A guide to save tax for NRIs and optimize their tax outgo.
Ever since India embraced globalization in the early 1990s, a large number of Indians have moved to foreign countries for work. Moving abroad also changed their tax status. Any Indian who stays in the country for less than 182 days in a financial year is categorized as a non-resident Indian (NRI). The tax rules for NRIs are quite different from those that apply to resident citizens. For NRIs, there is no tax on foreign income but the tax reporting is very elaborate. They have to adhere to the tax laws in two different countries. Besides, the TDS rules for NRIs are also quite stiff and they don’t enjoy some of the tax privileges that normal citizens are eligible for.
Even so, prudent tax planning and timely measures can help NRIs get past the tax hurdles in their path. Given below are 20 steps that can help them optimize their tax outgo. These measures will ensure that the NRI taxpayer wins the Tax 20-20.
- Maintain NRI status to avoid tax on foreign income: The residential status of the individual determines the tax liability. As mentioned earlier, the foreign income of NRIs is not taxable in India. An individual should therefore plan his stay in India in a way that it does not change his NRI status. Tax rules say a person is an NRI if he/she stays in India for less than 60 days during a financial year (1 April to 31 March) or has spent less than 365 days in the country in the past four years. In case of Indians who went abroad for work during the year or are a member of a crew on an Indian ship, this limit is longer (182 days to be exact) during a financial year (from 1 April 2017 to 31 March 2018). Sounds complicated? Use our calculator to check the correct residential status here https://www.taxspanner.com/services-calculators
- Avail maximum deductions to reduce tax: Like any other taxpayer, NRIs are also eligible for the Rs 1.5 lakh deduction under Section 80C and Rs 50,000 for investment in the NPS under Section 80CCD (1b). However, they cannot invest in the Senior Citizens’ Saving Scheme, open a PPF account or buy NSCs and post office deposits. They are also not eligible for certain deductions, including medical treatment of disabled dependent (Sec 80DD), treatment of family member suffering from specified diseases (Sec 80DDB), disability of self or dependent (Sec 80U) or royalty income (Sec 80QQB).
- Buy house in India with loan: Living abroad, NRIs can claim deduction under Section 24 for the interest paid on home loan to buy a house in India. Up to Rs 2 lakh interest can be claimed as deduction in a year. If the house is given on rent, the entire interest paid can be adjusted against the rental income from the house. What’s more, the property tax paid is also eligible for deduction. The home loan acts as a compulsory investment and leads to regular cash flow. It is certainly a better option than keeping funds idle in a low yield savings bank account.
- Buy medical insurance for family in India: NRIs can claim deduction for securing the health of their family and parents. Up to Rs 25,000 premium for health insurance of self and family and Rs 25,000 for the health insurance of parents can be claimed as a deduction. The deduction for parents is higher at Rs 30,000 if any of them is a senior citizen. Therefore, an NRI can claim a maximum deduction of Rs 55,000 under Section 80D. A deduction of up to Rs 5,000 for preventive health check-ups is also available within this overall limit.
- Take education loan for family: NRIs are also eligible for deduction of interest paid on an education loan under Section 80E. The loan can be for higher education for self, spouse, children or any person for whom the NRI is a legal guardian. There is no limit on the amount which can be claimed as a deduction, but the deduction is available for a maximum of eight years. Also, there is no deduction for the principal of the loan.
- Obtain PAN even if income below basic exemption limit: Any income beyond a certain threshold is subject to TDS. According to Section 206AA introduced in 2010, the TDS is higher if the investor fails to furnish his PAN. If there is no PAN, TDS for NRO deposits is 30% (as against 20% which is the existing TDS rate). To avoid a higher TDS, obtain a PAN now.
- Avail exemption for long term capital gains: Long-term capital gains earned by NRIs are taxable and also subject to 20% TDS. But NRIs are allowed to claim exemptions under Section 54 if the residential property has been sold after holding for more than two years. If the capital gains are used to buy a new house, the NRI can claim refund of TDS. For assets other than house property (land, gold, bonds, artefacts or unlisted equities), exemption can be claimed under Section 54F.NRIs can also buy capital gain bonds under Section 54EC to avoid tax. Up to Rs 50 lakh can be invested in bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). You have six months’ time to invest the capital gains in these bonds. But the investment has to be done before the tax filing deadline to able to claim this exemption. The bonds cannot be sold within three years from the date of sale on which capital gain occurred
- Avoid receiving foreign income in Indian bank: Though the foreign income of NRIs is not taxable in India, it becomes taxable if received directly in an Indian bank. To escape this provision, make sure that the foreign income is deposited in your bank outside India.
