NRI Taxation: Income, Investment & Filing Requirements in India

Paying tax for an NRI can feel like juggling apples and oranges, with different rules for income, investments, and filing in India. Let's dissect and simplify, shall we?

Who is an NRI as per Indian Tax Laws?

Residential Status Criteria-

An NRI (Non-Resident Indian) is someone who: 

• Does not stay in India for more than 182 days during the financial year, OR
• Stays in India for less than 60 days during that year and less than 365 the previous 4 years.

Difference Between NRI and OCI-

NRIs are Indian citizens living abroad. OCI refers to a different status - a permanent foreign citizenship with certain rights in India.

Income Tax Rules For NRIs

Income earned In India vs. Abroad

Only such income which is earned or received in India is taxable in India. Anything that is earned outside India? India will stay away.

Taxable Income Sources in India

• Salaries for services rendered in India
• Rental income from the Indian property
• Capital gains on Indian investments
• Interest on NRO accounts

Income not taxable in India

• Income from jobs abroad
• Interest on NRE & FCNR accounts (fully exempt)

Investment Opportunities in India 

Real Estate-

Agricultural land cannot be purchased by NRIs, but they can purchase residential and commercial properties.

Mutual Funds-

NRIs can invest in Indian mutual funds with some restrictions imposed on US/Canada-based NRIs as per FATCA compliance.

Fixed Deposits (NRE/NRO/FCNR Accounts)-

• NRE: Repatriable plus tax-free interest
• NRO: Taxable interest
• FCNR: Held in foreign currency, free of taxes

Stock Market (via PIS)-

Going through banks approved by the RBI under PIS, NRIs are allowed to trade in Indian equity.

Taxes Applicable to NRI Investments

Capital Gains Tax-

• Short term (within 3 years): Tax at slab rate
• Long term: Between 10% and 20%, with indexation benefits

Tax Deducted at Source (TDS)-

NRI incomes like rents, interests, capital gains are subject to TDS even if the income is below the taxable limit.

Double Tax Avoidance Agreement (DTAA)-

Since India has DTAA with more than 90 countries, you are protected against being taxed twice on the same income for claiming either a credit or lower tax rates. 

ITR Filing Requirements for NRIs

When Filing is Mandatory-

If your taxable income in India exceeds ?2.5 lakh, you need to file ITR even if you are residing abroad.

ITR Forms Applicable to NRIs-

ITR-2: Mainly for NRI salaries, rent and capital gains

ITR-3: If you earn income in India from an occupation or business

Deadlines & penalties

• Deadline: 31 July
• Penalty for late filing: ?1,000- ?5,000
• Interest under Sections 234A/B/C if taxes have not been paid on time

Common mistakes/numeric errors made by NRIs when filing their taxes in India

• Using normal savings accounts instead of Non-Resident Ordinary (NRO) or Non-Resident External (NRE) accounts
• Not declaring income sources in India
• Not claiming benefits under Double Taxation Avoidance Agreements (DTAA)
• Not claiming the recovery of TDS because of lack of filing

Ways to Avoid Taxes Legally in India

• Invest in ELSS mutual funds to save taxes
• Purchase health insurance and make a claim under Section 80D
• Claim HRA benefits from the rental property
• Ensure you have selected the right residential status to avoid higher tax burden

Professional assistance versus filing on your own - getting professional help is essential for NRIs

Filing your taxes from abroad? You need to hire an Indian tax professional. While you can prepare and file your own form, tax professionals are able to optimize your tax filing and refunds so you avoid any legal issues or fines, along with TDS, specifically on capital gains. 

Concluding thoughts

Taxation for NRIs is not difficult in India. Knowing where your income has originated from, selecting the right tax filing form, and knowing what exemptions and treaties (DTAA) you can claim can be all of your worries. With knowledge and correct help, you can be compliant and free from tax worry.