Income Tax for NRI: Taxable earnings, deductions - Read it all over here


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By CA Nitin J Shetty 

Mangaluru, Apr 22: After the amendments in Budget 2020 and clarificatory post budget press meet by the Finance Ministry, Non-Resident Indian (NRI) citizens were worried about their liability to income tax in India on their global income, as there were certain modifications in residential status of individuals. After numerous representations received from various stake holders, The Finance Act has been passed in The Gazette of India as on March 27, 2020. The said amendments will be effective from FY 2020-2021, and affects only an individual who is a Citizen of India or a Person of Indian Origin (PIO) whose taxable income in India from Indian sources will exceed Rs 15 lac during a year.

At this juncture, it is important to understand certain concepts, which will have a bearing on understanding of residential status and taxation of incomes in their hands.

Concepts of Nature of Incomes

1. Income from Indian Sources Income earned in India will include Salary income from employment in India, Rental income from property in India, business/profession income earned in India, Capital Gains from sale of properties in India, Interest/Dividend and other incomes earned in India
2. Income from Indian business/profession earned outside India It will include, Income earned outside India from business controlled from India or profession set-up in India
3. Income from foreign sources Income earned outside India includes, Salary income from employment outside India, rental income from property held outside India, Income earned outside India from business controlled from outside India or profession set-up outside India, Capital Gains from sale of properties held outside India, Interest/Dividend and other incomes earned outside India.

Concepts of Taxation of income in the hands of Individuals in India

In India, there are primarily three types of taxable Individuals and in their hands the following nature of incomes will be taxable.

1. Residents and Ordinarily Residents (ROR) In the hands of ROR, all these types of income as stated above will be taxable in India, i.e. Income from Indian Sources, Income from Indian business/profession earned outside India and Income from foreign sources.
2. Residents but Not Ordinarily Resident (RNOR) In the hands of RNOR only two types of income i.e. Income from Indian Sources and Income from Indian business/profession earned outside India.
3. Non-Residents in India (NRI) In the hands of NRI only income from Indian sources will be taxable.

Before going ahead with illustrations to understand the residential status and amended provisions thereon, it is better to make clear certain facts.

  • The basic condition of determination of residential status in India will remain the same as it was for the earlier years, i.e. one who stays in India for 182 days or more during a year, will become resident in India. Otherwise he will be a NRI.
  • The amended provisions will be applicable only to those individuals who are Indian Citizens or PIO’s and have total taxable income in India in excess of Rs 15 lac per year, which has been earned from Indian Sources and/or Income from Indian business/profession earned outside India.
  • Hence, those Indian Citizens or PIO’s, who do not have aggregate taxable income in India in excess of Rs 15 lac, earned from Indian sources and/or income from Indian business/profession earned outside India, need not be bothered about the amendments that have taken place by The Finance Act, 2020, effective from FY 2020-2021. 
  • Further, it is to be noted that, all the NRI’s are liable to tax on their Income from Indian Sources, even when their total taxable income does not exceed Rs 15 lac per year. They will have to file their return of income in India as they would have been normally complying in the earlier years.

As stated above, the amendments in Finance Act, 2020 will have effect only on two categories of Individuals, whose aggregate income from Indian sources and income from Indian business/profession earned outside India, exceeds Rs 15 lac per year. The two categories are as follows

1. Indian Citizen or PIO, who, being outside India, comes on a visit to India and has stayed in India during the FY for 120 days or more but less than 182 days + has stayed in India for 365 days or more during 4 previous FY.
2. Indian Citizen, who is a NRI as per normal provision and he is also not a tax resident in any other country/jurisdiction during that FY. (Concept of deemed resident)

Furthermore, even when the above mentioned two categories of people become resident in India, they will only be RNOR and they will be liable to pay tax in India only on incomes from Indian Sources and income from Indian business/profession earned outside India. They need not pay tax on income earned by them from foreign sources as explained above. Necessary amendments in this respect also has been made in The Finance Act, 2020.

Illustrations to understand the concept of Residential Status and Taxation of Income

Illustration 1

Q 1: An Indian Citizen leaves India for the purpose of employment/as a member of crew of Indian ship, after a stay in India of 180 days during the previous year 2020-21. He has a total income of Rs 20 lakhs from Indian sources, Rs 10 lakhs income from Indian business/profession earned outside India and Rs 40 lakhs income from foreign sources.

Ans 1a: If, the said person is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be NRI. His taxable income in India will be Rs 20 lac earned from Indian sources.

Reason: He has stayed in India for a period less than 182 days. Further, as he is a tax resident of a foreign country, the deemed resident provision will also be not applicable.

