What NRIs in India Need to Know About Cross-Border Taxation?

Cross-border taxation is a primary issue for Non-Resident Indians (NRIs) operating assets, investments, and earnings in various countries. As NRIs tend to earn income from one country but live in another, it becomes important to learn how taxes would be applicable so that double taxation can be averted and the international tax statutes complied with.

This blog discusses the central issues of cross-border taxation for which NRIs in India should be informed, providing tips for coping with them.

Knowing Tax Residency Status

The tax residency status of an individual determines in which manner and where they will be taxed. NRIs are typically categorized on the basis of the duration they are in India and whether or not they earn income in India or abroad.

• Resident vs. Non-Resident NRIs staying in India for a period not exceeding 182 days in a financial year are considered non-residents for taxation purposes, i.e., taxed only on income earned or received in India.
• Global Income: NRIs treated as residents may be taxed on their global income according to the tax law of the host country. Residency status needs to be determined annually to ascertain tax liability.

Double Taxation and DTAA

Double taxation is the most severe issue that is faced by NRIs as the same income gets taxed twice, first in the country of residence and then again in the host country. However, India has implemented Double Taxation Avoidance Agreements (DTAA) with many countries to prevent it.

• Claiming Tax Relief: NRIs are eligible to claim DTAA under tax relief either by way of taking the exemption method (non-payment of tax in either of the two countries) or credit method (payment of tax in one country that is set off against tax payable in the other).
• Forms and Documentation: NRIs are required to submit specific forms like Form 10F and provide a Tax Residency Certificate (TRC) of the foreign country to be able to avail DTAA in India.

Taxation of Foreign Income

As for NRIs, foreign income such as salary, dividends, and sale of real estate can be taxed in India if they qualify as residents. Foreign income earned by non-residents, nonetheless, is immune from tax under Indian law if it does not arise or accrue in India.

• Income Derived from Property Outside India NRIs deriving rental or sale income from foreign property could be subject to taxation in both the nations. Care must be taken to approach tax consultants so that tax provisions in India and overseas are adhered to.
• Foreign Bank Accounts: Interest earned on foreign bank accounts is subject to tax if the NRI is considered a resident in India. Tax planning can help NRIs deal with such burdens.

Capital Gains Tax for NRIs

NRIs earning capital gains from the sale of assets such as property, shares, or bonds in India are subject to tax on capital gains. The tax payable rate depends on whether the gains are short-term or long-term.

• Long-Term Capital Gains (LTCG): Gains from the sale of property or shares, which are kept for two years or longer (for property) or one year or longer (for shares), are categorized as long-term and charged at a lower rate, typically 20%.
• Short-Term Capital Gains (STCG): Assets disposed of within a shorter period are subject to short-term gains taxation, with different rates depending on the asset being disposed of.

Foreign Asset Reporting Compliance

NRIs are liable for foreign asset reporting as per Indian law. This includes reporting foreign bank accounts, financial interest, and other foreign assets to the Indian tax department.

• Foreign Asset Disclosure: Tax-resident NRIs are required to disclose foreign assets while submitting tax returns in India. Failure to comply will draw heavy penalties.
• Foreign Exchange Management Act (FEMA): The foreign income and asset rules fall under FEMA, and NRIs should ensure that they comply with FEMA regulations while remitting money or investing abroad.

Conclusion

Prime Wealth’s Experience in NRI Cross-Border Taxation Navigating the complex world of cross-border taxation requires expert guidance, especially when dealing with multiple jurisdictions. Prime Wealth offers specialized tax planning services for NRIs, ensuring compliance with both Indian and international tax laws. Our team can help you minimize your tax liabilities and maximize your financial growth through effective cross-border tax strategies.

FAQs:

1. What is cross-border taxation for NRIs?

   Ans- Cross-border taxation refers to the tax implications for NRIs who earn income in one country and reside in another.

2. How can NRIs avoid double taxation?

   Ans- NRIs can avoid double taxation by claiming benefits under the Double Taxation Avoidance Agreement (DTAA) between India and the foreign country.

3. What is a Tax Residency Certificate (TRC)?

   Ans- A TRC is a document issued by a foreign country to confirm an NRI’s tax residency status and is required to claim DTAA benefits in India.

4. Do NRIs have to pay taxes on foreign income in India?

   Ans- NRIs classified as residents may have to pay taxes on their global income, including foreign income. Non-residents are taxed only on Indian income.

5. What are the tax rates for long-term capital gains for NRIs?

   Ans- Long-term capital gains from the sale of property are taxed at 20%, while gains from stocks are taxed at 10% in India.

6. How does FEMA impact NRI taxation?

   Ans- FEMA regulates foreign exchange and asset transactions for NRIs. Compliance with FEMA is essential when repatriating money or investing abroad.

7. What documents are required to claim DTAA benefits?

   Ans- NRIs need to submit Form 10F and a Tax Residency Certificate (TRC) to claim DTAA benefits.

8. Are NRIs taxed on foreign bank interest?

   Ans- NRIs classified as residents must pay taxes on interest earned from foreign bank accounts.

9. What is the difference between short-term and long-term capital gains for NRIs?

   Ans- Short-term capital gains are taxed at higher rates, while long-term gains are taxed at lower rates, depending on the holding period of the asset.

10. Why should NRIs consult a tax professional for cross-border taxation?

    Ans- Cross-border taxation is complex, and consulting a professional ensures compliance with international tax laws and maximizes tax savings.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.