How should NRIs file a tax return? All they must know

NRI's tax return filing

Many NRIs are unsure about income tax filing rules and go wrong with taxation. As an NRI, you need to file an income tax return in India for the income arising in India in a financial year. The taxation rules are different compared to Indian residents. Hence, if you had filed returns when you were an Indian resident, the same regulations cannot be applied when filing tax as an NRI.

Even though you are earning in a foreign land, your tax obligations in India do not end. You have to file IT returns if your Indian income exceeds the basic exemption limit. Let us look at everything you need to know about tax returns as NRI.

Know your residential status

The first thing you must be sure of is your residential status. It is determined for every financial year and depends on the number of days you have stayed outside India. As per the IT Act 1961, you are NRI if you meet one of the below two criteria:

  • You are physically present in India for less than 182 days in a financial year.
  • You have been present in India for more than 60 days in a year or cumulatively not more than 365 days in the last four years.

Calculate your taxable income

Once you have determined your taxable income, you should calculate your taxable income. You need to understand total gross income – it is your total income before tax deductions. If your total gross income is more than Rs 2.5 lakh in a financial year, you will have to pay taxes.

You could have earned this income from several sources – a monthly salary, capital gains on mutual funds, interest from deposits in an NRO account, or rental income. You should carefully sum up all the income. Using all the available data, file the income tax. If TDS is deducted from your income, you can claim refunds.

NRIs can also claim deductions up to Rs 1.5 lakh under Section 80C of the Income Tax Act. However, they cannot invest in a specific tax-savings investment option under Section 80C. You are prohibited from investing in Public Provident Fund, National Saving Certificate, Senior Citizen Saving Scheme, etc.

If your Indian income is above Rs 50 lakh in a financial year, you need to report your assets and liabilities in India. In case you need help in the process, it is always better to consult a tax  consultant than to file incorrect numbers.

Claim Double Taxation Treaty Benefits

As an NRI, you must know the Double Tax Avoidance Agreement (DTAA). It will help you save on taxes. DTAA enables you to avoid paying tax twice on the same income. According to DTAA, your income will either be exempted from a tax deduction in one country or should be taxed at a lower rate in your home country.

Let us understand this with an example. You paid your taxes in India and can get a tax credit in the residing country where you earn. This credit is available on the tax paid on the same income.

Verify your IT returns

The last step is to verify your tax returns within 120 days of filing. If you fail to do it, the returns are not valid.

What are provisions related to long-term capital gains for NRIs?

For long-term capital gains made from sales of assets, you receive no benefit of indexation, and no deduction is allowed under Section 80C. However, you can avail exemption on the profit under Section 115G under specific scenarios. For example, if you reinvest the amount back into the shares of an Indian company, central government securities, etc.

Do NRIs have to pay advance tax?

If your tax liability in a financial year is more than Rs 10,000, you must pay advance tax. If advance tax is not paid, interest under Section 234B and Section 234C is applicable.

Do you need tax expert help in filing returns?

As an NRI, if you need help filing returns, you can get in touch with Right Horizons and we can help you file your returns by yourself or connect you to an auditor. We have years of experience in managing the end-to-end portfolio of our clients. Get in touch with us now and transfer all your taxation and personal finance worries to us.

Financial Planning for Child’s Education

financial planning for child education

“Education is the passport to the future, for tomorrow belongs to those who prepare for it today.” – Malcolm

In India, everyone firmly believes that education is everything. We want our kids to go to the top schools and support them in what they want to do. We understand the importance of good education, but the cost is a concern. The cost of education is increasing at a high rate. As per a report in Financial Express, education inflation stands at 11 to 12%. Let us understand the impact of this inflation.

Assume your son is three years old, and the cost of education today is Rs 5 lakh for the courses you assume he may get enrolled in. You have 15 years before your son gets ready for graduation. Assuming 11% inflation, the education cost will be approximately Rs 24 lakh. Financial planning for a child’s education becomes essential to beat high inflation.

Steps you must follow

You can follow the below steps to start financial planning for your child’s education:

  • Know the time: The first step is to know how much time you have for your child’s graduation. The longer the time horizon, the easy it is for you to plan for it. You must not delay and wait for the last hour to start planning. It is one of the essential and mandatory financial goals, and you must plan NOW.
  • Find the cost of education: It is one of the toughest questions to answer as the education cost will depend on many factors. The first question to answer is whether you plan to send your child to a foreign university or you want them to graduate in India. There is no way you can predict – the course your child will enroll in the future. You can only assume – your child will be in a profession similar to yours. For example, if you are a lawyer, check the cost of this field and factor in inflation to calculate the education cost in the future. You may need a lot more or less depending on what your child is interested in doing, but it is a good starting point.  As the child gets closer to their 10th/12th standard, one may be able to plan based on your child’s interests.
  • Know the amount that needs to be saved monthly: Once you know the amount for education, you must decide the amount you need to save and invest to reach the corpus. If the goal is far away, the easiest way is to opt for regular monthly investments. Your goal should be to put aside some money regularly to meet your goals. Assume you are unable to invest the required amount for a child’s education. Then, you must try to reduce your household and personal expenses or find an additional income source. Taking the help of your financial advisor is one of the best things you can do. You can achieve your goal with a lower investment amount with proper guidance. They have expertise in balancing the risk and the reward.
  • Plan your investments smartly: This is the most crucial step in financial planning. You have to decide where you will invest to achieve your goal. You need to invest your hard-earned money in suitable financial instruments depending on your risk profile and investment horizon. You will also need to follow asset allocation. When the goal is far away, you can make most of your equity investment. As the financial goal nears, you have to move gradually from equity to debt – rebalancing is essential. If you think you cannot do it yourself, get in touch with Right Horizons. We have expertise in financial planning.
  • Prepare for the unexpected: Like any other journey, you may have unexpected turns in your financial journey. You should be prepared for them. Figure out what happens to your goals if you have an untimely death or an accident and can no longer earn. One of the biggest setbacks to a child’s education is the death of the only breadwinner in the family, and there is no insurance. Have enough insurance for your life and health. The coverage should be able to take care of your family’s future needs and also take care of your child’s education. Investing in plans that offer a child’s education protection option (for example, ULIP) can also be considered. A financial advisor would be the best person to tell you which is the best option to secure your goals.

Start now

The last thing or the first thing you must do is to start NOW. One way to surely not achieve your goal is procrastination. Since it is a mandatory financial goal, you should start it as soon as your child is born. You can save and invest early since the longer the time horizon, the easier your financial journey becomes. The power of compounding works magic for you.

If you have any questions about your child’s education planning, get in touch with us. Right Horizons has a range of products to share your burden and you to secure your child’s future.