How NRIs can take advantage of special tax relief on Indian earnings

India offers NRIs various tax concessions under domestic taxation law and under Double Taxation Avoidance Agreements (DTAAs) with foreign countries.

Non-Resident Indians (NRIs) who receive income from India are generally eligible for special tax privileges but availing of them requires acquaintance with eligibility as well as documentation. As tax filing season is near, many NRIs are looking to reduce tax payable on interest, dividends, or rent earned from Indian sources.

Who are eligible for special tax privileges?

NRIs are individuals who are classified as "non-resident" under the Income Tax Act of India. Usually, this will entail remaining in India for less than 182 days within the financial year, among other considerations.

India offers NRIs various tax concessions under domestic taxation law and under Double Taxation Avoidance Agreements (DTAAs) with foreign countries. These concessions can exempt or limit tax on certain types of income, provided the taxpayer qualifies and makes proper claims.

What type of income is on offer?

NRIs can be offered lower tax rates or exemption on types of income such as:

•       Interest on foreign currency non-resident (FCNR) deposits, which are tax-exempt.
•       Interest earned on Non-Resident External (NRE) accounts, also tax-exempt.
•       Interest on certain government securities and savings bonds.
•       Dividends, subject to DTAA relief.
•       Capital gains on listed shares, with DTAAs providing relief.

Rent for Indian property and some other incomes are taxed fully unless they come under treaty benefits.

Claiming the benefits

To avail of special tax benefits, NRIs must firmly comply with documentation and filing regulations:

First, they need to acquire a Tax Residency Certificate (TRC) from the nation of tax residence. This certificate determines eligibility for DTAA benefits.

Secondly, they should file Form 10F with the Indian taxation authorities, if necessitated, along with self-declaration of tax residence.

Income payers or banks can deduct tax at source (TDS) at a higher rate unless the NRI provides these documents in advance under the DTAA applicable for a lower rate to be claimed.

While making the tax returns, such incomes must be reported by NRIs under the respective heads and treaty benefits claimed as is fitting.

What to expect

NRIs sometimes face a delay in TRCs or confusion about which sources of income can be claimed for concessions. Proper care must also be taken to see that banks apply the correct rates of TDS after the concerned documents have been filed.

Experts suggest that NRIs begin early each year to avoid last-minute hassles and unwanted deductions in tax.

Why claiming concessions is important

By failing to take advantage of these benefits, NRIs might end up paying higher taxes in India on exempt income or income eligible for lower rates of taxation under DTAAs. Under some circumstances, failure to file proper documents within time can result in tax disputes or delayed refund claims.

For NRIs looking to maximize returns on Indian holdings or maximize worldwide tax planning, education and application of such concessions become an important step.