Income tax can be puzzling for high-net-income individuals, especially for Non-Resident Indians (NRIs) who stay abroad for work or business. The intricacies of NRI taxation in India require a careful understanding of the laws and regulations that govern income tax. This guide will walk you through the essentials of NRI taxation in India and help you navigate the intricate landscape of income tax for NRIs.
Getting acquainted with NRI taxation in India
To decode NRI taxation, you must first understand who qualifies as an NRI for tax purposes. The residential status of an individual is pivotal in determining the extent of their tax liability in India. An NRI is generally someone who does not reside in India for at least 182 days during a financial year or has been abroad for 60 days during the relevant year and for a total of 365 days or more in the preceding four years.
Understanding how residential status is determined for tax purposes
Residential status plays a fundamental role in NRI taxation. It divides NRIs into three categories: Non-Resident, Resident, and Resident but Not Ordinarily Resident. Each category comes with its own set of tax rules. Non-Resident Indians are typically taxed only on income earned or received in India, while Residents and Residents but Not Ordinarily Residents are subject to taxation on their global income.
What is taxable and what is exempted?
As a high-net-income NRI, you need to be aware of the types of income that are taxable in India. Income generated within India, such as rent, capital gains, and income from business or profession, is taxable. However, some income sources remain exempt, such as income from foreign assets, foreign pensions, and NRI investments in specified financial instruments.
Navigating through NRI tax slabs
The tax slabs for NRIs are similar to those for residents, and they depend on the individual’s age and the total income earned during the financial year. Here’s a brief overview of the NRI tax slabs in INR as per the new tax regime:
Income between ₹2,50,001 to ₹5,00,000: Taxed at a rate of 5%
Income between ₹5,00,001 and ₹7,50,000: ₹12,500 +10% above ₹5,00,000
Income between ₹7,50,000 and 10,00,000: ₹37,500 + 15% above ₹7,50,000
Income between ₹10,00,000 and ₹12,50,000: ₹75,000 + 20% above ₹10,00,000
Income between ₹12,50,000 and ₹15,00,000: ₹1,25,000 + 25% above ₹12,50,000
Income exceeding ₹15,00,000: ₹1,87,000 + 30% above ₹15,00,000
It’s worth noting that NRIs are not eligible for the basic exemption limit available to resident individuals such as sections 80C and 80D, and thus, they need to pay taxes from the first rupee of their income. To further reduce their tax liability, NRIs can consider taking advantage of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.
NRI investment and wealth management
Investment and wealth management play a significant role in managing tax implications. NRIs have various investment options, such as NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts, which can help them manage their finances and investments effectively. NRE accounts are best suited for maintaining foreign income in foreign currency, while NRO accounts are ideal for managing income earned in India. NRIs can invest in various financial instruments, including fixed deposits, mutual funds, and real estate, among others. Careful planning and expert guidance in wealth management can assist in optimising returns and minimising tax liabilities.
The bottom line
For NRIs, seeking professional guidance is advisable to ensure that they optimise their financial strategies, manage their tax obligations efficiently, and make the most of their wealth management opportunities.
Understanding NRI taxation as per the residential status and comprehending taxable and exempt income, is essential. Knowing your NRI tax slabs can help you manage your tax liability effectively and draft a better financial plan.