Ans 1b: If, the said person is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be RNOR. His taxable income in India will be Rs 30 lac earned from Indian sources and income from Indian business/profession earned outside India.

Reason: As the said person is not a tax resident in any foreign country, he will be covered by the amended deemed resident concept. As his income from Indian sources and income from Indian business/profession earned outside India exceeds Rs 15 lac, he will be a deemed resident and RNOR.

Note: It has to be noted that, there is a significant difference between the words ‘for the purpose of employment’ and ‘in continuation of employment’. If a person is leaving India with a fresh appointment letter to join a new job, then it will be considered as ‘for the purpose of employment’ and only to those persons the said clause will be applicable.

Illustration 2

Q 2: An Indian Citizen leaves India for the purpose of employment/as a member of crew of Indian ship, after a stay in India of 180 days during the previous year 2020-21. He is not a tax resident of a foreign country as per the law prevailing in that country. He has a total income of Rs 10 lac from Indian sources, Rs 2 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans: He will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: He has stayed in India for a period less than 182 days. Further, even though he is not a tax resident of a foreign country, as his income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lac (does not exceed Rs 15 lac), he will not be covered by deemed resident provision also.

Illustration 3

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India for 180 days during the previous year 2020-21. He has stayed in India for a total period of 350 days during the four immediately preceding previous year (i.e. 2019-20, 2018-19, 2017-18, and 2016-17). He has a total income of Rs 10 lac from Indian sources, Rs 2 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans 3a: Indian Citizen will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: He has stayed in India for a period less than 182 days. The amended provisions including the deemed resident provision will not be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lac, which is less than Rs 15 lac.

Ans 3b: PIO will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: He has stayed in India for a period less than 182 days. The amended provisions including the deemed resident provision will not be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lac, which is less than Rs 15 lac. Further, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

Illustration 4

Q 4: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 110 days during the previous year 2020-21. He has stayed in India for a total period of 450 days during the four immediately preceding previous year (i.e. 2019-20, 2018-19, 2017-18, and 2016-17). He has a total income of Rs 10 lac from Indian sources, Rs 7 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans 4a: PIO will be NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Ans 4b: If, the said Indian Citizen is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: The amended provisions will be applicable to Indian Citizen or PIO, as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lac, which is in excess of Rs 15 lac. However, it has to be noted that, as he has stayed in India for less than 120 days during FY 2020-21, he will be a NRI. His stay in India in excess of 365 days during 4 previous years will not make any difference as in the relevant financial year his stay is less than 120 days. Further, as he is a tax resident of a foreign country, the deemed resident provision will also be not applicable. Furthermore, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

Ans 4c: If, the said Indian Citizen is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a RNOR. His taxable income in India will be Rs 17 lac earned from Indian sources and income from Indian business/profession earned outside India.

Reason: The amended provisions will be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lac, which is in excess of Rs 15 lac. As he is not a tax resident of a foreign country, the deemed resident provision will be applicable, even though his stay in India is for less than 120 days during the FY 2020-21.

Illustration 5

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India for 180 days during the previous year 2020-21. He has stayed in India for a total period of 350 days during the four immediately preceding previous year (i.e. 2019-20, 2018-19, 2017-18, and 2016-17). He has a total income of Rs 10 lac from Indian sources, Rs 7 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans 5a: PIO will be NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Ans 5b: If, the Indian Citizen is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: The amended provisions will be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lac, which is in excess of Rs 15 lac. However, it has to be noted that, even though he has stayed in India for a period more than 120 days during the FY 2020-21, his stay in India during previous 4 years was only for 350 days, i.e. less than 365 days as prescribed. Therefore, as one of the additional condition of stay of 365 days during previous 4 years is not satisfied, he will be a NRI. Further, as he is a tax resident of a foreign country, the deemed resident provision will also be not applicable. Furthermore, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

Ans 5c: If, the Indian Citizen is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a RNOR. His taxable income in India will be Rs 17 lac earned from Indian sources and income from Indian business/profession earned outside India.

Reason: The amended provisions will be applicable to Indian Citizen as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lac, which is in excess of Rs 15 lac. As he is not a tax resident of a foreign country, the deemed resident provision will be applicable, even though his stay in India is for less than 365 days during the 4 previous years.

Illustration 6

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 125 days during the previous year 2020-21. He has stayed in India for a total period of 450 days during the four immediately preceding previous year (i.e. 2019-20, 2018-19, 2017-18, and 2016-17). He has a total income of Rs 10 lac from Indian sources, Rs 7 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans: He will be a RNOR. His taxable income in India will be Rs 17 lac earned from Indian sources and income from Indian business/profession earned outside India.

