Taxation in India is a crucial element for the economy of the nation. Taxes are meant to add a better shade to the services and products that are used by consumers. Income Tax, Goods and Service Tax, Tax Deducted at Source are the commonly known forms of taxes in India and every Indian citizen is required to pay such taxes whether directly or indirectly.
But then arises the question of how taxation in India affects people who do not stay in India but are of Indian origin, in other words, non-resident Indians. An NRI’s income tax in India will depend upon his residential status for the year. ( for determining residential status of an individual refer to our previous article Non Resident Indians ……………………)
INCOME TAX OF NRIs
If you are a NON RESIDENT INDIAN, your taxable income as per Income Tax Act, simply put would be
- Any income that is ‘earned’ in India is taxable for you in India.
WHAT DOES THE TERM “EARNED” IN INDIA MEAN?
- Any income received in India or the law deems it to be received in India by you or on your behalf
- Any income that accrues or arises in India or income that the law believes accrues or arises in India
TAXABLE INCOME OF A NRIs WILL INCLUDE:
- Income from salary will be considered to arise in India if your services are rendered in India. So even though you may be an NRI, but if your salary is paid towards services provided by you in India, it shall be taxed in India immaterial of where you are receiving the income.
- Income from salary which is payable to you by the Government of India for services rendered outside of India when you are an Indian citizen.
- Income from a property which is situated in India is taxable for an NRI. The calculation of such income shall be in the same manner as for a resident. This property may be rented out or lying vacant. An NRI is allowed to claim a standard deduction of 30%, deduct property taxes, and take benefit of an interest deduction if there is a home loan.
- Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable in India. Interest on NRE and FCNR account is tax-free. Interest on NRO account is fully taxable.
- Any capital gain on transfer of capital asset which is situated in India shall be taxable in India. Capital gains on investments in India in shares, securities shall also be taxable in India.
- Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.
- Dividend paid by an Indian company even though this may have been paid outside India.
- .Interest, royalty or technical fees received from the Central or the State Government or from specified persons in certain circumstances.
- A tenant who pays rent to an NRI owner must remember to deduct TDS at 30%. The income can be received to an account in India or the NRI’s account in the country he is currently residing.
- Any income from business connection in India –
Some illustrative instances of a non-resident having business connection in India, mentioned in Income Tax are given below:
(a) Maintaining a branch office in India for the purchase or sale of goods or transacting other business.
(b) Appointing an agent in India for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-resident’s goods, or for other business purposes.
(c) Erecting a factory in India where the raw produce purchased locally is worked into a form suitable for export abroad.
(d) Forming a local subsidiary company to sell the products of the non-resident parent company.
(e) Having financial association between a resident and a non-resident company.
Transactions which are not to be regarded as business connection:
In simple words, NRI is supposed to pay taxes on income earned in India during a particular financial year. So, any income that has been either received in India or accrued in India shall form part of taxable income of NRI.