Relocating overseas does not usually signify that there’s a complete break from Indian tax liability. The NRIs often have property, investments, bank deposits or business interests in India and each of these has tax consequences beyond the scope of the change of residential status. However, a lot of NRIs make mistaken assumptions while filing taxes on India-related transactions, which may be based on their past experiences as citizens of India, resulting in either non-compliance or tax payment that is too low. This article explains the process of filing returns and dealing with income earned in India from an NRI investor’s point of view.
Determining Residential Status Correctly
Before anything else, NRIs must have clarity on their residential status for a particular financial year as this factors in the taxability of their income in India. The definition of residential status under Income Tax Act depends upon the number of days the assessees spent in the country during the financial year and the previous few years and has been narrowed in recent years for some classes of high income earners reporting significant income from India, though spending a limited period of time in the country.
One of the most frequently confused points is that if an individual is determined as being ‘non-resident’, this status will be permanent. In practice, it is necessary to reset it annually according to the actual days spent in India, and sometimes NRIs who go back and forth from countries for family or business visits find that they fall below the threshold at one point and above it at another, thus reclassifying themselves for a specific year with corresponding tax treatment implications.
What Counts as India-Sourced Income
Even if the income is not earned or received in India, some categories of income are taxable in India, if the income arises or accrues in India. This covers rental income from property in India, capital gains on assets in India like property, shares or mutual funds, interest on bank account or fixed deposits in India, and any income from business activities carried out in India. Surprisingly, the salary received for services rendered in India is also taxable here, even if the employer is outside India, thus defeating the notions of NRIs that their employment abroad automatically exempts all of their income from Indian tax jurisdiction.
The taxability of dividend income of Indian companies and on interest received from NRE accounts differs, with the interest received from NRE accounts being exempt from tax and interest received from NRO accounts being taxable in full. This distinction is often missed out by some of the NRIs and as a result they either under report taxable interest or unnecessarily get worried about the interest that is actually exempt.
TDS on NRI Income and Its Practical Implications
In general, payments to NRIs are taxed at a higher rate than the resident, and in the case of property sale transactions, the TDS deducted can be significant despite the actual capital gains situation. This leaves a common cash flow problem, as allotment of a substantial portion of the sale proceeds is done at the source, even if the actual tax liability of the NRI, after taking into account indexation benefit or exemptions, is quite low.
NRIs in such cases will be able to apply to the tax department for a lower or nil deduction certificate before the transaction and the tax department will then reduce the taxable liability and use a lower rate for TDS. This is often overlooked because it’s not known to the business or because of time constraints with transactions, and too much tax is deducted and a refund claim must be made on the annual return, tying up funds for longer than they should be.
Filing Requirements and Common Oversights
NRIs have to file income tax returns in India if they have income from India which is above the basic exemption limit, or under certain other conditions like if they have certain assets located outside India or under limited circumstances, they intend to claim refunds of excess TDS deducted. One common pitfall is thinking that as tax has been deducted at source, there’s no need for them to file again. In most situations it is still important to file a return to balance the final tax liability, to claim all eligible deductions, and to get back any over-collected tax.
Many times, India and the country of residence enter into Double Taxation Avoidance Agreements (DTAs) to save taxpayers from being taxed twice on the same income, but claiming the benefit of the DTA requires proper documentation such as Tax Residency Certificates from the country of residence and Form 10F, which is sometimes submitted late and improperly.
Managing Indian Investments from Abroad
NRIs who have mutual funds, shares and fixed deposits in India must ensure that their accounts are properly registered as NRIs as otherwise if the investments are held in their resident account after they move to other countries it creates some compliance problems under tax law and foreign exchange regulations. The types of accounts and account designation are often administrative issues that NRIs forget to address when converting into NRIs, but have serious regulatory implications if they are not.Portfolio Investment Scheme accounts, which are essential when you become an NRI in Indian shares, and designation of correct demat accounts are administrative details that are easily forgotten when converting to non-resident status, but can have real regulatory consequences if not addressed.
Keeping Compliance Manageable from a Distance
It is much easier to manage tax compliance in India when NRIs have organised documentation on income received from India, TDS certificates, status of investment accounts etc. throughout the year, instead of putting it all together in a hurry during the filing season. The time zone differences and unfamiliarity with changing tax laws in India make it beneficial to involve professionals who will keep track of deadlines and updates with respect to tax laws changes in India on behalf of the NRI.
While maintaining compliance with the Indian laws and tax regulations, managing income and assets in India can be a complex process that can be made simpler by professional guidance for NRIs. Anagha Consulting helps NRIs in return filing, TDS certificate application, and other tax-related matters related to India.