5 Tax Rules NRIs Should Know To Plan Investments Efficiently

Indians make up for one of the largest number of migrants in affluent countries. A recent report from the World Bank also showed that India was the highest receiver of foreign remittances in the world. It was $69 billion as of April 2018. This goes to show that though many Indians move to other countries in search of jobs, they have been investing in their home country.

The government too has eased laws to help them facilitate investment in the country. For example, non-repatriable investments by NRIs (Non-Resident Indians), OCIs (Overseas Citizen of India) and PIOs (Person of Indian Origin) have been treated as domestic investments since 2015 and exempted from foreign direct investment caps. NRE (non-resident external) account facility provided by Indian banks have made deposits completely repatriable and interest earned on them are tax-free.

If you are an NRI planning to invest or have invested in India, there are certain tax and other financial implications that you may be unaware of. More often then not, these little things will affect your financial planning greatly. Here are some of the things every NRI should know about investing in India:

1. Residential status

Tax implications and financial rules in India depend on the individual's residential status. As per the income tax laws, a person is deemed as a resident if he/she resides in India for at least 182 days in a single financial year. So if you an Indian citizen but work abroad or you are a crew member of an Indian ship, you can only be considered a resident if you fulfill the above condition.

2. Taxable Income

Since you are not a resident as per Indian income tax rules, your income earned abroad is not taxed in India. However, any income accrued in India is taxable. These include, any salary received in India for any services provided, income from house property (like rent), capital gains from transfer of an asset located in India, interest earned on deposits in banks.

Interest earned on NRE and FCNR accounts are tax-free, but interest on NRO account deposits are taxable in the hands of an NRI.

3. Existing investments

If you had investments in India before you moved abroad, you need to know that some of these like NSC will be deemed as closed. Recently, NRIs were allowed to continue with their PPF scheme until maturity (without an option to renew it) due to its long-term commitment of 15 years. Small savings schemes are not allowed to be opened by non-residents.

If you have a savings account, it will have to be converted into an NRO account and can be managed from anywhere in the world. If you have any investments like stocks and mutual funds, you will have to inform your bank and brokerage of your change in residential status and submit the required documents. They will keep you informed of the rules that will apply to you based on your country of residence. This is important because if you are based in the US or Canada, you cannot be invested in certain funds.

You will also need to open an NRE account to send foreign currency to India. Understand the difference between NRO and NRE accounts to know their functions.

4. TDS (Tax Deducted at Source)

Everything from stocks, mutual funds, property to gold is subject to TDS. The effect of the tax implication is greater on the NRI as the percentage deducted is higher.

• Interest on NRO accounts: 30 percent
• Interest on NRE and FCNR accounts: No TDS
• Dividends earned on equity and mutual funds: No TDS
• Short-term capital gains on equity or equity-based MF: 15 percent
• Income from rent: 30 percent
• Income from professional services: 10 percent
• Income from royalty: 10 percent
• Income from technical fees: 10 percent
• Other categories of income: 30 percent

3 percent education cess is also applicable to TDS. Income beyond Rs 10 lakh is imposed with a surcharge of 10 percent.

You can mitigate TDS by becoming a second holder in joint investments with an Indian resident so that the liability of the TDS will lie with the first holder.

5. Income tax returns filing in India

If the income earned in India exceeds beyond Rs 2.5 lakh in the particular financial year, the NRI is required to file the income tax returns.

Investment opportunities

As an emerging economy, stocks and debentures of Indian companies and mutual funds should be a good opportunity to grow your money. Government securities and bonds are some of the safe options to invest in.

If you plan on returning to India in your retirement years, NPS (national pension scheme) can be used as one of the instruments to create the corpus. NPS is a market-linked scheme and could prove profitable.