How to determine that an Individual is NRI:
As per section 6 of the Income-tax Act, an individual is said to be non-resident in India if he is not a resident in India.
An individual is deemed to be resident in India in any previous year if he satisfies any of the following conditions:
1. If he is in India for a period of 182 days or more during the previous year; or
2. If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.
The Finance Act 2020 introduced a new leg to this condition, which states that if an Indian citizen or person of Indian origin who comes for a visit to India and his total income (other than income from foreign sources) exceeds ₹15 lakh during that FY, then 60 days will substituted by 120 days in point (2) above. However, if the ₹15 lakh threshold is not met, then the 182 condition will continue to apply. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Deemed residency
With an aim to tighten the clutches of the residency provisions and to plug certain loopholes, a new concept of deemed residency has been introduced. An Indian citizen whose total income (other than income from foreign sources) exceeds ₹15 lakh during any FY, and if he is not liable to tax in any other country or territory by reason of his domicile or residency or any other criteria of similar nature, then he will be deemed to be resident of India.
Indian income tax provisions related to Non Residents:
In the case of Non-residents, only that Income which is received or deemed to have been received in India by or on his behalf and income that accrues or arises or is deemed to accrue or arising in India is Taxable in India.
Section 9 of the Income Tax Act, 1961 also envisages certain deeming provisions. As per the deeming provisions following Incomes will be deemed to accrue or arise in India, even though they may actually accrue or arise out of India :-
1. Income from Business Connection in India: Any income earned by an NRI from a business controlled or set up in India is taxable to the NRI.
2. Income from any Property, Asset or Source of Income in India: Income from a property which is situated in India is taxable for an NRI. The calculation of such income shall be in the same manner as for a resident. This property may be rented out or lying vacant. An NRI is allowed to claim a standard deduction of 30%, deduct property taxes, and take benefit of an interest deduction if there is a home loan. The NRI is also allowed a deduction for principal repayment under Section 80C. Stamp duty and registration charges paid on the purchase of a property can also be claimed under Section 80C.
3. Capital Gains from transfer of any Capital Asset situated in India.
4. Income from Salary earned in India: Income from salary will be considered to arise in India if your services are rendered in India. So even though you may be an NRI, but if your salary is paid towards services provided by you in India, it shall be taxed in India immaterial of where you are receiving the income.
5. Income from salary (other than perquisite &/or allowance ) paid by Government of India to an Indian Citizen of India even though the service is rendered out of India.
6. Dividend paid by Indian Company outside India.
7. Income by way of Interest in some situations. [For example: Interest on NRE and FCNR account is tax-free. Interest on NRO account is fully taxable.]
8. Income by way of Royalty in some situations.
9. Income by way of Fees for Technical Services in some situations.
Special Provision Related to Investment Income:
When an NRI invests in certain Indian assets, he is taxed at 20%. If the special investment income is the only income the NRI has during the financial year, and TDS has been deducted on that, then such an NRI is not required to file an income tax return.
Further as per Section 115D, no deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non- resident Indian.
And where the gross total income of a non-resident Indian consists of only investment income or income by way of long- term capital gains or both, no deduction shall be allowed to the assessee under Chapter VIA and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head “Capital gains”.
Further, where the gross total income includes any investment income or income by way of long- term capital gains or both, the gross total income shall be reduced by the amount of such income and the deductions under Chapter VIA shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
How can NRIs Avoid Double Taxation?
NRIs can avoid double taxation (meaning: getting taxed on the same income twice in the country of residence and India) by seeking relief from DTAA between the two countries. Under DTAA, there are two methods to claim tax relief – exemption method and tax credit method. By exemption method, NRIs are taxed in only one country and exempted in another. In tax credit method, where the income is taxed in both countries, tax relief can be claimed in the country of residence.