NRI Taxation in India under Income Tax Act, 1961

The Income Tax Act & Rules allowed to Non-Resident Individual is different from those applicable to Resident Individuals. NRI Taxation in India is a matter of concern for a large number of persons living abroad. In this article, I have talked about the definition of NRI, the income on which the tax liability arises and the due date of filing ITR.

How to determine that an Individual is NRI?

‘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, in order to determine whether an Individual is a non-resident Indian or not, his residential status is required to be determined under Section 6.

As per Section 6 of the Income-tax Act, an individual is said to be non-resident in India if he is not a resident in India.

And 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 that year.

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.

The Finance Act, 2020, w.e.f., AY 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year.

Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Note: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.

Thus, from AY 2021-22, an Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.

What income of Non-Resident will be taxable in India?

A Non-Resident is liable to tax only on that income which is earned by him in India. Income which is earned outside India is not taxable in India. Income is earned in India if –

1. It is directly or indirectly received in India; or

2. It accrues or arises in India or the law believes that it has accrued or arised in India.

The meaning of accrues or arises in India has been laid down in Section 9 of the Act which is defined as:

How can NRIs avoid Double Taxation?

An NRI in receipt of income in India is taxable in India on such income i.e. India as a source state has the right to tax such income. However, the country of which such NRI is a resident, will also have a right to tax such income as it is the residence state. This situation leads to Double Taxation. In the process, the NRI will end up getting taxed twice on the same income. To overcome this, India has entered into DTAAs with various countries which provides exemption or credit of foreign taxes paid while filing their return of income in the home country.

Do NRIs have to pay Advance Tax?

If the tax liability exceeds Rs 10,000 in a financial year, then it is required to pay advance tax. Interest under Section 234B and Section 234C is applicable when the advance tax is not paid on time.

When should an NRI file his return of Income in India?

NRI, like any other individual taxpayer, must file his return of income in India if his Gross Total Income received in India exceeds Rs 2,50,000 for any given financial year.

The due date for filing return for an NRI is also 31st July of the Assessment Year. With the ongoing COVID -19 pandemic, the government announced the extension of ITR filing deadline for FY 2019-20 to 30th November, 2020 from 31st July, 2020.

Also, from FY 2019-2020 and onwards, Individuals are required to file their returns mandatorily for the below mentioned cases (even when their gross total income is below the exemption limit)

Accordingly, if the NRI’s taxable income is below the maximum amount not chargeable to tax in India (i.e Rs 2,50,000) and they are not covered under the specified circumstances mentioned above, they are not required to file tax returns.

In case the NRI has missed the filing of ITR, can the same be still filed?

An ITR can be filed after the due date along with a penalty of Rs. 5000 (if filed till 31st December) and Rs.10,000 (after 31st December but till 31st March). If the tax payer falls in the income bracket of upto Rs. 5 lakhs, then the penalty shall be Rs.1,000. The taxpayer has to file the ITR before the end of the relevant assessment year, i.e., before March 31, 2021 for FY 2019-20.