Smart Tax Planning for NRIs in India: Maximize Your Savings and Deductions

Many Non-Resident Indians (NRIs) continue to hold Indian bank accounts, investments, and real estate. It is not always simple or advisable to abandon everything and establish a new life in a foreign country where one is neither a citizen nor a permanent resident.

There are numerous differences between the treatment of Resident Indians and Nonresident Indians investment, income, and tax liability. These distinctions may be obvious in most situations, but they may also be subtle and cause confusion.

How Can Non-Resident Indians Save Taxes in India?

1) Tax-Free Incomes for Non-resident Indians.

Numerous sources of income for NRIs are entirely exempt from Income Tax. These include:

Interest earned on Non-Resident Non-Repatriable [NRNR] and Foreign Currency Non-Resident Non-Resident (Bank) [FCNR(B)] Deposits.

Interest accrued on Government of India-issued bonds and savings certificates.

The interest accrued on NRE accounts.

Interest earned on Non-Resident Ordinary [NRO] savings accounts up to Rs 10,000 u/s is exempt from tax.

One lakh rupees in long-term capital gains from the sale/redemption of shares or equity mutual funds.

Long-term capital gains on the sale of a house property are reinvested in a new house property (under section 54), invested in notified bonds of NHAI or REC (under section 54EC), or reinvested in a house property (under section 54F).

2) House property-related deductions

NRIs can claim deductions for the purchase of residential property in India, just like Indian residents. These deductions are for the property tax paid, the home loan interest, and the principal amount.

1. Home loan interest

The interest portion of their home loan EMI is deductible up to Rs 2 lakh under section 24. This deduction is available for the principal residence where the NRI’s family resides or for a vacant home. If you have rented out the property, you may deduct the entire interest expense.

2. Home loan principal repayment

Section 80C of the Income Tax Act allows all householders to claim a tax deduction of up to Rs. 1.5 lakhs. Stamp duty and registration fees can also be deducted under section 80C, as they are deemed to be part of the property cost of acquisition. It is preferable to recover them first, as they are only deductible in the year they were paid.

3. First-time homeowners

As the government seeks to promote affordable housing, special tax treatment is applicable. For all affordable housing developments approved after September 1, 2019, the new exemptions will be available until March 31, 2022. These deductions are allowed under sections 80EE and 80EEA.

Section 80EE – Provides an additional tax deduction of up to Rs. 50,000 on the home loan if the property is the buyer’s first residence.

Section 80EEA – Interest up to Rs. 1.5 lakhs on the home loan for the first house (under affordable housingprojects), in excess of the Rs. 2 lakhs limit available under section 24. This makes the total limit Rs. 3.5 lakhs, even if the property is not rented out.

4. Long-term capital gains on the sale of the property

Like a Resident Indian, an NRI can claim deductions for long-term capital gains realized from the sale of property in India. It falls under sections 54, 54EC, and 54F.

Section 54 – If the long-term capital gains on the sale of real estate are reinvested in the purchase of new real estate within a year prior to the sale or within two years of the date of sale. The construction duration is three years.

Section 54EC – If the long-term capital gains from the sale of a residential property are invested in bonds issued by the National Highways Authority of India or the Rural Electrification Corporation, the gains are exempt from taxation.

Section 54F – If the long-term capital gains on the sale of property other than a home are reinvested in a home within one year of the sale or within two years of the sale date. The construction duration is three years.

Decductions under 80C

Section 80C income tax deductions are accessible to all individual taxpayers up to a maximum of ₹1.5 lakhs.

1. Life insurance premium payments

Under the aggregate limit of ₹1.5 lakhs, all life insurance premiums are deductible, regardless of the type of plan: endowment, money-back, term, child plan, and ULIP.

2. Public provident fund

If you had a PPF account before becoming an NRI, you are required to continue investing in it. PPF investments are entirely secure because they are direct deposits with the Government of India and have Exempt-Exempt-Exempt status with the maximum interest rate (7.10% at the time of writing). The PPF investments have a minimum lock-in period of 15 years.

3. National Pension Scheme for NRIs

The NPS, promoted by the Indian government, enables NRIs to create a retirement fund. An NPS account can be opened by any NRI between the age of 18 and 60 years who has an NRE or NRO bank account. NRIs have the option of investing their funds in equity, corporate bonds, and government debt. NPS investments are eligible for a deduction of up to ₹1.5 lakhs under section 80C and an additional ₹50,000 under section 80CCD 1(B).

4. Bank FDs

NRIs favor 5-year tax-saver bank fixed deposits because they are considered a secure investment option. You can establish an FD with your FCNR, NRO, or NRE account. There is a 5-year lock-in period, and the interest rate depends on the bank and market conditions.

Other deductions under section 80C

• Cost of children’s education tuition
• Repayment of the home loan’s principal
• Equity-mutual funds offer investments in equity-linked savings schemes. They have a three-year lock-in period.

Section 80D Health-related Deductions

1. Medical coverage and preventative health exams for self and family

NRIs can claim a deduction of up to ₹25,000 per year for preventive health examinations and health insurance premiums for themselves and their dependents.

2. Medical coverage and preventative health exams for parents

Section 80D also allows you to receive tax benefits if you purchase a health insurance policy or pay for your parents’ or in-laws’ preventive health exams. The benefit available depends on the ages of the parents as follows:

• Under 60 years old – ₹25,000 for health insurance plus ₹5,000 for a preventive health examination equals to ₹30,000
• Between 60 and 80 years old – ₹50,000 for health insurance plus 5,000 for a preventative health examination equals ₹55,000.
• Over the age of 80 years – ₹50,000 for health insurance plus ₹7,000 for a preventative health examination equals ₹57,000.

Other Deductions

There are numerous other deductions available to NRIs, such as deductions for donations made to specified charities (50% or 100% of the donation amount) and political parties recognized by the Election Commission of India.