Understanding the Income Tax for NRI in India

When it comes to income tax return in India for NRIs, it can be hard to keep up with all the rules and tax systems that are always changing. It's important to know your tax responsibilities in India, whether you've just moved there or have been an NRI for years. This is important for both planning and compliance. 

As more Indians work abroad while still keeping financial ties to India, it is more important than ever to understand the tax implications for NRIs. This complete guide will teach you everything you need to know about NRI taxes, from figuring out your tax residency status to filing your returns online.

Who Qualifies as a Non-Resident Indian (NRI) for Tax Purposes?

Before we get into the details of which income tax return for NRIs, it's important to know who is an NRI under Indian tax laws. Your tax residency status is based on how long you were physically present in India during the financial year. The Finance Act 2024 has made a lot of big changes. For example, it has a 120-day rule for high-income NRIs who make INR 15 lakh or more in India and a deemed residency rule for Indian citizens who make the same amount but don't pay taxes anywhere else.

Key Criteria for NRI Status

Physical Presence Test

• If you spend less than 182 days in India during the financial year, you are an NRI.

• The limit drops to 120 days for people with high incomes (those who make more than ₹15 lakh from Indian sources).

Tax Liability Test

The deemed residency provision says that an Indian citizen will be considered a resident if they don't have to pay taxes in any other country, even if they are not in India.

Let us understand the criteria for residential table status with the help of a table:

Understanding NRI Tax Slabs and Rates for FY 2024-25

The new tax system is now the default choice for people because of the Finance Act 2024. However, taxpayers can still choose the old tax system. To get the best tax break, you need to know how both systems work.

New Tax Regime (Default from AY 2024-25)

In the new tax system, you have to pay taxes on your primary income when it goes over ₹2.5 lakh in the old system or ₹4 lakh in the new system.

Tax Slabs for New Regime:

• Up to ₹3,00,000: Nil
• ₹3,00,001 to ₹7,00,000: 5%
• ₹7,00,001 to ₹10,00,000: 10%
• ₹10,00,001 to ₹12,00,000: 15%
• ₹12,00,001 to ₹15,00,000: 20%
• Above ₹15,00,000: 30%

Old Tax Regime

Tax Slabs for Old Regime:

• Up to ₹2,50,000: Nil
• ₹2,50,001 to ₹5,00,000: 5%
• ₹5,00,001 to ₹10,00,000: 20%
• Above ₹10,00,000: 30%

Additional Charges

In addition to their base income tax, NRIs must also pay a surcharge and a Health and Education Cess. The surcharge is a percentage of the tax amount: The Old Tax Regime charged 10% on income between ₹50 lakh and ₹1 crore and 37% on income above ₹5 crore.

Types of Taxable Income for NRIs in India

Understanding what constitutes taxable income is fundamental to your income tax filing for NRI process. Let us explore the various types of taxable income for NRIs:

Income from Salary

If you get paid by an Indian company or for services you do in India, you have to pay taxes on all of that money. This includes:

• Base pay
• Allowances (HRA, transport, etc.)
• Extra pay and bonuses
• Benefits for retirement, such as a provident fund and a gratuity

Income from House Property

NRIs have to pay taxes on rental income from properties in India. Key points are:

• Income is based on the annual rental value.
• You can take a standard deduction of 30% for repairs and maintenance.
• You can deduct the interest on your home loan.
• You can take the property tax you paid out of your rental income.

Capital Gains

Profits from selling assets in India are subject to taxes:

• Short-term Capital Gains (STCG): Assets that are owned for less than a certain amount of time
• Long-term Capital Gains (LTCG): Assets held for longer periods of time with lower tax rates
• Indexation benefits for LTCG on some assets

Business and Professional Income

All income from a business or profession done in India is taxable. This includes:

• Profits from trading
• Fees for professionals
• Income from a partnership
• Money made from a private business

Other Sources

This includes:

• Interest earned on bank accounts and fixed deposits
• Income from dividends
• Earnings from investing in mutual funds
• Any other income earned in India

Which Income Tax Return Form Should NRIs Use?

Selecting the correct income tax return form for NRI is crucial for accurate filing. Most NRIs will have to opt between ITR-2 and ITR-3. Fill ITR-2 if you are an NRI with income from salary, house property (such as rent), capital gains (such as from selling property or shares), or income from other sources such as interest or dividends.

ITR-1 (Sahaj)

ITR-1, also known as Sahaj, is the income tax return form for resident individuals (not HUFs or companies) with total income up to ₹50 lakh. However, NRIs cannot use ITR-1 as it is specifically designed for residents only.

ITR-2

This is the most commonly used income tax return form for NRI with:

• Salary income
• Income from house property
• Capital gains
• Income from other sources (interest, dividends)
• Income up to ₹50 lakh
• No business or professional income

ITR-3

NRIs should use ITR-3 if they have:

• Business or professional income
• Income as a partner in a firm

Step-by-Step Guide: How to File Income Tax Return for NRI Online

The government's digital initiatives have made it easier to file your income tax return filing for NRI. This detailed section will guide you through the whole process, from registering to submitting successfully. This will make sure you can file your taxes quickly and correctly.

