NRI taxation rules in India and tax benefits (Part 1)

As a Non-resident Indian (NRI), one constantly copes up with the issue of taxability of his/ her income in India. Non-resident Indian is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. Thus, the residential status of a person earning income is very much relevant for determining the taxability of such income in his hands.

Residential status of an individual:

Taxability of any income in the hands of a person depends on the following two things:

  1. Residential status of the person as per the Income-tax Law; and
  2. Nature of income earned by him.

The Income-tax Law has its own set of provisions for determining the residential status of a person. Thus, while determining the residential status of a person under the Income-tax Law, the facts like Indian citizenship, Indian passport, etc., have no relevance. From the point of view of Income-tax Law, a person will be treated as a resident in India if he satisfies the criteria specified in this regard under the Income-tax Act.

For the purpose of Income-tax Law, an individual can have any one of the following residential status:

  1. Resident and ordinarily resident in India (also known as resident)
  2. Resident but not ordinarily resident in India
  3. Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard and, hence, it may so happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

How to determine that an Individual is NRI?

As per the Indian Income-tax Act, an individual is said to be non-resident in India if he is not a resident in India.

An individual is deemed to be resident in India in any previous year if he satisfies any of the following conditions:

 1.  If he is in India for a period of 182 days or more during the previous year; or

 2.  If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

However, condition No. 2 does not apply where an individual being citizen of India or a person of Indian origin, who being outside India, comes on a visit to India during the previous year.

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A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India

For example, while you are an NRI, you were physically present in India for more than 182 days during one financial year. In such a case, you will be considered as a resident when it comes to taxes and you are obliged to pay taxes to the Indian government for the income earned in India, if any for that year. 

In case of resident taxpayer all his income would be taxable in India, irrespective of the fact that income is earned or has accrued to taxpayer outside India. However, in case of non-resident all income which accrues or arises outside India would not be taxable in India.

Whether Non-Resident Indians are required to file their Income Tax Returns in India?

Presently, as per Income Tax Act,1961 the NRI qualifies to file his/ her income tax returns in India in case he/ she fulfills either of the following conditions:

  1. Your taxable income in India during a financial year is more than the exemption limit of Rs 2.5 lakh.
  2. You have earned short-term or long term capital gains from sale of any investment or property, even if the gains are less than the exemption limit.

Thus, if the income of an NRI is more than the basic exemption limit for the year, he or she is liable to file return in India. Also, to claim tax refunds, or to carry forward losses to future years, NRIs must file return.

Is the Income Tax Return mandatorily required to be filed online for a Non-resident Indian?

Central Board of Direct Taxes (CBDT) in India issued a notification which has made it mandatory for individuals who have annual gross total income more than Rs 5 lakh to file their returns online from Assessment Year 2014-2015. This applies to all individuals including non-resident Indians. So, as an NRI with gross total income exceeding Rs 5 lakh in Assessment Year 2014-2015, you must file your returns electronically.

In case your taxable income exceeds Rs.5 lakh in the previous year, you would be required to file the return of income electronically either using the digital signature or through submission of the verification Form ITR-V after electronically filing the return of income. In case your income does not exceed the above limit, you would also have an option to file the return of income in paper form.

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Are NRIs liable to pay advance tax?

As per the Income Tax Act, Individual must pay advance tax in three installments during the year in case the tax payable is likely to be Rs 10,000 or more after considering TDS deduction. In case of default interest is generally 1 percent per month for the default amount and extends till the date of payment. Therefore, NRIs should evaluate if they were liable to pay advance tax and whether the same was paid in time.

What is last date to file your Income Tax Return? What if NRI do not have any tax payable?

The last date to file returns for the financial year Assessment Year 2014-2015 is July 31st 2014. However, if you do not have any tax payable (that is all your tax has been deducted at source), you can still file your tax return by 31st March 2015 without any penalties.

What if NRI do not file return till 31 March 2015?

If you do not file your tax returns even by the 31st of March 2015, you may be charged a penalty of Rs 5,000 for every year of delay or sometimes may not be able to file your returns at all after 2016

Requirement for a PAN:

  1. Whether it is mandatory for a non-resident Indian to have a PAN?

Every person who is required to file a return of income or intends to enter an economic or financial transaction where quoting of PAN is mandatory must have a PAN.

  1. Application for allotment of PAN:

A non-resident Indian can apply for PAN by submitting the Form No. 49A along with the requisite documents and prescribed fees at the PAN application center of UTIITSL or NSDL. He can also make an online application through the website of UTIITSL or NSDL.

  1. Documents to be enclosed along with PAN application Form

NRI is required to submit the copy of passport (alongwith PAN application Form) as proof of identity. He is also required to submit any of the following documents (alongwith PAN application Form) as proof of address:

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  • Copy of passport; or
  • Copy of the bank account statement in country of residence; or
  • Copy of NRE bank account statement (showing at least two transactions in last six months’ period and duly attested by Indian Embassy/Consular office/high commission or Apostille or by the manager of the bank in which the account is held. The applicant may be a joint holder).
  1. Foreign address

A foreign address can be provided as residential and office address by NRIs applicants, if they do not have any Indian address of their own.

  1. Fees

Fees for processing of PAN application shall depend on the communication address provided by the applicant. Fee for processing of PAN is INR 107 if the communication address is within India, and INR 994 (Application fees +dispatch charges) if the communication address is outside India.

  1. Correction of Mistakes in PAN card

All guidelines as followed while filling fields of name, address, signature, etc., of PAN application form should also be followed while filling up form for 'Request for New PAN Card or/and Changes or Correction in PAN Data".

There are two modes for filing this form:

  1. Offline mode, i.e., submitting the application at the PAN application center of UTIITSL or NSDL,
  2. Making an online application through the website of UTIITSL or NSDL. T

The applicant must submit the application along with the related documents and the prescribed fees.

  1. Penalty for holding more than one PAN card

A person cannot hold more than one PAN. A penalty of INR 10,000shall be imposed under section 272B of the Income-tax Act, 1961 for having more than one PAN. If a person has been allotted more than one PAN, then he should immediately surrender the additional PAN card(s).

  1. Penalty for non-compliance with provisions relating to PAN

Section 272B provides for penalty in case of default by the taxpayer in complying with the provisions relating to PAN, i.e., not obtaining PAN, even though he is liable to obtain PAN or knowingly quoting incorrect PAN in any prescribed document in which PAN is to be quoted or intimating incorrect PAN to the person deducing tax or person collecting tax. Penalty of INR 10,000 under section 272B can be levied.

The tax incidence of Non-resident Indians would be discussed in my next series.

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