Tax Saving and Taxation Rules for NRI

Quick guide to NRI taxation

Taxes applicable

Question – whether you need to pay taxes in India as well as your current resident country.

Answers – “The income which is earned outside India by an NRI is not taxed here.” While the interest earned on a savings bank account for resident Indians is taxed, an NRI doesn’t have to pay tax on the interest income in a non-resident external (NRE) account or foreign currency non-resident (FCNR) account.

You will need to be careful about the taxes you pay in your new home country as some income that is exempt in India is taxed abroad. “Dividend income received from Indian companies is exempt here, but you have to pay tax on it in the US,”.

Filing returns

There is no need to file income tax return if you don’t have any income here. However, if the income accruing in India through capital gains, rent, dividend or interest is beyond the threshold limit, you will have to file tax returns. Here, too, you can claim certain deductions.

For instance, if you own a house in India which you have rented out, you can claim a standard deduction of 30% on the annual net rent received, that is, gross rent received minus municipal taxes paid, if any. “The interest payment made every year for a home loan availed of in India or outside India is also allowed as a deduction in case of a rented property,” says Sonu Iyer, tax partner, Ernst & Young.

So, for 2011-12, an NRI (male and below 60 years) should file tax return in India if his income exceeds `1.8 lakh, while a person above 60 years, who earns more than Rs 2.5 lakh, will also have to file it. The due date for filing the return is 31 July of the year following the relevant tax year.

Says Vatsaraj: “You have to declare the income earned in India while filing tax returns in the foreign country too. If the latter has a Double Tax Avoidance Agreement (DTAA) with India, it will help you get tax credit for the taxes paid here.”

There are situations when you need not file returns. Patel says, “For NRIs, there is a special chapter (XII-A) in the Indian IT Act, according to which if he earns a specified income and the tax, if any, has been deducted at source, he need not file a return in India.”

In most cases, regulators have mandated tax deductions before handing over money to NRIs. So, your rental income or mutual fund withdrawals will be deposited in your account after taxes have been cut. The rates are the same as that for residents.

Source – Economic Times