NRI Tax in India - Citizenship Based Taxation: A Guide!

NRI taxation in India has been simplified, uncertainty decreased, and compliance burden reduced. Learn about citizenship-based dividend taxation for NRIs.

Citizenship Based Dividend Taxation

NRI taxation in India has been improved under the Income Tax Act of 1961 to simplify tax filing for Non-Resident Indians (NRIs). Are you an NRI? Do you want to know more about NRI tax and dividend taxation for NRIs? If yes, read this article to learn more.

To enhance transparency and reduce uncertainty/burden of compliance, the Indian government has improved and simplified the Income Tax Act of 1961. NRI taxation in India has also been improved to simplify tax filing for the Non-Resident Indians (NRIs).

Let's explore the NRI tax in India to learn everything you want to know about citizenship based taxation, NRI tax residency provisions, and dividend taxation.

NRI Tax Residency Provisions: A Quick Look

The Indian government has made some basic modifications in NRI Tax Residency Provisions since 2020-21. Modifications have been done in the meaning of:

  • Person of Indian Origin (PIO)
  • Indian citizen

This is one of the major changes done by the government to determine an individual’s residential status.

What has changed in the definition?

Let’s explore how the definition has been modified:

An Indian citizen or PIO as an NRI: Earlier Definition

A PIO or Indian citizen was considered a non-resident in India for taxation purposes in the case:

  • The concerned person has been living in India for 181 days or more.

An Indian citizen or PIO as an NRI: Current Definition

A PIO or Indian citizen was considered a non-resident in India for taxation purposes if:

  • The concerned person has been living in India for 120 days or more.

Please note that Indian citizens/PIOs having more than Rs. 15 lakhs will come under this tax rule. The accrued taxable income in a financial year should be Rs. 15 lakhs.

You'll not be considered as Non-Resident in India (NRI) but 'Not ordinarily resident' if, as a PIO or Indian citizen, you've stayed in India for:

  • Over 120 days
  • Less than 182 days

Citizenship-Based Taxation: What is it?

If you have stayed in different countries in a certain financial year, your residency provision becomes complicated. This can have a significant effect on your taxes too. To improve residency provisions for such individuals like you, the Indian government has introduced the "deemed residency" provision. This is known as citizenship based taxation. If you are an NRI, you’ve to check whether you’ve stayed in India for over 365 days in the last 4 years.

Example:

Suppose you are an NRI and you've stayed for over 120 days in India during the 2022-23 financial year. In that case, you have to check whether you've stayed here for over 365 days in the last 4 financial years:

  • FY 2021-22
  • FY 2020-21
  • FY 2019-20
  • FY 2018-19

For tax purposes, such an NRI who has stayed in India for over 365 days in the previous 4 financial years will be considered as deemed to be an Indian resident. However, such persons will be categorised as:

  • RNOR or Resident but Not Ordinarily Resident

To become an RNOR, two more clauses should be fulfilled:

  • The Indian sourced income of that NRI must surpass Rs. 15 lakhs
  • The concerned person shouldn't be liable for taxes in other countries.

An RNOR has to pay income taxes in India if he/she has earned income in:

  • Foreign countries from companies that are controlled in India
  • A profession that has been set up in India

It is important to note that no income tax will be charged on the foreign income of an RNOR (Resident but Not Ordinarily Resident).

In any previous financial-year, you can be considered as deemed to be an Indian resident if:

  • Due to your residence or domicile, you don't have to pay taxes in any other territory or country.

This provision will be applicable to you only if your total income accrued in India surpasses Rs. 15 lahks during a financial year. The tax provision determines a stateless individual's residential status if you are a foreign citizen or Overseas Citizens of India (OCI).

Dividend Taxation for NRIs

Till March 2020, shareholders' income from dividends was tax-free. Since April 1, 2020, Dividend Distribution Tax (DDT) needs to be paid by Indian companies that distribute dividends. The classical dividend taxation method has been chosen.

With the introduction of dividend taxation for NRIs, non-resident Indians can now claim DDT credit in their home nation if they’re taxed on their received dividends from companies that were taxed in their home nation. However, currently, DDT is abolished.

Now, the individuals will be taxed according to the applicable tax slabs. In the case of NRIs, the Indian company that distributes dividends to NRIs has to withhold tax from that individual. However, the NRI tax in India doesn't apply to FPIs (Foreign Portfolio Investors).

The concerned company has to withhold lower of the:

  • Prevailing rates of tax treaty
  • 20% tax rate (along with the applicable cess or surcharge)

The NRIs can claim tax credits at the time of paying taxes in their home country.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.

