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Need assistance in choosing the right insurance plan? Get a call from our Expert.

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Tax Implications on Capital Gains Earned by NRIs: The Complete Guide

The Finance Act of 2020 and 2021 have introduced significant modifications in the rules concerning the determination of residential status for individuals. These changes, applicable from the FY 2020-21 onwards, have directly impacted the Non-Resident Indian (NRI) community.
 

With more than millions of NRIs residing in various countries, it is important to understand the revised criteria for determining the NRI status.

Understanding the Change in NRI Status upon Returning to India

When an NRI decides to return to India permanently, their NRI status undergoes changes based on the duration of their stay in India during the year of their return.
 

If they return in the fiscal year after October, they can still maintain their NRI status for that year since their stay in India will be less than 182 days. However, the NRI status is lost in the same year if the return happens before October.
 

Upon losing the NRI status, returning NRIs can be categorised as residents but not ordinarily resident (RNOR) or resident and ordinarily resident (ROR) Indians.
 

The RNOR status serves as a transitional phase for returning NRIs before they become ordinary residents of India (ROR).
 

Returning NRIs qualify as RNOR for a fiscal year if any of the following conditions are met:
 

  1. They have been an NRI for at least 9 out of the 10 years preceding the fiscal year under consideration.

  2. They have spent no more than 729 days in India during the preceding seven years.

  3. They are not considered tax residents in any other country, and their Indian income exceeded ₹15 lakhs in the previous year, with their stay in India ranging from 120 days to 181 days.

If returning NRIs do not meet any of these conditions, they automatically become ordinary residents for taxation purposes. Returning NRIs may either qualify as RNOR or become ordinary residents based on specific criteria outlined by the tax regulations.

New Criteria for NRI Status in India

Until the end of the financial year 2019-20 (March 31, 2020), NRIs (comprising Indian citizens and Persons of Indian Origin) were defined as individuals who visited India for less than 182 days in a financial year while residing outside India.
 

However, the Finance Act of 2020 modified this rule, reducing the maximum permissible stay to 120 days for visiting individuals whose total taxable Indian income (income earned in India) during the financial year exceeded ₹15 lakhs. 
 

As a result, NRIs visiting India with a total income of up to ₹15 lakhs will still retain their NRI status if their stay does not exceed 181 days, as per the previous NRI criteria for income tax.
 

  • In addition to monitoring the number of days spent in India, visiting NRIs must also track their Indian taxable income. If the taxable income in India exceeds ₹15 lakhs, the provisions concerning stays exceeding 120 days will apply.

  • Dividends distributed by Indian companies are now subject to taxation as part of shareholders' taxable income. Hence, the interest earned on FCNR (Foreign Currency Non-Residential) and NRE (Non-Residential External) deposits is exempt and does not contribute to taxable income.

  • Moreover, if an NRI's taxable Indian income surpasses ₹15 lakhs and their stay in India extends to 120 days or more, they must also evaluate whether their stay in India during the immediately preceding four financial years totals 365 days or more.

For example, a non-resident individual who visits India during FY 2022-23 (with taxable income exceeding ₹15 lakhs) stays in India for 130 days. Their cumulative stay in India over the preceding four financial years (FY 2020-21, 2019-20, 2018-19, 2017-18) amounts to 365 days or more.
 

In this case, they will be classified as residents for income tax purposes. However, there is some relief for NRIs per the new NRI criteria, as they will be categorised as Resident but Not Ordinarily Resident (RNOR). This classification can benefit them since their foreign income (income earned outside India) will not be subject to taxation in India.

Residential Status - Under Section 6(1A) based on Indian Income Criteria

In accordance with Section 6(1A) of the Income-tax Act, an individual who is a citizen of India will be considered a resident in India for a previous financial year if they are not "liable to tax" in any other country or territory due to factors such as domicile, residence, or similar tax criteria in India. However, this provision will only apply if their total taxable Indian income exceeds ₹15 lakhs in the financial year.
 

Before the financial year 2019-20, the Income-tax Act did not include such a provision. It is important to note that this determination of residential status for stateless individuals does not apply to OCI (Overseas Citizen of India) card holders, foreign citizens, or PIOs (Persons of Indian Origin).
 

Ensuring the security of your family through life insurance is made simple for NRIs, especially when it comes to taxation rules. NRI insurance plans provide a convenient option in India, specifically designed to offer life cover protection to Non-Resident Indians and their families.
 

With NRI insurance, the process becomes hassle-free. You can easily purchase the policy in India and manage premium payments from another country, guaranteeing uninterrupted life insurance coverage for your family back home.
 

Opting for a Tata AIA life insurance policy brings numerous advantages. You can choose from various NRI policies that best suit your requirements. Additionally, you can customise premium payments to align with your preferences. Moreover, these life insurance policies offer tax and policy benefits tailored to your residential status.

Conclusion 

As seen above, the revised criteria for determining the NRI status and taxation rules in India have introduced significant changes for NRIs. Even though NRIs with taxable Indian income exceeding ₹15 lakhs and falling under the necessary residential qualifications can be taxed as residents, the Resident but Not Ordinarily Resident (RNOR) status can provide some taxation relief on foreign income.

Your Life, Your Legacy: Life Insurance Inquiry for Indians Abroad

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Frequently Asked Questions

Is ITR filing mandatory for NRI?

Yes, NRIs must file their income tax returns in India if they pay income tax on income earned in India and on income deemed to accrue or arise in India. Moreover, the money they receive or that is deemed to be received in India will also be taxed.

Is TDS refundable for NRIs?

Under Section 195 of the Income Tax Act, all the income of an NRI is subject to TDS deductions. However, if they claim TDS while filing their returns, they can receive a refund on the income earned in India.

Disclaimers

  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.

  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.