5 Income Tax Rules NRIs Must Know Before Making Investments in India

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Changing economic scenarios and a shortage of jobs in the country have made many Indians migrate to other affluent countries in search of better economic scenarios and job opportunities. According to a report released by the World Bank, India is found to be the highest receiver of foreign funds across the world. As of April 2018, this amount stood at $69 billion which is a huge amount to be ignored.

These remittances prove that although many Indians are moving to other countries, their first priority for making investments is still in their own country -India. The government of India has also eased its income tax rules to help the NRIs facilitate investments in their home country.

For instance, non-repatriable investments by OCIs (Overseas Citizen of India), NRIs (Non-Resident Indians) and PIOs (Person of Indian Origin) are now regarded as domestic investments. Since 2015, these investments are free from any foreign direct investment caps.

In addition to that, Indians banks provide NRE (Non-Resident External) account facility that has made deposits completely repatriable and also the interest earned on these accounts is completely tax-free as per income tax rules.

If you also belong to the lot who have moved to other countries but is looking for investment avenues in India, there are categorical tax & other financial implications that you should be aware of. More often than not, these NRI taxation rules affect your financial planning immensely.

Here’s a look into Income Tax rules every NRI should be aware of before making investments in India:

1. Residential status

Tax implications, as well as income tax rules in India, vary according to one’s residential status. As per the NRI taxation rules, an individual is deemed as a resident if s/he is residing in India for a minimum of 182 days in a single financial year. It means that, if you are an Indian resident and work as a crew member on an Indian ship or are working abroad on a project, you will only be deemed as an Indian resident if you have fulfilled the aforementioned criterion.

2. Taxable Income

Since you are not an Indian resident according to Indian income tax rules, the income you are earning abroad will not be taxed in India. However, any income you have accrued in India will fall under the NRI taxation rules.

This taxable income includes, any income earned from house property (e.g. rent), salary earned in India for any job, or interest earned on bank deposits or capital gains in exchange of transferring an asset in India.

There are also various bank account services in India that are specifically designed for NRIs such as NRO, NRE and FCNR accounts. However, deposits made in only NRO accounts are tax liable and any interest accrued on FCNR & NRE accounts are tax-free.

3. Existing Investments

If you had made investments in different Indian schemes before moving abroad, you need to understand that some of these schemes like NSC (National Savings Certificate) will be deactivated for you.

As per new income tax rules, NRIs are now allowed to continue their PPF accounts until its maturity i.e. until it completes its tenure of 15 years. However, NRIs don’t have any option to renew their PPF accounts. It’s important to note down that NRI taxation rules don’t allow small savings schemes to be opened by NRIs.

In case you already have a savings account in a bank, you need to convert it into an NRO account and you can then manage it from anywhere across the world. Again, if you have made investments in stocks or mutual funds, you need to intimate your brokerage and bank about the change in your residential status. You may also need to complete the documentation procedure as mentioned by your bank or brokerage.

The respective bank or the brokerage will let you know about the NRI taxation rules that are to be followed based on your country of residence. This is an important piece of information to know as there are certain funds you can’t invest in, if you are living in the US or Canada.

Furthermore, you will also be required to open an NRE account to send foreign currency to India.

4. TDS (Tax Deducted at Source)

Everything from mutual funds, stocks, gold to property falls under TDS category. The effect of income tax rules is greater on non-residents as the deduction percentage is higher for NRIs.

  • Dividends earned on mutual funds & equity: No TDS
  • Interest on FCNR & NRE accounts: No TDS
  • Professional Services’ Income: 10%
  • Royalty Income: 10%
  • Income earned from technical fees: 10%
  • Short-term capital gains on equity-related & equity Mutual Funds: 15%
  • Interest on NRO accounts: 30%
  • Rent Income: 30%
  • Income earned from other categories: 30%

NRI taxation rules make 3% education cess also applicable to TDS. In addition to, income above Rs 10 lakhs is also imposed with a surcharge of 10%.

NRIs can lessen their TDS by becoming a secondary subscriber in joint investments or accounts with an Indian resident. It will make the liability of TDS lie with the primary account holder.

5. Income tax returns (ITR) filing for NRIs in India

If the income earned by a non-resident in India exceeds beyond Rs 2.5 lakhs in a financial year, NRI is required to file the Income Tax Return (ITR).

Bonus Point:

In the end, if you are planning to return to India for your retirement, you can always use NPS (National Pension Scheme) as an investment tool to create your retirement corpus. NPS is a market-linked scheme and could prove profitable for you in the long run.

Final Thoughts:

Stocks & bonds of Indian mutual funds & companies as an emerging economy offer a good opportunity to the NRIs to grow their money. Alongside, government bonds & securities are some of the safest options to invest in for the non-residents.

Published on 21 December 2018

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