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An individual who is not a resident of India is considered to be a non-resident Indian. An individual is classified as a resident if his / her stay in India for a given financial year is 182 days or more, or 60 days or more, and 365 days or more in the 4 immediately preceding prior years. In case either of the conditions is not satisfied, the individual will be considered an NRI. An NRI must also file his / her return of income in India if the gross total income received in India exceeds Rs 2.5 lakhs for any given financial year.
Tax-Deducted at Source (TDS) Refund
One of the most important features of filing an ITR as an NRI is the option to claim refunds on tax deductions at the source. An NRI can have bank accounts in India — these can be NRE, NRO, or FCNR accounts. Among these categories, the NRO account is taxed at 30% along with surcharge and cess. This tax will be deducted in the form of TDS and refundable as per the tax slab of the NRI. NRIs invest in multiple asset classes in India for each of these investment options.
Claiming Foreign Tax Credit
NRIs are often left paying double their taxes owing to income from two countries. There is the double tax avoidance agreement (DTAA) that is signed between two countries enabling residents to avoid paying double taxes on the same income. India has signed DTAA with more than 85 countries. Filing an ITR is the best way to get tax exemptions in one of the countries or get credit for the tax paid in India when filing in the resident country. To avail of benefits from DTAA, the Tax Residency Certificate (TRC) has to be submitted after obtaining it from the country of residence. In addition, a self-declaratory form with details of the account number, country of residence, the period of submission of TRC, the applicable tax rate under DTAA, and attested copies of passport, visa & PAN.
Repatriation
The transfer of money from NRI bank accounts to overseas bank accounts is called repatriation. Both NRE and FCNR accounts are completely repatriable for an NRI as these accounts hold foreign income. However, for repatriation from the NRO Account, (the account that holds your income generated in India) one needs to furnish forms 15CA and 15CB. The process requires support from a Chartered Accountant (CA). If the ITR is filed, the repatriation process becomes smooth and convenient.
Sanction of Loans
As an NRI, personal loans or home loans for retirement planning require basic documentation to be submitted that includes income tax returns. The ITR is an essential document for the bank to validate residential status and financial transactions and go ahead with the sanctioning of loans.
Claiming Deductions under 80C
Deductions of up to Rs.1.5 lakhs are available under Section 80C of the IT Act. This section contains around 25 asset classes where deductions can be availed. However, all these deductions are not applicable to an NRI. There are some specific classes where deductions can be claimed as an NRI and filing an ITR is the only way to do that.
Avoid Notice from the Income Tax Department
Non-filing of ITR can lead to situations where one might receive a notice from the IT department. These notices can be easily traced to the individual due to the presence of Form 26AS.
Carry Forward Losses
As an NRI, any losses reported after the sale of property or mutual funds can be carried forward to the next year to be set off against profits in future years. However, if one fails to file the ITR before the due date, then the losses would not be carried forward. While some NRIs may feel nothing is lost when not filing a return when losses are reported, they stand to lose a chance to redeem the losses the next year.
Reporting of Residential Status and Financial Transactions
The Residential Status of an NRI for tax purposes is defined under the Income Tax Act, of 1961. Hence, the ITR serves as proof of residential status and financial transactions for a particular financial year. It is on the basis of the ITR, that the residential status is verified.
Deductions Under Other Sections
Apart from Section 80C, there are other sections where deductions can be claimed by an NRI. Sections like 80D, 80G, 80E, and 80U are some of them. Also, NRIs are allowed to claim tax exemption under Section 54, Section 54EC, and Section 54F on long-term capital gains. For claiming such deductions, filing an ITR is necessary.
Valid Legal Document For Various Purposes
An ITR can be used as income or address proof in India. Apart from that, it has multiple uses which include sanctioning loans, VISA processing, etc. It is a valid document when repatriating funds abroad and one of the most important documents to possess if an NRI has to report income in India above the basic exemption limit of Rs. 2,50,000.
For any support with determining your tax liability in India & abroad, GKM’s experienced team of tax professionals can be contacted at info@gkmtax.com.