Special Tax Concessions Available For NRIs

Non-resident Indians (NRIs) are also considered citizens in tax parlance. However, tax laws apply differently for NRIs, and they are eligible to get some tax concessions. Knowing how to claim benefits for some assets and what earnings are exempted from taxation in India can go a long way.

Key exemptions and benefits

NRIs can get tax exemptions on foreign assets and income, and some specified income sourced in India. For an NRI, a tax return must be filed in India, provided that the annual income of the individual exceeds Rs. 2.5 lakh under the old tax regime and Rs. 3 Lakh under the new tax regime. The income tax returns can be filed through ITR-2 or ITR-3 by NRIs.

To understand standard deductions available to NRIs, it should be known on which assets or income are NRIs taxed in India. NRIs are eligible for special tax provisions on investment income made from foreign exchange assets and any gains made from the sale of such assets.

In this context, foreign exchange assets mean any assets bought through convertible foreign exchanges. This includes shares or debentures of any private or public Indian, deposits with a public Indian bank abroad, and government securities by the NRI.

These assets must be obtained by converting foreign currency into Indian rupees if they are bought with convertible foreign currencies. For example, when you transfer money from your international bank account to your non-resident external (NRE) account, the money is first converted to Indian rupees and then put into the NRE account. As a result, equity shares purchased with money from the NRE account are regarded as foreign exchange assets. However, the same shares will not be eligible for the favourable tax rate under the Special Tax Provisions if they are purchased with domestic funds from the non-resident ordinary (NRO) account.

In this case, funds routed from NRO to NRE accounts are also eligible for tax concessions, provided that the investment is made using foreign currencies remitted into India. The Income Tax Act of 1961, under sections 115 to 115L, have provided for such tax concessions for NRI income. In routing funds from NRO to NRE accounts, however, it must be noted that the simple transfer of funds does not make it eligible for the concession. The key factor to benefit from this clause is that the income must be inwardly remitted in convertible foreign currency, and not generated or retained domestically, with a clear trail of the income.

Tax concessions

The rates under section 115E of the Income Tax Act are fixed and applied on a gross basis. Under the section, the special tax rate on investment income by NRIs is 20 per cent, and on longer-term gains, it is 12.5 per cent. NRIs can no longer claim indexation benefits for property or other assets sold after July 23, 2024. They must use the 12.5 per cent flat rate. Unlike resident Indians, NRIs were not given the "buyback" option to choose the old 20 per cent rate with indexation for older properties.

Additionally, the LTCG is also exempted from taxes if the NRI invests the net consideration within six months from the sale of the assets in another foreign exchange asset or a savings certificate. In this case, if the price of the new foreign exchange asset is less than the net sale consideration, the exemption in taxes will also be computed in a proportionate manner. It must be noted that there is a three-year lock-in period once investment is made in the new foreign exchange asset. If the new asset is sold or transferred within three years of buying the asset, then the exemption which was claimed by the individual earlier will become taxable in the year when the new asset is sold.