July 31st is the last date for filing your Indian income tax returns for the financial year 2012-2013. If you are a Non Resident Indian (NRI) and are trying to figure out if you need to file a tax return in India, this guide will help you.
Should you file returns in India?
If you are an NRI, you would have to file your income tax returns for 2012-2013 if you fulfill either of these conditions:
- Your taxable income in India during the year 2012-2013 was above the basic exemption limit of Rs 2 lakh OR
- You have earned short-term or long-term capital gains from sale of any investments or assets, even if the gains are less than the basic exemption limit.
"What this means is that firstly, NRIs do not get the benefit of differential exemption limits on basis of age or gender that is available to Resident Indians. Secondly, for NRIs, certain short term or long term capital gains from sale of investments or assets are taxed even if the total income is below the basic exemption limit. These include short term capital gains on equity shares and equity mutual funds where tax rate is 15% and long term capital gains on securities and assets where tax rate is either 20% or 10% without indexation," explains Vaibhav Sankla, Director, H&R Block India.
Are there any exceptions?
Yes, there are two exceptions:
- If your taxable income consisted only of investment income (interest) and/or capital gains income and if tax has been deducted at source from such income, you do not have to file your tax returns.
- If you earned long term capital gains from the sale of equity shares or equity mutual funds, you do not have to pay any tax and therefore you do not have to include that in your tax return
Tip: You may also file a tax return if you have to claim a refund. This may happen where the tax deducted at source is more than the actual tax liability. Suppose your taxable income for the year was below Rs 2 lakh but the bank deducted tax at source on your interest amount, you can claim a refund by filing your tax return. Another instance is when you have a capital loss that can be set-off against capital gains. Tax may have been deducted at source on the capital gains, but you can set-off (or carry forward) capital loss against the gain and lower your actual tax liability. In such cases, you would need to file a tax return.
What is the last date for filing India tax returns?
The last date to file returns for the financial year 2012-2013 is July 31st 2013. However, remember the following:
- If you do not have any tax payable (that is all your tax has been deducted at source), you can still file your tax return by 31st March 2014 without any penalties
- If you do have tax payable, you can still file your returns by 31st March 2014 but you will be charged an interest of 1% per month for every month of delay starting from 31st July 2013 till the time you file your tax returns .
- If you do not file your tax returns even by the 31st of March 2014, you may be charged a penalty of Rs 5,000 for every year of delay.
Should you have paid advance tax?
As per the provisions of the Income Tax Act, you must pay advance tax in three installments during the year in case the tax payable, after adjusting TDS is likely to be Rs 10,000 or more. There are interest implications in case of default in payment of any installments or lesser payment of advance tax. The interest is generally 1 percent per month for the default amount and extends till the date of payment. Therefore, NRIs should evaluate if they were liable to pay advance tax and whether the same was paid in time. If not, they would need to calculate the interest for default and deposit the same before filing the tax return," explains Vineet Agarwal, Director, KPMG India.
What is the best way to file your returns?
There are 3 ways in which you can file your tax returns. You can do it yourself using online e-filing portals. In fact, from financial year 2012-2013 onward, the income tax department has made it mandatory to e-file returns for in case your taxable income is over Rs 5 lakh. The income tax department provides a free method to upload your tax return online. If you are looking for a more user friendly approach, paid e-filing portals might be a good choice. Many of these paid service providers do offer special packages for NRIs.
If you are not comfortable doing the entire filing by yourself, you can choose to go to assisted preparers. You can get professional advice along with help with filing your tax return.
Lastly, you can opt for the traditional route where your regular chartered accountant with whom you have a long term relationship with files your tax return.
For income tax purposes in India, you can be a 'Resident Indian' or a 'Non Resident Indian.' Or you can also be a 'Resident but not Ordinary Resident (RNOR).' In this article, we take a look at who an RNOR is and why this special status is accorded.
Who is an RNOR?
To understand who an RNOR is, we first need to understand the definitions of resident and non-resident Indian.
A person is a resident Indian in a particular year if he fulfills either of these two conditions:
He/she has been in India in that year for 182 days or more or He/she has been in India for 60 days or more in that year and 365 days or more in the 4 years preceding that year
A person who does not fulfill the above conditions is considered to be a non-resident.
Now, if you have recently moved back to India after spending many years overseas, you must check for the status of RNOR.
A person is an RNOR if he meets either of these two conditions:
He/she has been non-resident in India, that is, an NRI, in nine out of the ten previous years preceding that year, or He/she has, during the seven previous years preceding that year, been in India for a period of 729 days or less
Now depending on the date of return, a person can take the benefit of the RNOR status for up to 3 tax years in India. (Note than a tax year in India is a fiscal year, that is, from April to March)
Illustration: Rakesh Verma returns to India on 15th January 2011 after spending more than 20 years abroad. The first tax year for him in India would be 2010-2011. Does he qualify as RNOR in 2010-2011? Yes, because:
He has been an NRI for all the years preceding 2010-2011.
