NRI income tax filing: A complete guide

NRI income tax filing: A complete guide

Meet Srishti, an Indian citizen currently residing and working in the USA. Recently, she checked her Form 26AS online and discovered a TDS entry of INR 20,000, deducted at 30% of the interest earned in her NRO account in India. Now, the big question arises: Does Srishti need to pay tax in India? And is it mandatory for her to file an income tax return? Let’s take a look into the world of income tax filing for NRIs to find the answers.

Understanding when NRIs should file income tax returns in India

NRIs should file income tax returns in India if they have earned income within the country during the financial year. An NRI’s income taxes in India will depend upon his/her residential status for the year as per the Indian Income Tax Act, 1961 tax rule. If your status is ‘resident,’ your global income is taxable in India. For NRIs like Shristi, only the income earned or accrued in India is taxable in India.

Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on a savings bank account are all examples of income earned or accrued in India, and these incomes are taxable for an NRI. Conversely, income earned outside India is not taxable in India. Additionally, interest earned on an Non-Resident External (NRE) Account and Foreign Currency Non-Resident (FCNR) account is tax-free, whereas interest on Non Resident Ordinary (NRO) accounts is taxable in the hands of an NRI.

Exploring tax-saving options for NRIs in India

NRIs have several avenues to save on taxes in India, with one promising option being ITR filings that often play a pivotal role in facilitating the repatriation of funds and property sale transactions in India for NRIs. By adhering to the practice of filing ITR, NRIs ensure compliance with tax regulations and streamline financial dealings in the country. They can also explore other tax-saving instruments such as the Public Provident Fund (PPF), National Pension System (NPS), Equity Linked Savings Scheme (ELSS), or opt for tax-saving insurance policies.

Additionally, life insurance plans specifically designed for non-resident Indians, offer numerous benefits, including tax advantages. NRIs can potentially save income tax in India by investing in NRI life insurance plans. Here’s how NRIs can save income tax by buying life insurance plans:

Deduction under Section 80C: NRIs can claim a deduction of up to INR 1.5 lakhs under Section 80C of the Income Tax Act, 1961, for the premium paid towards NRI life insurance plans.

Tax-exempt proceeds: The maturity amount or death benefit received from an NRI life insurance plan is tax-exempt under Section 10(10D) of the Income Tax Act.

Understanding tax filing deadlines

The deadline for NRIs to file their income tax returns in India is typically July 31st of the assessment year, the same as for residents. However, it’s essential to stay updated with any extensions or changes announced by the government.

Understanding tax obligations for NRIs involving advance tax and filing deadlines

If NRIs’ tax liability exceeds INR 10,000 in a financial year, they are required to pay advance tax to fulfil their obligations. However, failing to do so can lead to consequences. Interest under Section 234B and Section 234C is applicable if advance tax is not paid, which can compound the financial burden. Moreover, missing the deadline for filing income tax returns can lead to penalties and interest on the outstanding tax amount. In severe cases, NRIs may even face legal repercussions. Therefore, it’s crucial to file tax returns on time to avoid such complications.

Analyzing Srishti’s tax situation

Let’s apply the above principles to Srishti’s case. Given her residential status, Srishti is deemed an NRI for income tax purposes as she spent less than 182 days in India during the financial year 2023-24. Her taxable income in India includes the interest earned on her NRO account, which amounts to INR 70,000.

For the financial year 2023-24, the minimum taxable threshold is INR 2.5 lakh. Since Srishti’s total income in India falls below this threshold, she is not liable to pay any tax. However, she can claim a refund for the TDS deducted from her interest income by filing an income tax return.

Conclusion

Filing income tax returns as an NRI may seem like a daunting task, but armed with the right knowledge, it becomes a breeze. By understanding your residential status, exploring tax-saving options, and adhering to filing deadlines, you can ensure a smooth and hassle-free tax-filing experience. Remember, timely filing and accurate reporting are the key to financial compliance and peace of mind.

The author is a tax expert at Cleartax.

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