Non-resident Indian status isn't just a label for Indians living overseas; it's a crucial legal category that affects your financial landscape, particularly in terms of taxation. Knowing if you are an NRI is important if you live abroad or plan to move. It's about understanding how to become an NRI, how it's decided officially, and how it affects your money matters. Whether you've lived abroad before or are thinking about it, understanding your NRI status helps you manage your finances better across different countries. This status is defined by specific criteria, which can influence everything from your income tax obligations to your eligibility for various financial services in India.
Who is a resident of India?
Under the Income Tax Act of 1961, your residency status in India hinges on your physical presence in the country during a given financial year.
To be considered a resident, you must either reside in India for at least 182 days during that year or have lived for at least 365 days across the four preceding years and 60 days in the current year.
This criterion is pivotal in determining your tax obligations to the Indian government. If you fulfil these conditions, your global income is taxable in India, making it essential to understand your residency status. This status not only impacts your tax liability but also your eligibility for certain tax exemptions and benefits. Knowing where you stand in terms of residency helps you plan your finances and investments in a way that is tax-efficient.
Deemed resident status
Interestingly, the Income Tax Act also introduces the concept of 'Deemed resident status'.
This applies to Indian citizens or persons of Indian origin who — while not meeting the standard residency requirements — have spent 120 days or more in India within the financial year and 365 days across the four preceding years.
Deemed residents are treated similar to residents for tax purposes, meaning their global income could be taxable in India. This special consideration aims to prevent tax avoidance and ensure that individuals with significant connections to India contribute their fair share.
Who is a non-resident in India?
Conversely, non-resident Indian status is assigned to individuals who do not meet the residency criteria outlined above. Primarily, this status is for Indian citizens who reside outside the country for employment, business, or other purposes, indicating an intention to stay abroad for an indefinite period.
Additionally, individuals who visit India for less than 182 days during the financial year are also considered non-residents. This status significantly influences your tax obligations, as NRIs are only taxed on their Indian-sourced income.
Criteria for determining NRI status
Determining your NRI status in India involves a clear understanding of the residency rules work. A key factor for this is the duration of your stay in India during the relevant financial year and over the last four years.
The primary consideration is whether your physical presence falls within the thresholds that classify you as a resident or non-resident. It's a critical determination that affects your tax liabilities, eligibility for certain accounts and investments in India, and your ability to remit money abroad.
Accurately determining your status can help you make informed decisions about your investments and financial commitments in India.
Rules governing NRI status
Several regulations underpin the NRI status in India, including the Income Tax Act and the Foreign Exchange Management Act (FEMA). While the Income Tax Act focusses on tax obligations based on residency, FEMA governs financial transactions and investments.
According to the Income Tax Act of 1961, an individual is considered an NRI if they meet certain criteria regarding their physical presence in India during a financial year.
Factors such as the individual's intention to stay in India and their residential status in previous years also play a role in determining their NRI status. It's essential to consult with a tax advisor or refer to the latest guidelines issued by the Indian government to understand the specific rules and criteria for NRI status.
Who is an RNOR?
The resident but not ordinarily resident (RNOR) category offers a transitional phase for NRIs returning to India.
This status applies under certain conditions, such as if you have been an NRI nine out of 10 previous years or have stayed in India for less than 729 days over the preceding seven years. RNOR status provides certain tax benefits, as it exempts foreign income from Indian taxes.
This status acts as a financial cushion, offering a period of adjustment where income from abroad may not be taxed in India, thus easing the transition for NRIs returning home. It’s a beneficial status for those who are realigning their life and finances to India after spending considerable time abroad.
Taxation rules for NRIs
- Earnings within India for NRIs are subject to Indian taxes.
- Earnings from abroad for NRIs remain untaxed in India.
- NRI seafarers on international ships won't have their salary taxed in India, even if paid into a non-resident external (NRE) account at an Indian bank.
- RNORs who return to India retain their tax-exempt status on foreign earnings for three years, similar to NRIs.
- Once an individual becomes a resident of India, their global income is liable for taxation in India.
Taxable income for NRIs
If you're classified as an NRI, only your earnings made in India fall within the Indian tax bracket. Your income sourced from outside India remains tax-exempt within the Indian jurisdiction.
In the specific instance of non-resident seafarers who earn their salary outside India on international vessels, this income isn't factored into their total taxable earnings in India, provided it is paid into an NRE account with an Indian bank.
Should you hold the status of a RNOR upon your return to India, you can enjoy this classification for up to three fiscal years. During this period, your income from abroad won't be subject to Indian taxes, mirroring the NRI tax treatment.
Once you become a full-fledged resident, your global income comes under the tax net in India, except where the Double Taxation Avoidance Agreement (DTAA) may apply.
Tax deductions for NRIs under Section 80C
NRIs are entitled to certain tax deductions under Section 80C when they file their Indian tax returns:
- Payments towards life insurance premiums
- School or college fees for children
- Contributions to unit-linked insurance plans (ULIPs)
- Repayment of the principal on housing loans
- Investments in equity-linked savings schemes (ELSS)
Additionally, NRIs may qualify for deductions under various other sections like 80G, 80D, 80TTA, and sections pertaining to capital gains like Section 54 and Section 54EC, subject to certain conditions.
Also Read: How to send funds from NRO to NRE Account? Complete guide
Conclusion
Whether you are pondering the implications of your NRI status or contemplating over it after returning to India, staying informed will help you make the best decisions for your financial well-being. With careful planning and understanding of the rules that govern NRI status, you can ensure a smooth transition and optimal financial planning for your future in or outside India.
In support of this journey, Axis Bank offers tailored services such as the NRE account, allowing you to deposit foreign earnings and enjoy tax-free interest in rupees. For income generated within India, Axis Bank's NRO account is an excellent option for managing your finances and consolidating your savings.
Disclaimer: This article is for information purpose only. The views expressed in this article
are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd.
and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader
for taking any financial decisions based on the contents and information. Please consult your financial advisor
before making any financial decision.