Step 1: Register on the Income Tax e-Filing Portal

1. Visit the official Income Tax Department website.
2. Click on "Register" and select "New User Registration".
3. Choose "Individual" as the category.
4. Enter your PAN, email, and mobile number.
5. Complete the registration process and verify your email and mobile number.

Step 2: Log in and Navigate to the Filing Section

Log in to the e-Filing portal using your user ID and password. On your Dashboard, click e-File > Income Tax Returns > File Income Tax Return.

Step 3: Select Appropriate ITR Form

Based on your income sources, select the appropriate ITR form (usually ITR-2 for most NRIs).

Step 4: Choose Tax Regime

From AY 2024-25, the new tax regime is the default option. Every year, you can select between the old and new tax regimes for that assessment year.

Step 5: Fill in Income Details

Enter all your income details accurately:

• Salary income (if any)
• House property income
• Capital gains
• Income from other sources

Step 6: Claim Deductions and Exemptions

Under the old regime, you could claim various deductions under sections 80C, 80D, etc.

Step 7: Calculate Tax and TDS

The system will automatically calculate your tax liability and show TDS details.

Step 8: Verify and Submit

• Review all details carefully
• Generate and submit your return
• Choose verification method (Aadhaar OTP, Net Banking, or physical verification)

Common Deductions and Exemptions Available to NRIs

When you file your income tax return as an NRI, one of the most important things you can do is make sure you get the most money back in deductions. Here we will explore various deductions and exemptions available to NRIs, helping you optimise your tax liability while remaining compliant with Indian tax laws.

Deductions Under Section 80C (Old Regime Only)

NRIs can claim up to ₹1.5 lakh deduction for:

• Employee Provident Fund (EPF) contributions
• Public Provident Fund (PPF)
• Life insurance premiums
• ELSS mutual funds
• NSE/NSC investments
• Home loan principal repayment
• Tuition fees for children

Section 80D - Medical Insurance

• Health insurance premiums for self, spouse, and dependent children: Up to ₹25,000
• Health insurance for parents: Additional ₹25,000 (₹50,000 if parents are senior citizens)
• Preventive health check-up: Up to ₹5,000 within the overall limit

Section 80E - Education Loan Interest

Interest paid on education loans for higher education is fully deductible without any upper limit.

Section 80G - Donations

Donations to specified charitable institutions are eligible for deduction ranging from 50% to 100% of the donated amount.

Conclusion

Understanding income tax for NRI in India doesn't have to be overwhelming. You can easily take care of your Indian tax duties and get the most out of legal tax breaks if you know the rules, the deadlines, and the available digital tools. It is essential to stay up to date on changes to tax laws and get professional help when you need it to stay compliant in the long run. Keeping your records in order, knowing your residential status, picking the proper tax regime, and filing your returns on time are all important parts of good NRI tax management.  

As an NRI, your financial health goes beyond just paying your taxes. It's just as important to protect your health and financial security with full health insurance coverage while you deal with your taxes in India. Niva Bupa offers health insurance plans that are specifically made for NRIs and cover a wide range of services in India and around the world. 

As healthcare costs rise and medical emergencies become more common, having good health insurance protects your hard-earned savings and gives you peace of mind knowing that you can always get good care when you need it. Along with your tax planning, you might want to look into Niva Bupa's NRI health insurance plans to add to your financial security.

Frequently Asked Questions (FAQs)

1. Can NRIs use the ITR-1 (Sahaj) form to file their taxes? 

   No, NRIs can't use ITR-1 because it was made just for people who live in India. Depending on where their money comes from, NRIs usually need to use ITR-2 or ITR-3.

2. What is the TDS rate for bank deposits made by NRIs? 

   NRIs have to pay a TDS rate of 30% on interest earned from bank deposits. This is more than the 10% rate that residents have to pay.

3. Do NRIs have to pay taxes on money they make around the world in India? 

   No, NRIs only have to pay taxes on money they make or earn in India. In India, they usually don't have to pay taxes on money they make outside of India unless they bring it there.

4. Are NRIs able to claim deductions under Section 80C? 

   Yes, NRIs can claim deductions under Section 80C of up to ₹1.5 lakh, but only if they choose the old tax system, as the new regime doesn't allow most deductions.

5. What happens if an NRI doesn't file their return on time? 

   If you file your taxes late, you could have to pay a fine of between ₹1,000 and ₹10,000, depending on how much money you make and how late you file. You may also have to pay interest on any unpaid taxes.

6. Can NRIs file their taxes online from outside the country? 

   Yes, NRIs can file their income tax returns online from anywhere in the world using the Income Tax Department's e-filing portal and their PAN and login information.