NRI Taxation

NRI Taxation

The government has been reviewing its policies to attract investment by NRIs in real estate. In its mid-term review of the economic policy for 2006-07, the RBI

  • Removed the lock-in period for the sale proceeds of property credited to NRO accounts, with a cap of USD1 million.
  • Permitted the full repatriation of income from the rented property after payment of tax.
  • Extended tax exemptions from wealth tax on commercial and residential property for at least 300 days in a calendar year.

The Government of India has entered into tax treaties or Double Tax Avoidance Agreements (DTAA) with several countries where Indians reside in large numbers. The treaties aim to protect taxpayers from paying double taxes in India and the adopted country. The treaties have provided for tax to be deducted at source out of payments to NRIs and PIOs to facilitate the process of assessment of taxes due by them.

The Income tax Act, 1961 (ITA) defines the taxability of an individual in India, which is dependent on his residential status.

 

As per the ITA, the different residential status can be

Resident

An individual who stays in India in a year ending March 31 for at least 182 days, or an individual who stays in India in a financial year ending March 31 for at least 60 days in that year, and a total of 365 days in the preceding 4 years.

The period of 60 days is extended to 182 days for:

  • Indian citizens who leave India for employment outside India,
  • Indian citizens who are crew members of an Indian ship
  • Indian citizens or a Person of Indian Origin who visits India in any year

 

Ordinarily Resident (ROR)

An individual who is not a RNOR or an individual who is resident and ordinarily Indian, is taxed on his income received from India or deemed to receive in India in the relevant financial year.

For individuals in the Resident and Ordinarily Resident category, global income is taxable in India.

 

Resident but Not Ordinarily Resident (RNOR)

An individual who does not reside in India in 9 out of 10 years before the previous year, or a person residing in India for 729 days or less during the previous 7 years before the previous year.

An RNOR is taxed in India on the income which accrues or arises in India. No tax liability accrues in respect of any income, which may accrue or arise out of India.

 

Non-Resident

An individual who does not fall into the above resident categories is a Non Resident

A Non-Resident is taxed in India on the income received or deemed to be received in India or accrues or arises or deemed to accrue or arise in India, in the relevant financial year.

 

Tax Exemptions from Property Investments

  • Income from House Property
  • Income from House Property is the annual value of House Property, of which the assessee is the owner. House property consists of buildings or land. The land may be in the form of a compound housing the building. Any rent received from standalone vacant plot is not assessable as "Income from House Property".
  • One self-occupied House Property or part of such property owned by an individual and used for personal use, but not let out, in the previous year, will not be taxable.
  • From the assessment year 2002-03, Income from House property is classified as: Let out Property (L.O.P.), and Self Occupied Property (S.O.P.)
  • The following two deductions are available from the income under the head "Income from house property" under the Income tax Act, 1961.
  • Standard Deduction: 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
  • Interest on Borrowed capital: Interest on borrowed capital is permitted as deduction if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.

OR

  • When more than one property is occupied for own residential purposes: Where the person has occupied more than one house for his own residential purposes, only one house (according to his choice) is treated, as self-occupied and all other houses will be "deemed to be let out".