NRI taxation in India has been improved under the Income Tax Act of 1961 to simplify tax filing for Non-Resident Indians (NRIs). Are you an NRI? Do you want to know more about NRI tax and dividend taxation for NRIs? If yes, read this article to learn more.

To enhance transparency and reduce uncertainty/burden of compliance, the Indian government has improved and simplified the Income Tax Act of 1961. NRI taxation in India has also been improved to simplify tax filing for the Non-Resident Indians (NRIs).

Let's explore the NRI tax in India to learn everything you want to know about citizenship based taxation, NRI tax residency provisions, and dividend taxation.

NRI Tax Residency Provisions: A Quick Look

The Indian government has made some basic modifications in NRI Tax Residency Provisions since 2020-21. Modifications have been done in the meaning of:

  • Person of Indian Origin (PIO)
  • Indian citizen

This is one of the major changes done by the government to determine an individual’s residential status.

What has changed in the definition?

Let’s explore how the definition has been modified:

An Indian citizen or PIO as an NRI: Earlier Definition

A PIO or Indian citizen was considered a non-resident in India for taxation purposes in the case:

  • The concerned person has been living in India for 181 days or more.

An Indian citizen or PIO as an NRI: Current Definition

A PIO or Indian citizen was considered a non-resident in India for taxation purposes if:

  • The concerned person has been living in India for 120 days or more.

Please note that Indian citizens/PIOs having more than Rs. 15 lakhs will come under this tax rule. The accrued taxable income in a financial year should be Rs. 15 lakhs.

You'll not be considered as Non-Resident in India (NRI) but 'Not ordinarily resident' if, as a PIO or Indian citizen, you've stayed in India for:

  • Over 120 days
  • Less than 182 days

Citizenship-Based Taxation: What is it?

If you have stayed in different countries in a certain financial year, your residency provision becomes complicated. This can have a significant effect on your taxes too. To improve residency provisions for such individuals like you, the Indian government has introduced the "deemed residency" provision. This is known as citizenship based taxation. If you are an NRI, you’ve to check whether you’ve stayed in India for over 365 days in the last 4 years.

Example:

Suppose you are an NRI and you've stayed for over 120 days in India during the 2022-23 financial year. In that case, you have to check whether you've stayed here for over 365 days in the last 4 financial years:

  • FY 2021-22
  • FY 2020-21
  • FY 2019-20
  • FY 2018-19

For tax purposes, such an NRI who has stayed in India for over 365 days in the previous 4 financial years will be considered as deemed to be an Indian resident. However, such persons will be categorised as:

  • RNOR or Resident but Not Ordinarily Resident

To become an RNOR, two more clauses should be fulfilled:

  • The Indian sourced income of that NRI must surpass Rs. 15 lakhs
  • The concerned person shouldn't be liable for taxes in other countries.

An RNOR has to pay income taxes in India if he/she has earned income in:

  • Foreign countries from companies that are controlled in India
  • A profession that has been set up in India

It is important to note that no income tax will be charged on the foreign income of an RNOR (Resident but Not Ordinarily Resident).

In any previous financial-year, you can be considered as deemed to be an Indian resident if:

  • Due to your residence or domicile, you don't have to pay taxes in any other territory or country.

This provision will be applicable to you only if your total income accrued in India surpasses Rs. 15 lahks during a financial year. The tax provision determines a stateless individual's residential status if you are a foreign citizen or Overseas Citizens of India (OCI).

Dividend Taxation for NRIs

Till March 2020, shareholders' income from dividends was tax-free. Since April 1, 2020, Dividend Distribution Tax (DDT) needs to be paid by Indian companies that distribute dividends. The classical dividend taxation method has been chosen.

With the introduction of dividend taxation for NRIs, non-resident Indians can now claim DDT credit in their home nation if they’re taxed on their received dividends from companies that were taxed in their home nation. However, currently, DDT is abolished.

Now, the individuals will be taxed according to the applicable tax slabs. In the case of NRIs, the Indian company that distributes dividends to NRIs has to withhold tax from that individual. However, the NRI tax in India doesn't apply to FPIs (Foreign Portfolio Investors).

The concerned company has to withhold lower of the:

  • Prevailing rates of tax treaty
  • 20% tax rate (along with the applicable cess or surcharge)

The NRIs can claim tax credits at the time of paying taxes in their home country.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.

NEWSLETTER

Premium Articles

Union Budget