Will he qualify as RNOR in 2011-2012? Yes, because
He will have been an NRI for nine out of the ten previous years. That is, except for 2010-2011, he will have been NRI in all other years
Will he qualify as RNOR in 2012-2013?
He will not have been NRI for nine out of the ten previous years because he would have been RNOR for 2010-2011 and 2011-2012.
During the seven previous years, that is for the seven tax years from 2005-2006 to 2011-2012, he would have been in India for the entire 2011-2012 (366 days) and for 75 days in 2010-2011. That's 441 days in total which is less than 729 days. Because he will fulfill this second condition, he will qualify as an RNOR in 2012-2013 as well.
Will he qualify for RNOR in 2013-2014?
He will not have been NRI for nine out of the ten previous years because he would have been RNOR from 2010-11 to 2012-13.
During the seven previous tax years, that is from 2006-2007 to 2012-2013, he would have been in India for 365 days in 2012-2013, 366 days in 2011-2012 and 75 days in 2010-2011. That's 806 days in total. Since he will not fulfill either condition, he will be considered as Resident Indian in 2013-2014.
Why this status?
The RNOR is a special status accorded in order to provide some benefits to returning NRIs. For Indian income tax purposes, an RNOR is treated at par with NRIs. That means, an RNOR needs to pay tax in India only on his Indian income. Any income from abroad will not be taxed in India. These include:
Any interest or dividends from foreign securities
Any capital gains from the sale of foreign assets including property
Any withdrawals made from foreign retirement funds such as 401K plans for US based NRIs
Interest on Foreign Currency Non Resident (FCNR) bank account held in India (until maturity)
Interest on Resident Foreign Currency (RFC) account
(Note: There is one exception here. Income received and accrued outside India from a business controlled or set up in India is taxable in India, even for an RNOR)
These exemptions will allow NRIs to bring back their foreign assets into India without the burden of heavy taxes. Once the person becomes a Resident Indian from the RNOR, all his foreign income will be taxable in India. "However, concessions and exemptions granted under the Double Taxation Avoidance Agreement, if any, between India and the country of the NRI's original residence will be applicable and relief will be granted as regards tax paid outside India on the overseas income liable to tax in India," explains Rajesh Dhruva, CEO of femaonline.com.
Another exemption is that of Wealth Tax. For RNOR, assets located outside India are exempt from Wealth tax in India. Once his status changes to Resident India, his foreign assets will come under the purview of Wealth Tax.
Investing in Indian real estate is a hot favorite among Non Resident Indians (NRIs). And like every other investment, real estate comes with its share of tax challenges. As we approach the due date for filing tax returns in India for the year 2011-2012, let us look at a tax law relating to real estate that is peculiar to the Indian Income Tax. This law is applicable to both residents as well as NRIs. However, unless they have a regular relationship with a chartered accountant in India, NRIs tend to miss this particular law.
According to the Indian Income Tax Act, if a taxpayer (resident or NRI) owns more than one house property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. The other one, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property (based on certain valuations prescribed by the income tax rules) and pay the tax thereof.
a If you have only one house in India and you have given it on rent, you would need to pay tax on rental income
a If you have only one house in India and you have not given it on rent, you do not have to pay any tax on that property. This is because that house will be deemed as self-occupied and there is no tax on self-occupied property.
a If you have two houses in India and have given both on rent, you would need to pay tax on rental income of both
a If you have two houses in India and you have not given either on rent, then one house will be treated as 'self-occupied' and no tax will be levied. The other house will attract deemed rental tax provision. You will have the discretion to make the choice.
Important: Property is defined as 'building and any land appurtenant'. So this includes residential property plus office building, factory building, godowns, flats, etc. It does not include only land holding. In case you own a single commercial property in India which is lying vacant, you would need to pay tax on deemed rental on that property.
A detailed explanation on this is available from the Income Tax Department under the Tax Payer Information Series - 17 .
One house in foreign country and one house in India
The Income Tax Act does not specify if either or both these properties must be situated only in India. Vikas Vasal, Executive Director of KPMG India explains, "At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of 'more than one property' will apply to global properties."
What this means is that if you are an NRI and own only one property globally and that property is in India, you would not have to pay any income tax on that property.
However, let us say you are an NRI living in USA. You own and live in a house in USA. You also own a house property in India which is not given on rent. That property in India would be treated as 'deemed to be rented' because your self-occupied property is in USA. So even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India.
Once you inherit the property, you become the owner. Therefore, the property qualifies for the same tax rules as if you had purchased the property. So if you have inherited a property in India and that is not your only property, you would have to pay tax on deemed income.
