Taxation rules for NRIs

Non-resident Indians need not pay all the taxes that are applicable to residents. Here are some exemptions, deductions and tax-saving tips that NRIs can avail of.
KHYATI DHARAMSI

Juggling finances in one country is bad enough; having to do it in two can be baffling. When it comes to filing taxes, NRIs find themselves in this unenviable position. The income tax rules that apply to NRIs are different from those that are valid for residents. Certain incomes resulting from remittances and investments in the home country are either exempt or taxed at concessional rates, says Rajesh Srinivasan, leader, global employer services, Deloitte India. Heres a quick guide to NRI taxation.

Taxes applicable
The most commonly asked question is whether you need to pay taxes in India as well as your current resident country. Answers Ameet Patel, tax partner at Sudit K Parekh & Co: The income which is earned outside India by an NRI is not taxed here. While the interest earned on a savings bank account for resident Indians is taxed, an NRI doesnt have to pay tax on the interest income in a non-resident external (NRE) account or foreign currency non-resident (FCNR) account. You will need to be careful about the taxes you pay in your new home country as some income that is exempt in India is taxed abroad. Dividend income received from Indian companies is exempt here, but you have to pay tax on it in the US, says Bhargav Vatsaraj, a chartered accountant.

Filing returns
There is no need to file income tax return if you dont have any income here. However, if the income accruing in India through capital gains, rent, dividend or interest is beyond the threshold limit, you will have to file tax returns. Here, too, you can claim certain deductions. For instance, if you own a house in India which you have rented out, you can claim a standard deduction of 30% on the annual net rent received, that is, gross rent received

minus municipal taxes paid, if any. The interest payment made every year for a home loan availed of in India or outside India is also allowed as a deduction in case of a rented property, says Sonu Iyer, tax partner, Ernst & Young. So, for 2011-12, an NRI (male and below 60 years) should file tax return in India if his income exceeds 1.8 lakh, while a person above 60 years, who earns more than 2.5 lakh, will also have to file it. The due date for filing the return is 31 July of the year following the relevant tax year. Says Vatsaraj: You have to declare the income earned in India while filing tax returns in the foreign country too. If the latter has a Double Tax Avoidance Agreement (DTAA) with India, it will help you get tax credit for the taxes paid here. There are situations when you need not file returns. Patel says, For NRIs, there is a special chapter (XII-A) in the Indian IT Act, according to which if he earns a specified income and the tax, if any, has been deducted at source, he need not file a return in India. In most cases, regulators have mandated tax deductions before handing over money to NRIs. So, your rental income or mutual fund withdrawals will be deposited in your account after taxes have been cut. The rates are the same as that for residents.

Investments
If, as a resident Indian, you made some investments and redeemed them after becoming an NRI, these will be treated differently. For instance, NRIs cannot extend the tenure of their PPF account. When the pre-existing PPF accounts are closed, the amount withdrawn will not be treated as income but as capital receipts, says Patel. The investments in existing PPF accounts are held till maturity on a non-repatriation basis. Capital gainslong-term or short-termwill be applicable when you redeem/sell your past investments. If you sell shares that are listed on a recognised stock exchange in India after holding them for more than a year, you will not have to pay tax on the capital gain provided the securities transaction tax has been paid, says Iyer. If an NRI sells shares and debentures of an Indian company that he had acquired using foreign currency, the taxation process will require currency conversion and re-conversion for capital gains calculations. These cap ital gains will be taxable at the rate of 10% and no indexation benefit shall apply, explains Iyer. Some of the rates may depend on the origin of the invested money. When an NRI sells assets in India, he can opt for a concessional 20% tax scheme under Chapter XII-A, which is only available on investments in India from funds remitted by an NRI, says Vatsaraj. An NRI doesnt have to pay tax on property or assets he inherits in India. However, any rental income or profit from such property or its sale will be taxable in India, says Iyer.

Tax-saving tips
NRIs can save on these taxes by investing in specified schemes. These include pension plans, life insurance policies and taxsaving mutual funds. The repayment by an NRI towards principal amount of home loan is eligible for deduction up to 1 lakh under Section 80 C, while the interest payment is also allowed as a deduction. Also, under Section 80D, NRIs can purchase a health insurance policy here for themselves, their family as well as dependent parents, and claim deduction up to 35,000 for the annual premium paid, says Iyer. However, some investment avenues have been restricted by the RBI. So, an NRI cannot invest in the National Savings Certificates, Senior Citizens Savings Scheme and post office time deposits or open a fresh PPF account. If you have been repaying an education loan taken for yourself, your child or spouse, the interest paid can be claimed for deduction. Similarly, your philanthropic interests in the country can help you claim benefits under Section 80G. You can also save tax if you invest

the gains earned from the sale of an asset within a specific period. You can claim exemption on long-term capital gains from the transfer of a foreign exchange asset if you invest the sale proceeds in specified schemes within six months of selling the asset. The amount of exemption is calculated based on the amount reinvested, says Iyer. NRIs can put their money in tax-saving bonds too. Capital gains up to 50 lakh earned from selling a capital asset can be invested in bonds of National Highways Authority of India or Rural Electrification Corporation, says Vatsaraj. Investment income from specified assets, typically foreign currency bonds, are subject to tax at 20% as against the maximum rate of 30%. NRIs can invest in such assets and benefit from the lower rate. Also, an NRI can avail of lower tax rates on interest income through beneficial treaty provisions. So, if he is based in the UAE and the interest income is remitted from India, he is eligible for lower rates as India has a DTAA with the country, says Srinivasan.

Tax-saving measures
NRIs dont need to pay tax in India on the income earned abroad or even file returns if tax is deducted at source. Investments in capital gains bonds, such as Rural Electrification Corporation and National Highways Authority of India, can be made to save tax on capital gains earned from selling an asset. NRIs can invest in foreign currency bonds, which are taxed at 20%, while income from other bonds is taxed at a maximum rate of 30%. Inheritance is exempt from tax, but the rental/sale income from the inherited asset is taxable. Capital gains tax can be avoided by investing in new property. Interest income in NRE and FCNR accounts is exempt from tax. NRIs can also claim a standard deduction of 30% of the net rent received.