapped person: Not available

For details about the various deductions u/s 80D to 80U, you can see ‘Other Tax Deductions Available u/s 80’. And also understand various conditions & restrictions imposed under section 80 before availing these deductions.

In next part, I’ll discuss about how to calculate the tax on NRI income under Indian tax laws


Also Read:

1. NRIs tax planning – An introduction
2. How to determine the residential status
3. Residential status of returning NRIs

14 comments:

  1. Dear Mr.Fisher,

    Is it advisable to file an IT return even if i do not have
    1. Any income locally in india
    2. Any sizeable income that will fall into taxable bracket ?
    3. If IT returns should be filed ( preferably ) then how does an NRI get to do it ? i.e how easy or difficult this process is?

    Rgds / Muralitharan

    ReplyDelete
  2. Muralitharan: Point-wise reply is as follows:

    1. No
    2. No
    3. The process of return filing is same for resident and non-residents. The tax return can be filed either in physical form or electronically. The process of return filing is explained in the post “12 Tips for filing tax returns”. The detailed online process of tax filing will be explained in a separate post.

    ReplyDelete
  3. Dear Mr Fisher,

    1.Are the sec 80C deductions available to NRI?

    2.Are the minimum exempted amounts Like 160000 for individuals and 180000 for women available to an NRI befoer calculating the taxable income?

    3.Are the tax rates same for NRI and Indian resident?

    4. What are the TDS rates for NRO accounts and can an NRI claim the excess deduction of tax under TDS by filing proper return?

    5. Can NRI file any forms like form 15H to avoid deduction of tax at source?

    please enlighten me
    Thanks
    sundaram

    ReplyDelete
  4. Sundaram,

    1. Yes, NRIs are eligible to claim section 80C tax benefit (with a few exceptions which I'll highlight in next post).

    2. Yes, the tax slabs applicable in case of non-residents is same as applicable in case of ‘other individuals’.

    3. Yes, except in a few specified cases …wait for next post about non-resident taxation.

    4. TDS rate applicable on NRO accounts is 30.9%. Yes, a NRI can claim tax refund by filing return of income.

    5. Form 15G / 15H is not applicable in case of NRI. However, NRI can apply to ITO in Form-13 for deduction of tax at a lower rate or a nil rate.

    ReplyDelete
  5. Hello Mr. Fisher,

    I am an NRI earning Rs.1.3 lacs per year from pension source.
    I also get about 40,000 interest from Bank deposits per year.
    I pay LIC premium of 8000 per year

    My questions are as follows:

    a) Can I claim standard deduction?
    b) Should I include my pension income?
    c) Can I claim rebate u/s 80L for the LIC premia paid?

    Thanks in advance

    Melvyn

    ReplyDelete
  6. N.RamakrishnanApril 13, 2010

    Dear Fisher,

    First, thank you for your valuable time in creating this blog and responding to readers' questions.

    I am a NRI and plan to retire in about 5 years (back to our homeland India, of course!) There are several international banks who approach NRI's with wealth management proposals, and most of them are interested in the fees. HOwever, no one seems competent to give any advice on how to invest with a view to generate a tax efficient flow of income for NRIs. Like most of us, they too seem unsure when it comes to tax matters!

    WOuld it be possible for you to come up with a post pointing us in the right direction. For example, you can list out the various options avaiable for us and give its pros and cons. Returning indians seldom receive pensions. For most of us, it is the rental income from a 2nd home that we have purchased as well as FD interest and/or dividends. PLease keep this in mind when you think through my request, YOur inputs wil be valuable for the NRI community.

    Thanks again.

    ReplyDelete
  7. AnonymousJune 05, 2010

    Dear Mr.Fisher,

    Please clarity in the following case is the assess eligible to claim 80c deductions or not

    he(citizen of india) is working in abroad( now nri) and earning salary income.
    Having property in india from which he is receiving rental income and also repaying the loan amount which is obtained from bank for construction of the said property.
    is this loan repayment is eligible for deduction u/h income form house property and 80 deduction if the repayment is made out of income earned in abroad

    he is making all investments which is eligible for 80c deduction and paid lic out of salary income which is earned outside india. is he eligible to avail deduction for all these payment u/s 80c.

    for availing 80 deductions, should the nri made all the payments out of income earned in india or he can meke those payments out of income earned outside india.

    kindly clarify this doubts.
    S. suresh
    Thank you

    ReplyDelete
  8. Dear Mr Fisher,
    I am an NRI and opened an NRO account as my retired father had done a life insurance in my name which has recently matured. (he has all the relevant papers)He transferred the money from his resident account to my NRO account but now the bank tells him that I will be taxed 30% of the amount at source? Is that true, and what do I have to do to avoid this? I rang the bank (call centre) and they told me I would only be taxed on the interest accrued and not on the principal amount but my dad's bank manager says it's 30% of the total amount. Who is right?

    ReplyDelete
  9. Anonymous,

    Call centre is right.

    ReplyDelete
  10. Dear Fisher

    I am getting salary from outside India. I don't have an NRI account. Am I eligible for tax paying. Since may to july end i was outside india and and now I am deputed for assignment since last 4.5 months [ staying in India] and and getting salary from Outside India [ Company transferring my salary to my indian account]. Please clarify my doubt and eligibilty on taxation.

    Regards
    Selva

    ReplyDelete
  11. Selva,

    For tax purposes, NRI account is not relevant; salary received for work rendered in India will be taxable irrespective of your ‘Residential Status’ under Indian Income Tax Act, 1961. For your other world income, taxability will depend upon your residential status which is determined based on your physical stay in India during a financial year…for more details, see the post on NRI Tax Planning – Residential Status #1 & #2 in Archives.

    ReplyDelete
  12. I am NRI and residing in USA. I have NRO account with state Bank of India in Mumbai but in my bank account, having balance of Rs.6000 only. I have capital of 50 lakhs which I have finance at rate of 12% per annum to private company in Mumbai. I am getting Rs.600000 six lakhs as interest every year...so questions are
    (1) can I take benefit of deduction of 80C up to rupees one lakh? like to invest in tax saver Mutual fund (ELSS) or Bank FD's with locking period of three and five year respectively?
    (2)Regular income tax exemption slab applicable for NRI?
    If anybody have clear answer let me know..
    Thank you
    Rasell

    ReplyDelete
  13. Dear Sir,

    May I Know the exceptions of 80C Deductions for NRI that can not be claimed by him?

    ReplyDelete
  14. I was NRI in FY 2011-12. I got salary in US$. How to submit ITR in Delhi with no other income? What is conversation rate of $ in rupees for ITR purpose?

    ReplyDelete

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