The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act. For the purpose of calculating tax, the income from the property is taken as the 'annual value' of the property. The municipal value of the property, the cost of construction, the standard rent if any under the Rent Control Act, the rent of similar properties in the same locality are relevant factors for the determination of the annual value. Usually, the highest of all the above is taken as annual value of the property. Your chartered accountant will help you to arrive at this annual value.
From this annual value, you will be allowed a deduction of 30% in expenses, irrespective of whether you have actually incurred 30% as expenses. The balance is added to your total income and taxed thereon.
Filing income tax return is a daunting task for many working professionals in India. The process gets even more cumbersome for the non-resident Indians (NRIs) or expatriates who have to look at tax laws of more than one country while filing their tax returns.
This year, non-resident Indians will have even more trouble because CBDT has introduced several changes in the tax filing space for NRIs.
These changes in tax filing rules and the tax return forms affect the expatriates working in India.
"As per a recent change in the Income Tax Act, 1961, 'ordinarily resident' individuals and HUFs having assets (including financial interest in any entity) outside India or a signing authority in any account outside India are required to file their returns online," says Vineet Agarwal, director, KPMG. "This is irrespective of their income level. Hence, if an NRI/expatriate or any of his family members qualify as 'ordinarily resident' and have foreign assets, they will be required to file their returns online," he adds.
Tax implications are determined by residential status (three categories listed below) of individuals in a particular financial year. They are Non-Resident (NR), Resident and Ordinarily Resident (ROR) and Resident but not Ordinarily Resident (NOR). Needless to say, non-residents will have to disclose their foreign assets in the tax return form.
"The government's intention of the legislature may be to track illegitimate transfer of money from India to create assets overseas. This will also help the government understand the nature of the assets and potential tax impact in India," says Mayur Shah, director-tax & regulatory services, Ernst & Young. "This will also give information regarding global assets of a resident since the income from such assets is taxable in India," he adds.
There is a category of residents called 'Not Ordinarily Resident' (NOR) and the income of a 'Not Ordinarily Resident' individual from assets located outside India is not taxable in India. "It has been clarified that the provision for compulsory filing of income tax return in relation to assets located outside India would not apply to a person, who is 'Not Ordinarily Resident'," says Mayur Shah.
This amendment will take effect retrospectively from April 1, 2012; and will, accordingly, apply in relation to tax year 2012-13 and subsequent assessment years.
The reporting requirement for details of assets held outside India has been made mandatory without specifying any minimum threshold for value of assets to be reported.
Tax Liability on Indian shores
The taxability depends upon the nature of income (accrual/receipt) and residential status in a particular financial year. The residential status is in turn dependent on actual days stay in India in a particular financial year.
"It is generally observed that in case of individuals qualifying as NR/NOR, only income received/deemed to be received/accrued or arisen/deemed to accrue or arise in India is taxable in India. However, for individuals qualifying as ROR, the worldwide income comes within the ambit of taxation in India," says Mayur Shah.
As a general rule, non-residents are required to offer only the Indian income for taxation. "For most non-residents, this income would be form sources such as interest on deposits in India, rental income from properties in India and capital gains on shares/mutual funds in India," says Vaibhav Sankla, director, H&R Block India
An expatriate who is ordinarily resident in India will have to report his worldwide income in the India tax return. "However, an expatriate who is a Resident but not Ordinarily Resident (RNOR) can reflect only his Indian income in India tax return. Typically, expatriates coming to India for the first time, enjoy RNOR status for the first two financial years," he adds.
Procedure for Filing returns
The procedure of filing returns is no different from that of a resident Indian.
In case the tax filing deadline (July 31, 2012 for FY 2011-12) is missed, there is a provision for filing a belated tax return. However, a belated tax return cannot be revised, losses cannot be carried forward for the purposes of being set off in subsequent years; and interest under sections 234A, 234B and 234C of the Act may be levied.
Things to Remember
NRIs/expatriates should evaluate their residential status based on the number of days of their physical stay in India. "If they qualify as 'Ordinarily Residents', they should also prepare a list of their assets outside India," says Vineet Agarwal.
They should also evaluate the correct forms that they can use for filing tax returns online. If their income is above 10 lakh, they can file returns in ITR 1 (SAHAJ), ITR 2, ITR 3, ITR 4S (SUGAM) or ITR 4. However, if they are 'Ordinarily Residents' and have foreign assets, they cannot use the SAHAJ and SUGAM forms.
"After filing the return online, they should ensure that the acknowledgment (ITR-V) is signed in blue ink and sent within 120 days to the Central Processing Centre at Bengaluru," he adds.
NRIs should ensure that the agency they use for mailing the signed ITR-V form can actually deliver it to the Post Box Number. Courier agencies cannot deliver documents to a Post Box Number.
"An alternative for them could be to send it to their family members in India by courier. The family member in turn can post the signed document to the Post Box Number assigned to the CPC," says Vaibhav Sankla.