Income Tax Deductions for NRIs in India

Are you still holding on to your income-generating assets in India after becoming an NRI? Or investing in Indian assets that generate income? 

You will have to pay taxes on your income in India, as per the Income Tax Act, 1961. Depending on your residential status, you may also be liable to pay tax on your global income.

Therefore, it is important that you plan your investments wisely and take advantage of the various tax-saving options. Today, we will discuss the tax-saving investments that NRIs can make in India.

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How Can NRIs Save Tax on Their Income in India?

According to the Income Tax Act, 1961 interest earned on Non-Resident External (NRE) accounts and Foreign Currency Non-Resident (FCNR) accounts is tax-free in India. However, the interest income will be taxed in your country of residence. 

While income from other sources is taxable, you can save tax on your income in India by investing in various tax-saving instruments under Section 80C of the Income Tax Act, 1961. Investments up to Rs 1.5 lakhs in these tax savings investments are tax exempted. Some of the popular tax-saving investments for NRIs are -

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Equity Linked Savings Scheme (ELSS)

ELSS is a type of mutual fund that invests predominantly in equity or equity-related securities and offers tax benefits to investors. 

Suggested Read - How Are Mutual Funds Taxed for NRIs?

You can invest in ELSS through their NRE or NRO accounts and claim a deduction of up to Rs. 1.5 lakh per year under Section 80C of the Income Tax Act, 1961. The lock-in period for ELSS is three years.

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Bank Fixed Deposits (FDs)

Bank FDs are a popular investment option among Indians and NRIs, as they offer safety, liquidity, and attractive interest rates. However, the interest income from bank FDs is taxable, as your slab rate. 

You can opt for tax-saver FDs, where investments up to Rs. 1.5 lakh per year are eligible for deduction under Section 80C of the Income Tax Act, 1961. These FDs have a lock-in period of five years.

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House Property Related Deductions

NRIs who own or buy property in India can also claim various deductions related to their house property income. These include:

Exemption on long-term capital gains

Long-term capital gains

You can claim exemption from long-term capital gains tax on the sale of a residential property in India if you reinvest the gains in another residential property in India within two years or in specified bonds within six months.

You can claim an exemption under -

• Sections 54 and 54F by using capital gains to buy a home, up to Rs. 10 crores.
• Section 54EC to buy government bonds and claim an exemption from LTCG tax up to Rs. 50,00,000.

Tax savings for home loan borrowers

• Home loan interest
  You can claim a deduction of up to Rs. 2 lakh per year under Section 24 for the interest paid on a home loan (buying or constructing). The deduction can be claimed for a self-occupied property or a let-out property.

• First-time home owners
  If you buy your first house property in India, you can claim an additional deduction of up to Rs. 50,000 per year under Section 80EE for the interest paid on a home loan.

• Home loan principal repayment
  You can claim a deduction of up to Rs. 1.5 lakh per year under Section 80C for the principal repayment of a home loan taken for buying or constructing a property in India.

Suggested Read - How are Indian Investments Taxed for Canada NRIs?

National Pension Scheme (NPS)

NPS is a voluntary pension scheme that allows you to save money for retirement. 

You can open an NPS account through your bank or online and contribute up to Rs. 1.5 lakh per year. The contributions are eligible for deduction under Section 80C of the Income Tax Act, 1961. And an additional Rs 50,000 is eligible for tax exemption under section 80CCD (1B).

• The returns from NPS are partially tax-exempt. 60% of the corpus that can be withdrawn at retirement is taxable per the slab rate.
• 40% is retained and invested in an annuity for monthly pension purposes.

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Insurance

Insurance is another tax-saving option for NRIs, as the premiums paid for life and health insurance are deductible under Section 80C (up to Rs 1.5 lakhs) and Section 80D (up to Rs 25,000) of the Income Tax Act, 1961, respectively. 

You can buy insurance policies from Indian insurers or foreign insurers. The maturity or death benefits from life insurance policies are also tax-free, subject to the sum assured being at least 10 times the annual premium.

Unit Linked Insurance Plans (ULIPs)

ULIP contributions up to Rs 1.5 lakhs are eligible for deduction under Section 80C. They provide the combined advantage of insurance and investment within a single integrated scheme. The lock-in period for ULIPs is five years. Premiums paid for oneself, spouse, and children qualify for deductions.

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Conclusion

If you have income in India, you can save tax on income by availing the various tax exemptions and deductions. By choosing the right tax-saving investments, you can reduce your tax liability and also achieve financial goals. However, you should also consider the tax implications of these investments in your country of residence and consult a tax expert before making any investment decision.

At iNRI, we’ll help you with investment and tax compliance-related matters.

Discover the best ELSS tax-saving funds tailored for NRIs here.

Tax Savings Investments for NRIs: Frequently Asked Questions (FAQs)

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Are there any tax-saving mutual funds for NRIs?

Investments in Equity Linked Savings Scheme (ELSS) mutual funds qualify for tax exemption. You can claim tax deductions on investments up to Rs 1.5 lakhs under Section 80C.

Knowing your residential status is crucial for making informed tax-saving decisions. Learn more in our blog on Understanding Residential Status & Its Tax Implications For NRIs & RNORs.
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Apart from 80C, what other provisions allow tax deductions for NRIs?

Apart from Section 80C, several other provisions offer tax deductions as follows:

• Section 24: Allows up to Rs. 2 lakh deduction on interest paid for home loan repayment.
• Section 54 – 54F: Provides exemption on long-term capital gains from property (Section 54) and assets other than property (Section 54F).
• Section 80D: Permits deduction for medical insurance premium for self, spouse, and dependent parents.
• Section 80EE: Enables deduction for interest payment on home loans for first-time homebuyers.
• Section 80G: Allows deductions for donations to charitable organisations.
• Section 80GG: Allows rent deduction under Section 80GG if income does not include House Rent Allowance (HRA). For this, you must be paying rent for a property in India.
• Section 80TTA: Offers up to Rs. 10,000 deductions on savings accounts and bank deposits. Only the NRO savings account holders can avail of this benefit.

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Do NRIs have to file income tax returns in India if they have no income?

It is best to file income tax returns in India. Even if you do not have any income in India, filing nil returns is advisable.

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Can NRIs avoid capital gains tax?

You cannot avoid capital gains tax. If these are capital gains from a property sale, you can get an exemption by purchasing a new residential house in India under Section 54.

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Which income is taxable for NRIs?

Any income that accrues, arises, or is deemed to accrue or arise in India, as well as income received or deemed to be received in India, will be taxable in India. 

Income accruing outside India from a business controlled by or a profession set up in India is not taxed. The taxable income for NRIs includes:

• Salary received for services provided in India.
• Income from residential property in India, whether rented or vacant.
• Capital gains resulting from the transfer of property or assets in India.
• Income from fixed deposits or interest on bank savings accounts in India.
• Interest on NRO (Non-Resident Ordinary) accounts.

NRIs receiving income through PayPal should be aware of the tax implications. Learn more about using PayPal in India here.

Suggested Read - Mistakes To Avoid While Diversifying Your Investment Portfolio

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