NRI Taxation Issues: Overview and Solutions

NRI tax issue

The NRIs (Non Resident Indians) are having lots of taxation issues especially when it comes to sale or purchase of property, securities, investments settlement, filling of returns, other various compliances etc. So, we will be discussing the each major issues in brief so that every NRI can become aware of such situation and also how to deal with such situations.

In a simpler terms, a NRI is a person who is holding the Indian Passport and for the purpose of employment, residence, education or any other reason, migrated to another foreign country on temporarily basis for a period of six months or more.

Due to the globalization of the world economies many Indian citizens are migrating to foreign countries or foreigners are also coming to India for employment. Hence, the tax benefits available to the NRIs can be discussed under the Indian Income Tax Law and Double tax avoidance agreements (DTAAs) and the same can be categorized under two heads as discussed below:

Category 1: for Non Resident Employees coming for Employment in India

The Indian taxation laws are based on the ‘source rule’ i.e. all the incomes which accrues/arise in India will be taxable and subject to fulfillment of certain conditions the exemption has been provided for such income earned in India, under the domestic tax laws and also under the DTAA. Any income received outside India by such Individuals is not taxable in India.

Category 2: for Non-Resident Employees leaving India to work outside India

Any income received by the Non-resident Indians in their foreign bank accounts than such income is not taxable in India; however, salary received in India will be taxable in India on the basis of receipt of such income in India. Also, the exemptions can be claimed under the DPS (Dependant Personal Clause) of the DTAA entered in between the India and the foreign country, if the individual qualifies as a resident of such foreign country.

Further, it is to be noted that, NRIs can also claim the Tax Credits in respect of the Incomes that have been taxed in both the countries (Home country and Foreign Country) in accordance with the rules mentioned in the Indian Tax Laws and DTAA. But to claim the tax credit, the tax payer need to obtain the Tax Residency Certificate for each of those years tax credit to be claimed by the tax payer.

Conclusion

Any income which has its source in India such as rent from property in India, interest on deposits, royalty income etc. shall be taxable in India as per the rules and provisions of Indian Tax Laws and exemption under the Indian Tax Laws can also be availed in respect of such incomes (such as 80C, payment of principal on Housing Loan etc.)

Filling of Income Tax Return by NRI (A BIG PICTURE VIEW)

Any Non – Resident Indian earning income below the basic exemption limit in India (Rs. 250000/- for F.Y. 2014-15) shall not be liable to file return in India, however, in case of below two mentioned cases, any income earned than filling of return in India by the NRI is mandatory in Law:

  • Short Term Capital Gains Income on securities such as equity shares or equity oriented mutual funds
  • Long Term Capital Gains Income which are chargeable to tax.

Thus, if the NRI does not have any income which is chargeable to tax, than NRI is not required to file the return. Further, if the NRI is having any income (Investment Income or Income from Long Term Capital Gains) on which tax is deducted at source than also it is not necessary to file the Income tax return by such NRI.

What are consequences of Non-Filling of ITR by NRI on Time?

As per the provisions of the Indian Tax laws, the penalty will be levied to the Individual for Rs. 5,000 for each year and further prosecution under section 276 CC may also be initiated by the Income tax department.

The important provision under the income tax law is given below:

“Provided that a person shall not be preceded for penalty or prosecution for failure to furnish return of income, if-

a) The return is furnished by him before the expiry of the assessment year;

or

b) The tax payable by him on the total income determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source (TDS), does not exceed three thousand rupees. i.e. his balance tax liability after considering TDS and Advance Tax does not exceed three thousand rupees.”

Importance of Filling ITR by NRI

a) If the Tax deducted at source is more than the actual tax liability of the NRI, than refund can be claimed by the NRI after filling return along-with interest at 6% p.a.

b) If the NRI has incurred any loss on sale on sale of investments (either short term or long term) than NRI can set-off such losses from the Income in future years.

c) If the notice is being received by the Income Tax Department, than NRI must respond actively in reply of such notice by filling of return.

d) Having details of the documentation of all the Income and Assets in India and in Foreign Country will help the NRI in complying with the Repatriation Rules for Income and Assets held in India and also when the NRI return to India.

How Taxes can be saved by NRIs.

The NRIs can reduce their taxes by following some of the ways given below:

a) Tax Exemption Certificates such as:

  • Lower rate of Tax in the following given below cases
  • Set-off Against Losses (as discussed above)
  • Reinvestment of Capital Gains
  • Buyback of Shares

Any NRI whose income is below the basic exemption limit can take the Tax Exemption Certificate and tax is likely to be deducted from his Income and the certificate is normally issued with-in a period of 20-25 days and the same is issued generally for a period of 1-3 years by the Income Tax Department and such certificate is provided to the Deductors of tax who will follow the Nil Rate or Lower rate of Deduction of Taxes.

b) DTAA Benefits

By availing benefits mentioned in the Double Tax Avoidance Agreements (DTAA) by carefully analysing the rules mentioned therein (Please Note that DTAA are available separately for each country and there are countries with such DTAA are not yet executed, one should take the help of professional consultants for better advisory)

c) Concessional Taxation Provision:

Like there are many provision for taxation of the Income of NRI and also in some cases the options are also allowed (like special tax regime is there in respect of certain types of Income under chapter XIIA (section 115C to 115I)) for the reason that to encourage the NRIs to invest their foreign earnings in India.

d) Carrying Losses Forward

By Filling of Returns of Income by the NRI for the carry forward of losses (as already discussed above)

e) Provision of Indexation

By taking the benefit of the Provision of the Indexation (wherever available to the NRI) in case of sale or purchase of securities in India.

Issue to be kept in Mind by the NRI returning to India

A returning Indian should carefully plan his return in India and following are the major concerns which needs to be taken care of while returning to India from a foreign country:

a) Filing of Return in India (a professional assistance should be taken so that return can be properly filled and without any errors so that compliance of the Indian Tax Laws can be fulfilled)

b) Holding of Assets in India & Outside India: A professional advice should be taken so that provision of the Foreign Exchange Management Act (FEMA) and India Tax Laws can be complied with in respect of Assets held outside India by the NRI.

c) All the Foreign Assets & Foreign Bank Account Details (even having Joint Interest) should be properly disclosed in the Return to be filed in India.

d) The provision of the DTAA should be applied (if DTA exists) otherwise in case of Indian return from Non-Jurisdiction Area, the provision of the same should be kept in mind.

e) One should re-arrange the portfolio of assets in India with proper assistance so that minimum tax to be levied along-with the date of returning of India should also be planned.

Conclusion

There are certain provisions in the Indian Tax Laws and to apply such provision carefully one should definitely take the assistance of the professionals dealing in such matters so that unnecessary delays and fines shall be avoided. Hence, after keeping the above major points the NRIs can carefully arrange their work or assignment in all over the world. The understanding of the correct provision in the DTAA applicable to a particular individual is the only major concern so that minimum taxes should be levied on the particular NRI.

About the Author: Tarannum Khatri is Chartered Accountant of India and practicing in taxation field. You can follow her blog – Tax Masala – to get taxation tips and advise.

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