Are you an NRI? Here’s what you should know…

Being far away from your motherland can be tough. It can be tougher if there’s a host of issues to be dealt with, requiring in-depth knowledge of tax processes and legalese. Here’s a peep into the pain points faced by the Non-Resident Indians (NRIs).

• Determination of NRI status

  Under the Income-tax law, residential status is determined based on physical presence of an individual in India during a financial year (FY) and the preceding 4 FYs.

  Residential status needs fresh determination for each year.

  NRIs are those individuals who are Indian citizens but live and work outside of India for more than 182 days in a financial year or those persons who have resided in India for a period less than 60 days during the previous year and for a period less than 365 days in the 4 years immediately preceding the relevant previous year.

  They often face several issues related to taxation when dealing with India, and these problems can range from understanding the tax laws to filing tax returns. In this note, we will discuss some of the most common problems faced by NRIs when dealing with taxation issues in India.

• Understanding the Indian tax laws applicable to NRIs

  One of the biggest problems faced by NRIs is the lack of awareness and understanding of Indian tax laws which apply to them specifically, especially those which are complex and constantly changing, such as the rules for determining their tax residency status, the tax rates that apply to them, and the deductions and exemptions they may be eligible for. This lack of awareness/understanding can lead to mistakes in tax planning and compliance, which can result in penalties and fines.

  For instance, an individual qualifying as NR is taxable on the following incomes (India- sourced incomes):

  • income accruing or arising in India;

  • income deemed to accrue or arise in India; and

  • income received or deemed to be received in India.

  • There are separate rules for taxation of different income such as dividend income, sale of unlisted securities, etc., in case of NRs.

• Double Taxation

  NRIs may face double taxation, which is when they are taxed on the same income in both their country of residence and in India. This can occur when the income earned by an NRI is taxable both in India and in the country of their residence. To avoid double taxation, India has signed double taxation avoidance agreements (DTAAs) with many countries, which allow NRIs to claim a tax credit in their country of residence for the taxes paid in India. However, not all countries have signed DTAAs with India, and even if they have, the rules for claiming a tax credit can be complex.

  Broadly, there are two methods provided to avoid double taxation and seek relief from the income tax department:-

       I.         Exemption Method: In this method, the non-resident is taxed only in the one country, as per his wish and is exempted from taxation over the questioned income in the other country.

     II.         Tax Credit Method: If income is simultaneously taxed in two jurisdictions, then tax relief can be claimed in the country of residence of the non-resident Indian.

• Difficulty in obtaining PAN and Aadhaar cards

  The Permanent Account Number (PAN) and Aadhaar cards are essential documents for NRIs when dealing with taxation issues in India. PAN is a unique identification number assigned by the Indian tax department to individuals and entities for tax purposes, while Aadhaar is a 12-digit unique identification number issued by the Indian government. An NRI (whether minor or adult) with a valid Indian Passport can apply for Aadhaar from any Aadhaar Kendra. An NRI can apply for PAN by submitting the Form No. 49A along with the requisite documents and prescribed fees at the PAN application center of UTIITSL or Protean (formerly NSDL eGov). He can also make an online application through the website of UTIITSL or Protean (formerly NSDL eGov).

• Complexity in filing income tax returns

  Filing tax returns in India can be a complex process, even though it can be done online and NRIs may find it even more challenging due to the additional requirements and rules that apply to them. For example, NRIs are required to file their tax returns electronically, and they may need to obtain digital signatures or other forms of authentication to do so. They may also need to provide additional documentation, such as proof of their foreign income and tax payments made in their country of residence.

  After determining their residential status, NRIs need to calculate their income taxable in India, whether it exceeds the threshold limits prescribed for that FY, and avail the exemptions and deductions that they are entitled to. This income could be from several sources. It could be in the form of your salary. It could be capital gains on the sale of shares and mutual funds. Interest from deposits in NRO accounts and rental income is also a part of the bracket. However, NRIs can claim benefits under tax treaties. NRIs can also claim refunds if TDS is deducted on their income. For this, they need to reconcile TDS credit and advance tax as reflected in Form 26AS.  
  NRIs can also claim deduction up to Rs 1.5 lakhs u/s 80c of the Income Tax Act. However, they cannot invest in certain instruments such as the Public Provident Fund (PFF). If your income in India exceeds Rs 50 lakhs, you are required to report your assets and liabilities in India.
  NRI can claim double taxation treaty benefit, as the Double Tax Avoidance Agreement (DTAA) enables an NRI to avoid paying tax twice on the same income. Lastly, they need to verify IT returns within 120 days of filing it, otherwise they are not valid. You can e-Verify your returns online using:

  • OTP on mobile number registered with Aadhaar, or

  • EVC generated through your pre-validated bank account, or

  • EVC generated through your pre-validated demat account, or

  • EVC through ATM (offline method), or

  • Net Banking, or

  • Digital Signature Certificate (DSC)

  NRIs may face limited access to tax professionals who are knowledgeable about both Indian and foreign tax laws especially if they live in a country where there are few tax professionals with this expertise. This can make it challenging to obtain advice and guidance on tax planning and compliance issues.

  To address these challenges, NRIs should stay informed about changes to Indian tax laws and regulations and take steps to comply with them in order to avoid penalties and fines.

  Disclaimer: The above note is only indicative and not exhaustive. Readers are advised to read the relevant regulatory provisions and take professional advice.