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New criteria for NRI status and how income will be taxed in India effective from FY2020-21

In the financial budget for the FY 2020-21, the government issued new criteria for NRIs, as well as amended the taxable income earned by this section of people.

The residential status of Indians plays a crucial role in determining the scope of taxable income. It even applies to the non-resident Indians (NRIs). As per the recent financial bill, the government made amendments to the residential status of NRI.

Previously, the government considered those people as NRIs who visited India for less than 182 days in a financial year. Now, it has been proposed to reduce this period to 120 days as per the Financial Budget 2020-21. Note that this is applicable only for NRIs earning a total income of more than 15 lakhs in a financial year.

Apart from keeping track on the number of days present in India, NRIs are also required to keep a tab on their income tax payable in India. If the taxable income in India is more than Rs. 15 lakhs, then the stay period of 120 days or more is applicable.

How is the income of NRIs taxed for FY 2020-21?

A resident of India has to pay various taxes, such as income tax, property tax, service tax, tax deducted at source (TDS), etc. In case of NRIs, income tax is the main tax, apart from wealth and property tax. Talking about NRI taxation, one needs to note that the income generated outside India is not considered under the Income Tax Act. However, if the NRI earns income in India through sources like mutual fund investment, rent, deposits, or capital gains, then he/she needs to file an Income Tax Return if the returns exceed the basic exemption limit.

Key points about NRI taxation:

  • NRIs need to pay taxes in India as per the income tax slab.
  • In the case of TDS, all income earnings of NRI is chargeable.
  • There is no nominal deduction on investment income.
  • NRIs do not need to e-file income tax, subject to legal clauses, as stated in Section 115G of the IT act.

Some of the provisions with regards to how income is charged for NRIs:

  • Section 115H: This relates to tax benefits an NRI can avail post he/she becomes a resident of India in respect to his/her total income
  • Section 115E: Income tax applicable to investments and long-term capital gains
  • Section 115G: As per this section, NRIs do not need to file tax returns in specific cases
  • Section 115D: No deduction in respect to any expenditure or allowance in the computation of investment income
  • Section 115F: No charges on capital gains on transfer of foreign exchange assets
  • Section 115I: Non-application of provisions for NRI taxation

 Income Tax Rates for FY2020-21 for NRIs:

Income Range Tax rate
Below 2.5 lacs NA
Between 2.5 – 5 lacs 5%
Between 5 – 7.5 lacs 10%
Between 7.5 – 10 lacs 15%
Between 10 – 12.5 lacs 20%
Between 12.5 – 15 lacs 25%
Above 15 lacs 30%

 Most NRIs will be liable to pay taxes in the country of their residence as well as in India. To seek relief from double taxation, you need to check whether India has any treaty or agreement with other nation like the concept of Double Taxation Avoidance Agreement (DTAA). It is an agreement which India has with select countries across the world. It has come in effect to help NRIs in eliminating the liability to pay double taxes on the same income.

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