When an Indian leaves his/her homeland and stays abroad for more than 240 days in a year (240 days is wef FY20-21, prior to that it is 182 days), s/he becomes a Non-Resident Indian (NRI). NRIs have been given special economic status and they enjoy certain benefits but are also restricted from availing others. Given that NRIs live in different countries, depending on India’s bilateral pacts with the respective countries, investments, repatriation and taxation differs vastly in each case. This becomes complicated for NRIs to make investments and deal with taxation on investment gains. In order to reduce the tax burden of NRIs from being doubly taxed in India as well as in their country of residentship, DTAA (Double Taxation Avoidance Act) was signed by India with over 70 countries.
How are NRIs taxed?
NRIs will have to pay tax on their Indian income, if it arises under any of the heads as described in the Indian IT Act. This may include rental income from house property, business/profession income, capital gains from sale of immovable assets & market securities (short-term & long term rates differ) and interest income. Several tax-reliefs have been made available to NRIs at par with resident Indians. These include 80C, 80CCC (contribution to pension funds), 80CCD (New Pension Scheme), 80D (medical insurance premium for self, family & parents) and 80E (interest on education loan). Tax liability needs to computed by taking into account DTAA provisions applicable in each case.
How does Tax planning help NRIs?
Proper tax planning is critical not only during income accumulation stage of an NRI, but also gains significance in the case of returning back to India post retirement. NRIs typically have assets spread internationally. For returning NRIs, the tax implications of global income in India and in the country where their assets are held would become paramount since their residency changes. They may also have US$ liabilities to pay off for higher education of their children, management of property investments abroad and some insurance obligations.
Apart from income tax, wealth tax aspects of Indian and global assets need to be taken into account. And Indian Income Tax laws change almost every year rendering it impossible for one to follow up with in light of all other responsibilities shouldered. This is where a Financial planner possessing sound knowledge in NRI taxation could add value to NRIs in advising the right investment vehicles to choose during income earning stages as well as during retirement. A Financial planner could proactively plan to ensure their NRI client’s tax liabilities are minimized not just in the year of capital gain or in the year of returning back to India for resettlement, but through out the asset building phase of their lives.