Important Tax provisions every NRI should be aware – Part-1

Indians who work outside of India or who settled overseas need to understand their tax obligations in India. In this effort, we identified key provisions that every NRI / Foreigner need to keep in mind to have easy Tax Compliance in India.

This article is a Part-1 of two part series. Refer second part @ Important NRI Tax Provisions – Part-2

Key Provisions in NRI Taxation

1. Determination of their residential status in India
2. Changes to Quoting of Aadhaar number
3. Reconciliation with Form 168 of IT Act 2025 (Form 26AS of IT Act 1961)
4. Capital gains tax treatment

1. How to Determine residential status in Indians

The foremost thing that comes to mind in determining tax applicability understanding individual residential status. Residential status could be classified into Resident, ROR, RNOR.

An individual is deemed to be resident in India in any previous year if taxpayer satisfies any of the following conditions:

1. If the taxpayer is in India for a period of 182 days or more during the previous year; or
2. If the taxpayer is in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year

An individual is deemed to be Resident and Ordinarily Resident (ROR) or Resident but not Ordinarily Resident (RNOR) in India any previous year if taxpayer satisfies any of the following conditions.

A resident individual will be treated as ROR during the year if taxpayer satisfies both the following conditions:

1. Taxpayer is resident in India for at least 2 years out of 10 years immediately preceding the relevant year, and
2. Taxpayer stays in India for 730 days or more for 7 years immediately preceding the relevant year.

A resident individual who does not satisfy any of the above-mentioned conditions or satisfies only one of the above-mentioned conditions will be treated as RNOR.

Let's understand the residential status with the help of an example, Mr. Sanjay, a resident of Hyderabad left India for the purpose of employment on 10/09/2017. For the previous year (PY) 2017-18, Mr. Sanjay was in India for 163 days. Since Sanjay was not in India for at least 182 days in PY 2017-18, he is non-resident for PY 2017-18 taxes.

2. Quoting of Aadhaar number in Income Tax Return

CBDT mandated the quoting of Aadhaar number in Income Tax (IT) Returns. The rule to quote Aadhaar number in IT returns does not apply for non-residents. It was one of the bottlenecks for NRI tax compliance in the past, this relaxation would enable many of the non-resident population to file their taxes and claim their refund.

3. Reconciliation of Income and Taxes with Form 168 of IT Act 2025 (Form 26AS of IT Act 1961)

Form 168 (a.k.a Form 26AS) is a comprehensive statement, which consists of income credited, tax deducted (TDS), advance taxes, self-assessment tax, or any TCS etc under the taxpayer PAN. While filing income tax return, individual should reconcile their income, taxes paid with Form 168 (a.k.a Form 26AS) to avoid any discrepancies, notices, and/or delays in getting their refund.

Refer TDS On Payments to Non-Resident Indians (NRIs) to know more.

The IT department process IT returns in conjunction with Form 168 (a.k.a Form 26AS). If there is any mismatch between filed return, and Form 168 (a.k.a Form 26AS), it will serve an intimation under section 270(1) of IT Act 2025 (section 143(1) of IT Act 1961).

4. How to treat Capital Gains for NRIs

1. Capital gains are incurred when an individual sells an asset at a value which is higher than its purchase value. Capital gains may be either of long term or short term.
2. Long Term Capital Gains: When an NRI sells their long-term capital asset, the gain will be taxable @ 20% with indexation or 10% without indexation depending up on the asset type.
3. If the long-term capital asset sold is equity shares or mutual funds, the gain is exempted up to Rs 1 lakh and LTCG in excess of Rs 1,00,000 is taxable @ 10% from AY 2019-20.
4. Short Term Capital gains: When an NRI incur short term capital gains on sale of equity shares / mutual funds, one need to pay tax @ 15% on the gain.
5. If the short-term capital gain is incurred on sale of debt / gold / real estate etc, the individual need to pay tax as per applicable income slab rates. However basic exemption limit is available in this regard.
6. The NRI cannot avail basic exemption limit in any one of the cases above other than short term capital gains on sale of debt / gold / real estate etc
7. For example, Mr. Sanjay, who is a non-resident of India has purchased a residential building in India on 21/11/2016 for Rs. 25 Lakhs, later he sold the same on 24/02/2018 for Rs. 50 Lakhs. It is considered as a short-term capital asset, where a gain of Rs 25 Lakhs is taxable as per the individual slab rates. He can avail the basic exemption limit of Rs 2.5 lakh while calculating his Income Tax, unlike in the case of equity (Shares, Mutual Funds) where this basic exemption is not available.
8. Overall, with these important provisions, both NRIs, and expatriates can plan, be compliant with their taxes in India. In addition, GOI, CBDT taking the measures to simplify the overall tax compliance in coming years, in this effort, CBDT has already notified that the NRIs who are claiming refund from Indian taxes but doesn’t have Indian bank account can now use their foreign bank account details in their income tax returns in India.

In the next article, we will cover few more provisions to make you aware for an easy tax compliance.