Did you know that India is home to more than 17 million NRIs, with the highest number residing in the United States, followed by the United Arab Emirates? According to the World Bank, in 2020, India received a total of USD 83 billion in remittances from abroad, with NRIs contributing significantly to this amount. However, with the tax laws and regulations constantly evolving, NRIs often face challenges in understanding their tax liabilities and planning their finances.
Let us discuss some essential tips for NRI tax planning, which can help NRIs save more money and minimize their tax burden:
1. Know your Residential Status:
Your residential status determines your tax liability in India. NRIs are taxed only on income earned or accrued in India. Hence, it is crucial to determine your residential status under the Income Tax Act. As per the Act, an individual is considered an NRI if he/she stays outside India for 182 days or more during a financial year (April to March) or if he/she stays outside India for 60 days or more in a financial year and for 365 days or more in the preceding four financial years.
2. Taxation of Income:
As an NRI, your income from Indian sources is taxable in India. This includes income from rent, capital gains, interest on savings bank account, fixed deposits, and other investments. However, there are certain exemptions and deductions available to NRIs, which can reduce the tax liability.
a) Exemptions: NRIs can claim exemptions on the following income sources:
- Interest earned on NRE (Non-Resident External) account and FCNR (Foreign Currency Non-Repatriable) account
- Long-term capital gains on sale of equity shares and equity mutual funds
- Dividends from Indian companies
- Income from specified investments in infrastructure bonds
b) Deductions: NRIs can claim deductions on the following expenses:
- Health insurance premium paid for self and family
- Contribution to the National Pension Scheme
- Interest paid on education loan
- Donation made to charitable institutions
3. Double Taxation Avoidance Agreement (DTAA):
DTAA is an agreement between India and other countries to avoid double taxation of income. NRIs can take advantage of DTAA and claim tax benefits in their home country. Under DTAA, NRIs can either claim tax credit or tax exemption in their home country for the tax paid in India. NRIs need to obtain a Tax Residency Certificate (TRC) from the country of their residence to avail of the benefits of DTAA.
4. Investment Options:
NRIs can invest in various options in India, including fixed deposits, equities, mutual funds, and real estate. However, the tax implications of these investments differ. Here are some points to consider:
- Interest earned on NRE and FCNR accounts is tax-free in India, whereas interest on NRO (Non-Resident Ordinary) account is taxable.
- Long-term capital gains on sale of equity shares and equity mutual funds are tax-free in India.
- Rental income from property in India is taxable, and a TDS (Tax Deducted at Source) of 31.2% is applicable. However, NRIs can claim deductions on municipal taxes and repair expenses.
- Investment in real estate can give tax benefits in terms of deductions on home loan interest and principal repayment.
NRIs need to comply with various tax laws and regulations in India. Failure to comply can lead to penalties and legal issues. Here are some compliance requirements for NRIs:
- File Income Tax Return: NRIs with taxable income in India need to file an income tax return in India.
- Obtain PAN (Permanent Account Number): NRIs need to obtain PAN to carry out financial transactions in India.
- Report Foreign Assets: NRIs need to report their foreign assets to the Income Tax Department in India.
- Remit Funds: NRIs need to comply with foreign exchange regulations while remitting funds to India. Any amount remitted above the prescribed limit needs to be reported to the Reserve Bank of India.
Tax planning is essential for NRIs to minimize their tax burden and save more money. Understanding the tax implications of their income and investments in India is the first step towards effective tax planning. By taking advantage of exemptions, deductions, and DTAA, NRIs can reduce their tax liability. Additionally, investing in tax-efficient options and complying with tax laws and regulations can further help in tax planning. As an NRI, it is advisable to seek professional guidance to ensure proper tax planning and compliance.
These tips are brought to you by expert Financial Planners at HappyWise Financial Services.
If you need any assistance in tax planning or want to discuss your investment options, feel free to connect through Email or Whatsapp. They can help you create a customized plan that meets your unique needs and goals.