For Income Tax pruposes, your residential status impacts how your income is taxed. A Resident Indian is taxed for his/her entire income – this may be earned or received in India or may have been earned or received outside India.
For a NRI – Only the income under the following 2 circumstances is taxed in India
- Income received in India by the NRI himself or by someone on his behalf
- Income that accrues or arises in India.
We’ll understand these in further detail below. If you have income from the above 2 sources and the total of this income exceeds the minimum exemption limit of Rs 2,50,000 – you will have to pay tax in India.
Let’s understand when an Income is considered to accrue or arise in India.
The following incomes are considered to accrue or arise in India–
- Income from any property, asset or source of income in India – You may earn Income from an asset source in India. This may be in the form of income which is earned from a property which is in your name in India and you have rented it out. Similarly you may be earning interest from a fixed deposit in a bank account in India. You have to pay tax on such income in India. As per rules of Income Tax, the tenant or the bank has to deduct TDS @ 30% for payments made to NRIs. In case you are in a lower tax bracket, you will need a certificate from your Income Tax for lower TDS rates.
- Capital Gain on transfer of a capital asset which is situated in India – If you sell a capital asset which is located in India – could be your own or inherited property, the capital gains on such sale of assets is taxable in India for you. TDS is also applicable on capital gains for NRIs. On Long term gains there may be a TDS of 20%. On short term capital gains on transfer of equity shares or units of equity oriented Mutual Fund, where the transaction is subject to STT securities transaction tax, TDS is 15%. If no STT is paid these there may be a TDS of 30%. Certain special Capital Gains exemptions are also available to NRIs and you may be able to take advantage of these while calculating your capital gains tax.
- Under section 48(1), upon fulfillment of certain conditions, where shares have been acquired in foreign currency, capital gains may be allowed to be computed in the same foreign currency in which purchases have been made.
- NRI can choose exemption under section 115F – where a long term specified asset purchased in convertible foreign exchange has been sold and within 6 months the NRI uses the net consideration (consideration less expenses on transfer) to purchase assets which have been specified for this purpose, the capital gains are exempt. If a lesser amount is invested, a proportion based on the amount invested is exempt.
In case you earn capital gains from an asset which is India and if these gains are your only source of Income for that year and TDS has been deducted on source, you may not be required to file your return if tax has been deducted and paid.
- When Salary Income is taxed in India for NRIs – Income from Salary is considered to arise in India if your services are rendered in India. So even though you may be an NRI, but if your salary is paid towards services provided by you in India, it shall be taxed in India. In case your employer is Govt of India and you are the citizen of India, Income from salary if your service is rendered outside India is also taxed in India. Note that Income of Diplomats, Ambassadors is exempt from tax.
- Income from a business connection in India – By business connection it usually means a person is acting on behalf of the NRI and is – doing contracts for business, or maintains stock of goods, or may secures orders in India, in such a case the income from these operations carried out in India shall be deemed to accrue or arise in India.