Non-Resident Indians, or NRIs, are individuals who hold Indian citizenship but reside outside of India for employment, business, or vocational purposes, and who have no set duration for their stay abroad. An NRI can also include an Indian citizen temporarily stationed outside India for work. To determine the tax liability of an NRI in India, various aspects must be evaluated.
To determine the taxability of an NRI in India, there are two main steps that need to be taken.
Step I: Identification of Residential Status of Individual
The first step is to determine the residential status of the individual. According to the Income Tax Act, of 1961, a person is considered a non-resident if they are not a resident of India. To be a resident of India, a person must meet one of two conditions:
- Stay in India for 182 days or more during the financial year
- Stay in India for 60 days or more during the financial year and 365 days or more during the immediately preceding four financial years.
If the individual does not meet either of these conditions, they will be considered a non-resident in that previous year. However, if an Indian citizen or a person of Indian origin visits India during the year, the period of 60 days is substituted with 182 days. A similar concession is provided to Indian citizens who leave India in any previous year as crew members or for the purpose of employment outside India. From the financial year 2020-21, the period is reduced to 120 days where the total income (excluding income from foreign sources) exceeds Rs 15 lakhs.
Moreover, an Indian citizen having a total income (excluding income from foreign sources) exceeding Rs. 15 lakhs during the relevant tax year will be deemed to be a resident of India if he is not liable to tax in any other country by reason of domicile or residence or any other criteria of similar nature.
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Step II: Incidence of tax in case of a Non-resident in India
Once the residential status is determined, the scope of income that is taxable in India under the Income Tax Act needs to be evaluated. The total income of a non-resident includes all income from whatever source derived, which is received or deemed to be received in India during the previous year, or accrues or arises or is deemed to accrue or arise to them in India during the previous year.
Additionally, only certain types of income of NRIs are taxable in India, which include:
- Income accrued in India
- Income received in India
- Income has its source in India.
Under Section 7 of the Income Tax Act, certain incomes are deemed to be received in India for the purpose of taxation. These include the annual accretion to the balance of an employee participating in a recognized provident fund, the transferred balance in a recognized provident fund, and the contribution made by the Central Government or any other employer to an employee’s pension scheme.
On the other hand, Section 9 of the Act defines the incomes that are deemed to accrue or arise in India. Non-resident individuals in India will consider any income falling under this section as taxable, and the person responsible for it will be liable to pay tax. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx
Furthermore, the income of a non-resident individual that is chargeable as per Double Taxation Avoidance Agreements (DTAA) includes royalty or fee for technical services, business income, independent personal services, dependent personal services, and other incomes specified in the DTAA. However, Both the Income Tax Act and DTAA govern the taxability of a non-resident in India, whichever is more beneficial for the non-resident.
Step III: Computation of Tax Liability
Once you determine the scope of income, the next step is to calculate the tax liability of the NRI. The tax rates for NRIs are the same as those applicable to resident Indians. However, the income tax liability of an NRI is limited to income that is earned or received in India.
In general, income tax is calculated on the total income of the previous year, which is the financial year that ended on March 31. The income tax rates for the financial year 2021-22 (the assessment year 2022-23) for individuals and HUFs (Hindu Undivided Families) are as follows:
| Total Income (Rs.) | Tax Rate |
| Up to 2.5 lakhs | Nil |
| 2.5-5 lakhs | 5% |
| 5-7.5 lakhs | 10% |
| 7.5-10 lakhs | 15% |
| 10-12.5 lakhs | 20% |
| 12.5-15 lakhs | 25% |
| Above 15 lakhs | 30% |
Note: An additional cess of 4% is applicable to all taxpayers.
NRIs must file their income tax returns in India if their taxable income exceeds the basic exemption limit of Rs. 2.5 lakhs. NRIs can file their income tax returns online using the e-filing portal of the Income Tax Department.
Step IV: Claiming Benefits under Double Taxation Avoidance Agreements
When NRIs reside in a country where their income is taxable, they may be subject to double taxation in India as well as in that country. To avoid this, India has signed Double Taxation Avoidance Agreements (DTAAs) with many countries. Under DTAAs, NRIs can claim relief from double taxation by either claiming the tax credit in the country of residence or availing the benefit of the tax treaty.
Conclusion
NRIs who earn income in India are subject to tax in India. The tax liability of an NRI depends on their residential status, scope of income, and tax rates applicable to the respective financial year. NRIs can also claim benefits under DTAAs to avoid double taxation. It is essential for NRIs to comply with the tax laws of India to avoid penalties and legal consequences. It is advisable to seek professional advice from a tax expert for proper tax planning and compliance.