Reason: The amended provisions will be applicable to him as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lac, which is in excess of Rs 15 lac and his stay in India during the FY 2020-21 is not less than 120 days + his stay in India during previous 4 years is also not less than 365 days, as prescribed. Therefore, he will be a RNOR. Even, in a case, where the Indian Citizen is not a tax resident in foreign country, his status will remain the same as of RNOR.

Illustration 7

Q: An Indian Citizen or PIO, who, being outside India, comes on visit and stays in India of 182 days during the previous year 2020-21. He has a total income of Rs 10 lac from Indian sources, Rs 2 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans: He will be a RNOR or ROR. His taxable income in India will either be Rs 12 lac earned from Indian sources and income from Indian business/profession earned outside India as RNOR or Rs 52 lac including his foreign source of income, if he is ROR.

Reason: As the said individual stay in India for a period of 182 days, he will not be attracted by the amended provisions by Finance Act, 2020. As his stay in India is 182 days as prescribed in normal provision, he will automatically be a Resident in India and to determine his ROR or RNOR status, one need to verify the normal provisions of The Income Tax Act, 1961. The provisions of deemed resident will not be applicable in this case, as the person is a resident under the normal provisions of The Income Tax Act, 1961.

Illustration 8

Q: An Indian Citizen or PIO, who stayed in India for a period of 55 days during FY 2020-21. He has a total income of Rs 10 lac from Indian sources, Rs 2 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans: He will be NRI. His taxable income will be Rs 10 lac earned from Indian Sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in this case, as his total taxable income from Indian sources and income from Indian business/profession earned outside India is only Rs 12 lac (less than Rs 15 lac). Furthermore, the amendment regarding deemed resident will not be applicable to PIO irrespective of his total taxable income in India and residential status in foreign country.

Illustration 9

Q 9: An Indian Citizen or PIO, who stayed in India for a period of 55 days during FY 2020-21. He has a total income of Rs 10 lac from Indian sources, Rs 7 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans 9a: PIO will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in the case of PIO irrespective of his total taxable income and residential status in foreign country.

Ans 9b: If, the said Indian Citizen is a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in this case, as he is tax resident in a foreign country.

Ans 9c: If, the said Indian Citizen is not a tax resident of a foreign country as per the law prevailing in that country for FY 2020-21, he will be a RNOR. His taxable income in India will be Rs 17 lac earned from Indian sources and income from Indian business/profession earned outside India.

Reason: Even though the said person is not a resident as per normal provisions, as his total taxable income from Indian sources and income from Indian business/profession earned outside India is Rs 17 lac, which is in excess of Rs 15 lac and as he is not a tax resident of a foreign country, the deemed resident provision will be applicable, he will be covered by deemed resident concept and will be a RNOR.

Illustration 10

Q: An Individual (who is not an Indian Citizen or PIO), who stayed in India for a period of 55 days during FY 2020-21. He has a total income of Rs 10 lac from Indian sources, Rs 7 lac income from Indian business/profession earned outside India and Rs 40 lac income from foreign sources.

Ans 10: He will be a NRI. His taxable income in India will be Rs 10 lac earned from Indian sources.

Reason: As his stay in India is less than 60 days as prescribed in normal provisions, he will be NRI. The provisions of deemed resident will not be applicable in this case, as he is not an Indian Citizen or POI, irrespective of the fact that, he has total income of Rs 17 lac from Indian sources and whether or not he is tax resident of any other foreign county.

To conclude, the residential status of an individual as amended by The Finance Act, 2020, which is applicable from financial year 2020-2021, i.e. from assessment year 2021-2022, will affect only those high net-worth individuals who have income taxable in India from Indian sources in excess of Rs 15 lac per year. Those NRIs who have income less than Rs 15 lac in India can take a sigh of relief as the prescribed amendment in the Finance Bill has been modified to a greater extent in the Finance Act. However, all the NRIs will have to continue to comply with the filing of return of income and pay applicable taxes in the same manner as they have been doing in the earlier years, as income from Indian Sources will always be taxable in India. It is also important for all tax residents of foreign country to obtain and keep with themselves a proper proof/evidence of them being tax resident, such as Tax Residency Certificate (TRC) from appropriate tax authorities or residency permit etc.

Further, it is also very important to note that interest income earned from NRE deposits will be taxable in India as pre residential status applicable for an individual under FEMA Regulations. Hence, the amendments that have taken place in Income Tax Act, through Finance Act, 2020, will not make interest earned from NRE deposits taxable in India, unless such person becomes resident under FEMA regulations.


