By Poonam Binaykiya
Taxable income of NRI is calculated in the same way as that of resident Indians. The only difference is that a resident Indian is also being charged on the global income, whereas an NRI is being charged only on Indian income
An Indian living abroad is generally being considered as an NRI (non-resident Indian) and it has also been defined under two broader ways—First being under FEMA (Foreign Exchange Management Act) and second being under the Income Tax Act, 1961.
As per FEMA, the day a person leaves India to stay outside for an uncertain period for whatever purpose whether the same is for taking up an employment, carrying out business or vocation; the person is considered as an NRI.
In contrast to the FEMA, as per the Income Tax Act, 1961; the person is defined as an NRI according to the number of days being spent abroad. Therefore, if the person satisfies both the conditions given below, he will be considered as an NRI:
a) An individual is not in India for 182 days or more during the previous year
b) An individual is not in India for 60 days or more during the previous year and he is not in India for 365 days or more during the four years prior to the previous year.
The above mentioned condition (b) can be excluded if an individual leaves India for taking up employment or joining as a crew of an Indian ship and his stay in India in the year did not exceed 182 days.
Now when an NRI comes to India, he has also got to do certain investment. Before starting any sort of investment, the NRI is supposed to follow certain formalities like getting a PAN Card, opening bank accounts, opening a demat account, appointing a financial planner, filling know your customer form, etc.
After completion of all the above steps, the most critical point is the amount of taxation he will be required to pay which also decides to a certain extent whether the investment option is a good one or not. Therefore, let’s discuss about the taxable income of NRIs, the income exempted from tax and the deductions as well as special provisions an NRI can avail of.
Taxable income of NRI
The taxable income of NRI is calculated in the same manner as that of resident Indians with the only difference that the resident Indian is also being charged on the global income whereas NRI is being charged only on Indian Income (income being accrued or arisen in India). While computations of taxable income, the income are being shown separately under five different heads as follows:
- Income from salary
- Income from house property
- Income from business / profession
- Income from capital gains
- Income from other sources
Income exempted from taxation:
a) Interest on deposit in the Non-resident (Non-Repatriable) Rupees Deposit Scheme, Non-Resident (External) account, Foreign Currency Non Resident Bank Account.
b) Dividend declared, distributed or paid by a domestic company on or after 01/06/1997.
c) Income from units of Unit Trust of India, other mutual funds and from venture capital/ company.
d) Interest on specified saving certificates, specified securities or bonds (including income by way of premium on the redemption of such bonds) issued before 01/06/2002 by the Central Government.
e) Agricultural income under Section 10(1) of Income-tax Act.
f) Scholarships granted to meet the cost of education Under Section 10(3) of the Income Tax Act.
g) Casual income up to Rs. 5,000 under Section 10(5) of the Income Tax Act.
h) Remuneration received by an individual as an official, embassy, high commission, consulate or the trade representation of a foreign state, or as a member of the staff of any of these officials. For the above exemption, it is necessary that the Indian official also enjoys the similar exemption in his country.
i) Remuneration of an employee of a foreign enterprise for service rendered by him during his stay in India. For the above exemption, it is necessary for the employee to follow some conditions: Not engaged in other trade or business in India. His stay does not exceed 90 days in previous year.
j) Remuneration is not liable to be deducted from the income of an employer.
k) Remuneration received by an employee by the government of a foreign state for his training.
l) Remuneration for doing a research work, for shooting any cinematographic film, etc.
Tax saving options
It is equally important for an NRI to have knowledge about the deductions available for him because of which he can avail the benefit of lesser amount of taxation on his gross total income.
a) Principal amount of home loan is eligible for deduction up to Rs. 1 lakh under Section 80C, while the whole interest payment is also allowed as a deduction under Section 24B
b) Health insurance premium up to Rs. 35,000 (Rs. 20,000 for senior citizens and Rs. 15,000 for non-senior citizens) under Section 80D
c) Interest payment towards education loan under Section 80E.
d) Deduction under Section 80G on specified donations.
Special provisions for incomes of NRI
Apart from the deductions discussed above, there are certain special provisions covering income of NRIs. The provisions are as follows:
a) No deduction in respect of any expenditure or allowance will be allowed in computing the investment income (Income derived other than dividends referred in Section 115-O from a foreign exchange asset) of a NRI.
b) While computation of the gross total income of the assessee, any income by way of long term capital gains will be reduced and the deduction under Chapter VI A will be allowed on the reduced gross total income as if the reduced gross total income was the gross total income of the assessee.
c) The income from foreign exchange assets and the long term capital gains arising from the transfer of foreign exchange assets shall be taxed at a concessional rate of 10%.
d) The Act provides a separate method of computation of capital gains (whether long term or short term) arising from transfer of shares or debentures. The capital gains should be computed in that foreign currency as was initially utilised for the purchase of the shares or debentures. The capital gains should be computed in that foreign currency and then such gains should be converted into Indian currency.
e) The long term capital gain arising from the transfer of any foreign exchange asset will be exempt from tax to the extent the net proceeds realised on transfer are reinvested within six months of the transfer in any specified asset. However, where the new asset is transferred into money within three years of its acquisition, the capital gain arising from the transfer of the original asset which has been exempted shall be deemed to be the capital gain of the previous year in which the new asset is converted or transferred into money.
f) NRI need not require to furnish a return of his income if his income only consists of investment income or long term capital gains or both and the tax deduction at source has been correctly deducted from such income.
g) If an NRI in any previous year becomes assessable as a resident in India in respect of the total income of any subsequent year, he may furnish a written declaration along with his return of income to the assessing officer for the year for which he is so assessable. These benefits will continue to him for the assessment year and the subsequent years until he converts such assets into money.
h) An NRI may elect not to be governed by the provisions of the Section 115C to 115H by giving a written declaration along with his return of income for that assessment years. Hence, the tax on such total income will be charged as per the regular provisions of the Act.
Role of a financial planner
When an NRI invests in India, he generally thinks of getting more return in comparison to his host country and comes with unlimited dreams as well as expectations but on the other hand he is restricted with limited resources and knowledge. At this point, the financial planner makes a proper planning and helps in improving the investment performance. Therefore, the role of financial planner can be best described as:
- To have a basic understanding of the risks of his client’s portfolio.
- To help NRI develop a long range financial plan for the investment of his assets as well as insurance needs of the client.
- To help in optimisation of tax by investing on those products which either attracts nil amount of taxation or can avail the deductions Under Section 80C to 80U, for example, the taxation on long term capital gain of equity mutual fund is nil.
- To do proper research on the investment products and suggest the best suitable one as per ones portfolio.
- To understand the local laws, for example; while repatriation of sale proceeds of house property is allowed, it is limited to two such repatriations per person per year; capital gain bonds are available only up to Rs. 50 lakh per person per year. Similarly, an understanding of the local laws and customs are very necessary before setting an investment limit for an NRI.
- To monitor the performance of portfolio on continuous basis, refine strategy if continuous required and carry out portfolio rebalancing.
- To communicate continuously with the client and provide regular update about his portfolio.
The role of financial planner is same for both resident Indians as well as NRI, but the major difference comes in the form of laws, customs, and currency fluctuations of both the countries. The more the financial planner remains updated with all the important legal aspects of both the countries; the more it will be beneficial for him in helping the NRI in proper formulation of investment portfolio.
The writer is the owner of Kolkata based financial consultancy firm Iplanzone.