- Continue tax free interest in NRE account for two years after returning to India: Tax laws allow RNORs (Resident but not ordinarily residents) the same exemptions available to NRIs for two years after their return. One of this is the tax free interest earned on an NRE bank account. Deposits held in foreign currency should therefore be retained in the NRE account to earn tax-free interest for two more years. After two years, when the tax status changes, these deposits can be moved to the regular account. Check your residential status here to know if you are RNOR https://www.taxspanner.com/services-calculators
- Take benefit of Double Tax Avoidance Agreement: NRIs can avoid getting taxed on the same income twice (in country of residence and again in India) by seeking relief under the double taxation avoidance agreement (DTAA) between the two countries. The NRI must obtain a tax relief certificate (TRC), which may need to be presented at the time of assessment of tax return. If the individual claims relief from TDS, the payer may want to see the TRC to deduct tax at the lower rate. The concessional rates can be checked at http://www.incometaxindia.gov.in/Pages/atoz-index.aspx
- Submit declaration to bank for lower TDS if living in country with no tax: Some countries don’t levy personal tax on their residents. Yet India has a DTAA with them, which allows NRIs living in those countries to avail a reduced rate of TDS. Each bank handles such situations in its own way. Some like the State Bank of India require NRIs to submit a self-declaration that they reside in a country with zero tax. On submitting this self-declaration, the bank will deduct tax at source at the reduced rate instead of the mandated 30% rate.
- Take benefit of special provision for long-term assets purchased in foreign currency: For long-term capital gains made from the sale of transfer of foreign assets, there is no benefit of indexation, nor any deduction allowed under Section 80. But you can avail an exemption on the profit under Section 115F when the profit is reinvested back into:
a) Shares in an Indian company
b) Debentures of an Indian public company
c) Deposits with banks and Indian public companies
d) Central Government securities
e) NSC VI and VII issues.
- File tax return in India within deadline: Any individual whose gross income before deduction under Section 80 exceeds Rs 2.5 lakh is required to file his income tax return in India. NRIs too must file their tax returns to claim refund of excess TDS and to carry forward their losses. It shall not be necessary for a NRI to furnish a return of income if:
a. Total income during the financial year was only from investments; and
b. TDS has been deducted from such income.
Thus, if you don’t have any income which is chargeable to tax, you are not required to file return of income.
- Pay advance tax and save interest penalty: If your tax liability exceeds Rs 10,000 in a financial year, you are required to pay advance tax. A delay can lead to a penal interest of 1% per month of delay under Section 234 B & C. Most taxpayers who end up paying penal interest are unable to estimate the tax liability on foreign income in India. In many cases, rental income is not subject to TDS but is taxable at the normal rates.
- Obtain CA certificate in form 15 CB for remittance abroad: If an NRI earns rent from property in India, the tenant deducts 30% TDS from the payment. The NRI needs to submit a Form 15 CA for remittance of rentals. In certain cases a certificate is also necessary in form 15 CB wherein a chartered accountant certifies the details of the payment, TDS rate, and TDS deduction as per Section 195, if any DTAA (Double Tax Avoidance Agreement) is applicable, and other details of the remittance. Form 15CB is not required when:
a. Remittance does not exceed Rs 50,000 (single transaction) and Rs 2.5 lakh in a financial year. Only Form 15CA has to be submitted in this case.
b. If lower TDS has to be deducted and a certificate is received under Section 197 for it or lower TDS has to be deducted by order of the AO.
c. In all other cases, if there is a remittance outside India, the person making the remittance will take a CA’s certificate in Form 15CB and then submit Form 15CA online.
- Provide power of attorney to relatives for investment and tax compliance: NRIs who invest in India should register a limited power of attorney for specific transactions. This will allow their family to transact on their behalf. For instance, if an NRI wants to rent out a flat, operate a bank locker or file tax return.
- Check Form 26AS to verify tax deduction: Like all other taxpayers, NRIs should regularly check their Form 26AS to keep themselves informed of transactions recorded against their PAN. The Form 26AS can be accessed through your netbanking account or directly through the income tax department website. It will tell how much tax has been deducted from income received from various sources.
- Ensure TDS is deducted when you sell: TDS is deductible when an NRI sells assets to an individual. Though it is the responsibility of the buyer to deduct TDS and deposit it with the Government, the NRI must get a TDS certificate for the same. The Form 26 AS comes in handy here. In you plan to sell some assets but want to avoid TDS, conduct the transactions only after your status changes to resident Indian.
- Be the second holder in joint investments, property: For all investments, the tax liability is always the first holder’s obligation. If the first holder is a resident Indian, there need not be any TDS. When it comes to rental income, TDS is 30% for NRIs. One can always claim a refund if excess TDS has been cut. But if you are the second holder with a resident, then the TDS will not apply unless rent is above Rs 50,000 a month. Similarly, mutual funds can be bought with the resident Indian as primary holder and the NRI as joint holder. But equities cannot be held jointly because NRIs who want to trade in the Indian stock markets have to register with a bank offering portfolio investment schemes. Keep in mind that the joint holding is only to escape TDS. Both investors and property owners would ultimately have to bear the tax liability on the income.
- Gift fixed deposits to major children or parents before you leave: NRIs cannot hold a resident fixed deposit in India. If one already hold a fixed deposit jointly with an family member, the bank may allow the deposit to be held till maturity but not renew it further. If an NRI still wishes to hold a deposit jointly, then he can open an NRO deposit, with the resident family member as a second holder.
TaxSpanner has a vast experience in tax optimization of Indian taxpayers. Over the last 9 years, we have helped thousands of our customers save lakhs of rupees every year. We are well trusted by leading banks, corporates, payroll companies and many others, For a small fee our CFO, CA Sudhir Kaushik and his team can review your NRI investments and guide on how to optimize India taxes through better planning of income and investments.