The question of taxation of the NRIs is quite complicated because you are dealing with the tax laws, not of one but of two countries. So, you have to be aware of the provisions in detail to ensure that you end up paying exactly what you owe – not more and not less. For this purpose, it is necessary to understand the tax laws governing the income of the NRI in India.
Taxing the income of the NRI
A person is considered a non resident Indian or NRI if he spends 182 days or more outside the country. With this basic definition in mind, consider the following tax provisions for the NRI.
- You are liable to pay tax only on the income generated in India. This income may come from rent, interests etc. You are taxed at the same rate as a resident and can file for the same exemptions.
- If your total income in India does not exceed the minimum income limit for paying taxes in the country, you do not have to pay any tax on it. However, there are a few exceptions to this rule.
- Regardless of your total income from India, you will have to pay tax on short term capital gains. You will also have to pay tax on the long term capital gains if the tax had not already been deducted at source.
- While this has been the general provisions regarding taxing the income of the NRI, some concerns have now been expressed by the fact that new laws may be introduced to tax the global income of the NRI. So, you may end up paying taxes in two countries. The cause for this concern is the new DTC or Direct Tax Code bill which is to be introduced in the Indian parliament.
- According to this code, the global income of a NRI will be taxable if he spends sixty or more days in the country. This will come into effect from April 2012.
- This has created major concern among the millions of NRIs who visit their friends and family in India for long vacations. Does this imply that if they spend sixty days or more on their vacation, their global income will be taxed?
Understanding the provisions of NRI taxation
While the DTC has been introduced with the specific purpose of plugging the loopholes in NRI taxation leading to tax avoidance, you should keep the following in mind before panicking at the thought of having to pay tax on your global income:
- If you have been enjoying the NRI status for the last nine out of ten financial years, then your global income will not be taxed even if your current stay exceed sixty days.
- If you have stayed in the country for a total of less than 730 days in the last seven financial years, your global income will not be taxed in spite of exceeding the sixty days limit.
- Once you return to India after being a NRI for ten years, you cannot directly become a resident. Instead, you will become a RNOR (resident not ordinarily resident) for two years. During this period, your global income will not be taxed. However, after this, you will acquire the status of a resident and will be taxed accordingly.
- There has been some effort to eliminate the RNOR category to simplify the tax laws and reduce the cases of tax avoidance, but it is yet to take effect.
- Finally, NRIs need to check whether India has Double Tax Avoidance Agreement with their country of residence so that they can avoid paying tax twice. India has such treaties with 74 countries at present.