Contact:

CA Nitin J Shetty
Partner
Nitin J Shetty & Co
Chartered Accountants
H.O. Violet Complex, SCS Hospital Road, Mangaluru - 575002
Ph:+91 824 2215000, 4272727.
B.O. #211, Commerce House, Behind Hotel Chandrika, Cunningham Road, Bengaluru - 560052

Website: Click Here

  

Comment on this article

  • Benedicta, Kuwait

    Thu, Apr 23 2020

    Thanks for good information.
    Interest on NRE deposit is treated as income from Indian source or foreign income ?

    DisAgree Agree Reply Report Abuse

  • Sriram, Mangaluru

    Thu, Apr 23 2020

    NRE deposit is Indian source income. However, as mentioned in the article, the same will be exempt from taxes, if such individual is a resident outside India under FEMA. Once the said income is exempted, the same cannot be taken into consideration for the purpose of calculation of 15 lakhs threshold as given in the Act and article above.

    DisAgree [1] Agree Reply Report Abuse

  • Rob Stan, Udupi / US

    Wed, Apr 22 2020

    I feel that bringing to tax net the "deemed resident" is a worldwide effort. What used to happen is that people who have acres of property in India, where there is good property appreciation but low returns on investment, used to sell their property there & invest in western countries where there is high returns & used to live mainly on rental income.
    Some people used to live in house where income required is of $100 per hour but earn $20 per hour.
    Last year the tax law was amended here so that property tax over a million worth of property is not refundable while filing income tax.
    That creates a loophole & incentive for being a "deemed resident" by living in different countries so that the person is not taxable anywhere in the world because property tax is not refundable while filing income tax.

    DisAgree [1] Agree Reply Report Abuse

  • Dilip, Mangalore

    Wed, Apr 22 2020

    Dear Nitin sir,

    Well compiled article. Really appreciate your efforts.

    Could you kindly also illustrate how an Indian citizen employed on foreign ships will be affected.

    Thank you.

    DisAgree Agree [3] Reply Report Abuse

  • Jossey Saldanha, Mumbai

    Wed, Apr 22 2020

    What is the Indian Government doing towards NRI's ...

    DisAgree [5] Agree [16] Reply Report Abuse

  • Satya, Dubai

    Wed, Apr 22 2020

    India government is doing nothing for poor stranding citizens

    DisAgree [4] Agree [11] Reply Report Abuse

  • Ivan Fernandes, Ashoknagar / Dubai

    Wed, Apr 22 2020

    Thanks Nitin for being very descriptive, and making it easy to understand. Very useful to us.

    While our Finance Minister keeps stating that she wants to make the IT Act very simple , the fact is that with these amendments this IT Act is probably the most complex that exists anywhere in the world. The worst part is the overall thought process of our government behind such complex changes. To catch a very small minority who always trying to find loopholes in current laws and take undue advantage of such loopholes, the government instead of going hard at such individuals, paints everybody in the same brush and starts making life as complicated as possible for everybody. This is exactly what happened with demonetization where finally RBI ittself declared that 99.3% of the notes were recovered. For 0.7%, the country had to go through its worst nightmare. India has been losing good talent only because they have not been able to retain them and give them better opportunities in our own country to succeed. The Angel tax implemented without any proper thought is another glaring example of how our government tried to kill entrepreneurship even before it matured. The thought process of the government should turn to positivity rather than victimizing its citizens for this country to prosper. Otherwise, we will be on a downhill in the coming years. I hope better sense prevails within our bureaucracy and decision makers.

    DisAgree [3] Agree [16] Reply Report Abuse

  • Save my India, India.

    Wed, Apr 22 2020

    Absolutely right.

    ""Killing the goose that laid the golden eggs"" will be more damaging to Indian economy since the flawed GST regime and demonetization of the Indian Rupee.

    NRIs need to be well taken care of be it repatriation to India from Virus hit countries, rehabilitation, taxation (that will scare them from investing in India), especially in this time of crisis.

    Future of NRIs in Gulf, US depends on the quick global changing scenario, which India may be caught unawares.

    Jai Hind!!!!

    DisAgree [2] Agree [16] Reply Report Abuse

  • Manoj, Kavoor

    Wed, Apr 22 2020

    Comprehensive Analysis

    DisAgree [1] Agree [5] Reply Report Abuse

  • Winston, Mumbai

    Wed, Apr 22 2020

    Informative. Thanks.

    DisAgree [1] Agree [8] Reply Report Abuse


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Title : Income Tax for NRI: Taxable earnings, deductions - Read it all over here


 
 
 
 

 
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