As a non-resident Indian, you may have the dubious honour of paying tax twice. If you live and earn abroad, your foreign income will be taxed in your host country. But if you still have investments, assets, or business transactions in India that earn you money, you will have to pay tax on the Indian income in India. It only makes sense that you want to make the most of any tax deductions and provisions available to you.
There are many different ways for you as a non-resident Indian to save on taxes. Below we unpack five tips to help you optimise your taxes as a non-resident Indian while you are living and earning abroad. These tips include making the most of your pension fund and home loan deductions, as well as maximizing the provisions on the sale of foreign assets.
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Are NRIs Liable for Taxes on Income in India?
Firstly, before we look at saving money on tax, you first need to understand whether you are even liable to pay tax in India as an NRI.
Non-resident Indians (NRIs) have to pay tax on any income that is earned in India. Although you are not currently residing in India, you may have NRI investments, assets, or business transactions in India that earn you money. You have to pay tax on that income to the Indian tax authorities.
As a non-resident Indian, you will have to pay tax on the following:
- All income earned or accrued in India
- Your income that is directly or indirectly received in India
- Income that is received, accumulated or accrued in India when deemed as such by the Indian tax authorities
Any income you earn while not in India that does not fall in the above categories is exempt from income tax in India. The income you earn and accrue abroad while living abroad as a non-resident is taxable by your host country.
So yes, as a non-resident Indian you may be liable to pay tax in India. Let’s look at five ways to save on the tax you have to pay.
1. Make the Most of Your Deductions
Many of the basic deductions that resident Indians are entitled to are not available to you as a non-resident Indian. You cannot earn tax deductions by investing in social schemes like Public Provident Funds or the National Savings Certificates for example. You also do not have access to tax deductions available for medical benefits or medical expenses.
You do, however, have access to the National Pension System and the tax deductions related to it.
Under Section 80CCD (1) of the Income Tax Act, you are eligible for a tax deduction on contributions you or your employer makes towards the National Pension System. The maximum tax deduction amount allowed is INR 1.5 lakh.
There is an additional deduction of INR 50 000 allowed over and above the INR 1.5 lakh deduction limit to encourage further investment in the National Pension System. To qualify for this additional deduction, you must have exhausted the limit of INR 1.5 lakh by making other investments eligible for deduction. Additional contributions you make towards the National Pension System can be utilized to claim an additional deduction of INR 50,000.
2. Apply for a PAN Card
A Permanent Account Number (PAN) is a code that identifies you as a taxpayer in India. A Permanent Account Number is used to help prevent tax fraud. You need a Permanent Account Number to claim an income tax refund.
Income made in India above a certain threshold is subjected to Tax Deducted at Source. If you fail to provide your Permanent Account Number when you invest in India, you will likely get charged a higher Tax Deducted at Source amount.
So, by getting your PAN Card, you can ensure you pay less Tax Deducted at Source.
3. Maintain Your NRI Status
While living abroad, the income you make abroad is not taxable in India. If, however, your non-resident status is in doubt, your income can be taxed by the Indian tax services. If you want to keep your tax affairs from getting messy, make sure you maintain your NRI status.
You need to plan your visits to India in such a way that you don’t lose your non-resident status. Your tax liability is determined by your residential status and income. If your residential status changes, so will your tax liability in India.
4. Take Advantage of Provisions
Another way to optimise your tax as a non-resident Indian is to take advantage of the tax provisions issued for long-term assets purchased in foreign currency.
When selling or transferring foreign assets, you will make a profit or a loss. You cannot deduct for capital gains received against the sale or transfer of foreign assets. But you can get some exemptions under Section 115F of the Income Tax Act.
If you make a profit on the sale of foreign assets, you can choose to reinvest this profit into shares of an Indian company, deposit it into an Indian bank, or contribute to the National Savings Certificate plan. There are tax provisions providing for tax exemptions if you choose to reinvest your profit in this way.
5. Pay and Claim Home Loan Interest
As a non-resident Indian, you can claim tax deductions that relate to your Indian property. If you pay the interest on your home loan or the property tax on your property, you are eligible for a tax deduction. This makes owning property a good way for non-residents to invest in India.
If you are selling your Indian property, you will pay capital gains tax on the sale’s profit. Try to limit the amount of capital gains you make in a year to stay in a lower tax bracket.
Conclusion
Being a non-resident Indian can complicate your tax matters. If you live and earn money abroad, your foreign income will be taxed in your host country. But if you still have investments, assets, or business transactions in India that you earn money on, you will have to pay tax on the Indian income in India.
Fortunately, there are ways you can save on taxes as an NRI. Keep the five tips we provided top of mind when planning your taxes so you can reduce the tax you have to pay.