Returning back to India after spending numerous years overseas, the returning NRIs too find it hard to make sense of the Indian tax regime. It could be challenging to understand tax law, understand their tax liability, and comply with tax laws in India. In this article, an effort is made to provide an overview of the key highlights of the Indian tax system, which returning NRIs should familiarize themselves with so that it becomes easy for them to get accustomed to their financial management in India.
Residential Status and Taxation
The very first aspect to understand about Indian taxation is your residential status. Your tax liability is dependent on whether you are a resident, a non-resident, or resident but not ordinarily resident (RNOR) according to Indian taxation laws. Your residential status is decided based on your physical presence within India in a financial year.
- Resident: You are treated as a resident and are taxable on your global income if you stay in India for 182 days or more in a financial year.
- Non-Resident: If you are not a resident, you are taxed only on the income that is earned or accrued in India.
- RNOR: You fall under this category if you were a non-resident for nine out of the last ten years or have been in India for 729 days or less during the last seven years. RNORs are taxed on Indian income but not foreign income.
Taxable Income for Returning NRIs
Once you determine your residential status, you need to know what is taxable income in India. The most significant categories are:
- Income from Salary: Salaries earned in India are taxable. If you continue to work abroad but earn a salary in India, this will be taxable.
- Income from House Property: If you own property in India and earn rent, it is taxable in India. Foreign property income is taxable if you are a resident.
- Capital Gains: Capital gains due to sale of property, investment, or shares in India are taxable. Capital gains on foreign assets are taxable only if you are a resident.
- Income from Other Sources: Dividends, interest on deposits, fixed deposits, and other miscellaneous income earned in India are taxable.
Tax Deductions and Exemptions
Resident NRIs can take advantage of different tax deductions and exemptions under Indian tax laws. They reduce your tax liability and taxable income. Key deductions are:
- Section 80C: You can claim deductions up to ₹1.5 lakh on life insurance, provident fund, and other financial instruments approved by the government.
- Section 80D: You can claim deductions on health insurance premium paid by you or your family members under this section.
- Section 24(b): Interest on a home loan for a property purchased in India can be claimed up to ₹2 lakh.
- Exemptions on NRE Accounts: Interest on Non-Resident External (NRE) accounts is tax-free for NRIs, provided you are not a resident.
- Double Taxation Avoidance Agreement (DTAA) Double taxation, or the taxation of the same income twice, once in India and once in the foreign country where the income has been earned, is one of the largest issues for NRIs returning to India. To avoid this, India has signed Double Taxation Avoidance Agreements (DTAA) with several countries. Under the DTAA, you can avail relief under the exemption method (where income is taxed in one country) or the tax credit method (where tax paid in one country is offset against the tax liability in another country).
Key Takeaway: If you receive foreign income or own foreign investments, make sure that India has a DTAA with the country from which you received the income. This may reduce or even eliminate double taxation.
Filing Income Tax Returns in India
NRIs coming back to India need to submit income tax returns in India if they have an income that is over the basic exemption limit (currently ₹2.5 lakh if you are under 60 years of age). The process is identical to residents, but you will have to declare Indian as well as foreign income if you are a resident.
- Form 2: Use this form in case you earn income from property, capital gains, or overseas assets.
- Form 3: To be employed when you receive income outside the country and seek returns under provisions of DTAA.
Submission of your returns at the right time spares you penalties as well as makes you compliant with taxation under Indian legislation.
Conclusion
Managing India’s tax system upon return as a returning NRI will be based on your residential status, taxable income, deductions, and DTAAs where applicable. Understanding these key factors can assist you in lowering your tax liability and taking care of your finances upon return to India. Always seek the advice of a tax consultant, especially if you possess complex foreign assets or income.
FAQs
- What is the residential status for tax purposes in India?
Ans- Residential status determines if you are to be taxed on your worldwide income or Indian income alone. It depends upon your physical presence in India during the financial year. - Is foreign income taxable in India?
Ans- Foreign income is taxable only in India if you are a resident. If you are an RNOR or are not resident, income from India only is taxable. - What is DTAA, and why is it advantageous to NRIs returning home?
Ans- DTAA avoids double taxation of the identical income in both the home nation and the home country. DTAA grants relief through exemption or credits to NRIs. - Is NRE account interest income subject to tax?
Ans- No, NRE account interest is tax-exempt if you still hold NRI status. - Do return NRIs need to file the income tax returns?
Ans- Yes, NRIs who return need to file returns if their Indian taxable income exceeds ₹2.5 lakh. - Am I allowed deductions on interest on my home loan?
Ans- Yes, you can claim deductions of up to ₹2 lakh of interest paid on a home loan under Section 24(b). - Which forms are to be filed by NRIs for income tax returns?
Ans- NRIs with foreign income, capital gains, or property income must file in Form 2 or Form 3, depending on their situation. - What is the basic exemption limit for NRIs?
Ans- The basic exemption limit is ₹2.5 lakh for residents less than 60 years of age, the same as resident individuals. - How do I calculate my taxable income in India?
Ans- Taxable income is calculated on the basis of income earned in India from salary, house property, capital gains, and other sources. - Do NRIs returning to India need to seek a tax advisor?
Ans- Yes, it is advisable, especially if you have foreign assets, complex investments, or need guidance on DTAA provisions.
Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.
