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.

Your Checklist On Taxes For The Financial Year End!

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We are just a few days to go before this financial year (2019-20) comes to a close. Though you have time till July 31st, 2020 to file your income tax returns, there are a number of activities that you need to do by March 31st, 2020 to claim the benefits in this assessment year (AY 2020 – 21). The finance minister came out with a series of extensions in dates till June 30th, 2020; but this is restricted mainly to tax saving investments.   Thus, you may have a bit of a breather on your tax saving investments.  Here is a checklist of items that you should go through to make sure that you have availed all the tax benefits available under different provisions of the Income Tax Act.
 

  • Set off your capital gains for the year with the losses:

     If you do have capital gains for the year upto January 2020 when markets were relatively buoyant, you would have a number of stocks or even mutual funds that would be showing losses.  You can book some losses and set off the capital gains. You would want to optimise your capital gains in a difficult year. Do check if you have exit loads on your mutual funds before booking the losses.  This needs to be executed by March 31 for one to avail of the benefit.

  • Section 80C:

    You can claim deduction of up to Rs 1.5 lakhs from your gross taxable income by investing in schemes eligible u/s 80C. These schemes are EPF, VPF, PPF, NSC, tax saver bank FDs, life insurance premiums, mutual fund ELSS etc. Tax payers who are not getting a salaried income and not having PF and other tax saving investments must make sure that they avail maximum benefits. Senior citizens and parents of girl children can claim deductions by investing in Senior Citizens Savings Scheme and Sukanya Samruddhi Yojana subject to the overall Rs 1.5 lakhs 80C limit. Investors paying home loan EMIs can claim deduction for principal payments made during the financial year. Benefit extended till June 30th.

  • Section 80D (Medical insurance):

    You can claim Rs 25,000 of additional deduction for medical insurance premiums for yourself and your family (seni or citizens can claim up to Rs 50,000). You can claim a further deduction of Rs 25,000 for medical insurance premiums of dependent parents (Rs 30,000 if your parents are senior citizens).  Benefit extended till June 30th.

  • Section 80CCD (NPS):

    You claim additional Rs 50,000 deduction, over and above Section 80C limit of Rs 1.5 lakhs, by investing in National Pension Scheme. You can claim total deduction of Rs 2 lakhs by investing Rs 1.5 lakhs u/s 80C and Rs 50,000 in NPS. Benefit extended till June 30th.

  • Section 24 (Interest payment on home loan):

    You can claim up to Rs 2 lakhs deduction for interest payments in your home loan EMI for self-occupied house. If you are paying home loan EMIs for a let out house, the loss is restricted to Rs 2 lakhs in a financial year.

  • Section 80E (Interest payment on higher education loan):

    If you have taken loan for your, spouse or children’s higher education, then the entire interest payment can be claimed as deduction from your gross taxable income.

  • Section 80G (donations to charities):

    Donation made to tax exempt charities is allowed to be claimed as deduction at the rate of 50% or 100% (of the contributed amount) depending on the charity and as per approval granted by prescribed income tax authorities.

 

  • Check your surcharge bracket:

      You maybe able to claim exemptions/deductions and set off your losses to reduce your net income to below the surcharge brackets (Rs 50 lakh / 1 Cr / 2 Cr / 5 Cr) if your income is on the border.  Plan before March 31st, because only tax saving investments are extended till June 30th.

 

  • Pay Advance Tax by March 31st:

    Tax payers who have income from other sources (e.g. rent, FD interest, capital gains etc) should make sure that they pay advance tax by March 31st, 2020. If you have worked in two different companies, you are likely to have to pay additional taxes for the year when you consolidate the two form 16s. If do not pay Advance Tax on time, you will have to pay interest @ of 0.75% per month of delayed tax payment (reduced from 1% per month for the period upto June 30th), even if you file your IT returns on time. For example, if your tax obligation over and above tax deducted at source (TDS) on March 31st is Rs 5 lakhs, you will have to pay Rs 16,250 as interest if you are filing your ITR and paying tax on July 31st

Summary

You can save a lot of money in taxes by availing the benefits available under different provisions of Income Tax Act. In this article, we have shared with you a checklist of items that you should review and make sure that you get maximum benefits. In addition to the tax savings avenues shared in this article, there may be other depending on your specific situations. If you need help with your tax planning feel free to email us at contactus@righthorizons.com .

Tax Rebate upto Rs 5 lakh: The real story

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Ever since Interim Budget 2019, there is some confusion on whether there is income tax relief given to all citizens or not. Some people are convinced there is an income tax relief for all. Others say they have read or heard news reports about tax rebate relief.

For a common man with limited financial knowledge, all this can be very confusing. So, let us clear that confusion once and for all. The Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate and so they pay zero tax. Read on to know more.

Tax slabs unchanged

There is no change in the income tax slabs. You must understand what is the difference between taxable income and total/gross income. Gross income includes all of the income a person has received during a financial year. This amount is not explicitly exempt from taxation. On the other hand, taxable income is the amount of income that is actually subject to taxation, after all deductions or exemptions. So, typically taxable income will be lower than gross/total income.

For a person aged below 60 years, up to Rs 2.5 lakh of their taxable income is not taxed.

Income between Rs 2.5 lakh to Rs 5 lakh is taxed at 5% of total income exceeding Rs 2.5 lakh. This tax comes to a maximum of Rs 12,500.

Income between Rs 5 lakh to Rs 10 lakh is taxed as at 20% of total income exceeding Rs 5 lakh.

Income above Rs 10 lakh is taxed at 30% of total income over Rs 10 lakh.

In the Interim Budget, these tax slabs remain the same. However, the Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate under section 87A of the Income Tax Act.

Do remember for senior citizens aged 60 years and above but below 80 years, income up to Rs 3 lakh is exempt from tax. Income up to Rs 5 lakh is exempt from tax for super senior citizens (ie. aged 80 years and above).

Tax rebate is not tax cut for all

What does full tax rebate for those with taxable income of Rs 5 lakh mean? Read the example below.

Let us assume you, a person below 60 years, has a taxable income of Rs 5 lakh. As per income tax slabs, you fall in two slabs.

First, your income up to Rs 2.5 lakh is not taxed.

Second, the excess amount above Rs 2.5 lakh is taxed at 5% of the exceeding amount. Since your taxable income is Rs 5 lakh, this means you have Rs 2.5 lakh extra over the zero tax-slab.

At 5% income tax rate, the tax liability comes to Rs 12,500. However, the full tax rebate of up to Rs 12,500 given in the latest budget means you will also pay no tax!

But what if your taxable income is Rs 5.5 lakh or Rs 6 lakh or more? The moment your taxable income crosses Rs 5 lakh, then the rebate is not applicable for you.

If your taxable income is Rs 5.5 lakh, for example, your gross tax liability shoots up to Rs 23,400. For somebody with taxable income of Rs 6 lakh, the tax rises further to Rs 33,800.

In essence, all this means your tax liability rises sharply once you cross Rs 5 lakh taxable income zone. For earning just Rs 50,000 more than Rs 5 lakh (taxable income of Rs 5.5 lakh), your tax liability is nearly 47% on the extra Rs 50,000 income.

Importance of tax-planning

Under the new income tax rules, it becomes highly important to plan taxes properly and carefully. A small mistake can cost a lot as you can understand.

Not just the pay structure, full focus and attention needs to be given to tax planning.

Those in the marginal area (just above Rs 5 lakh taxable income) should use all the tax deductions available. This is so that such individuals are not taxed more just because they forgot to claim exemptions, or were not aware of how to lower tax dues.

So, try to consult a good financial planner and prepare your tax blue-print for this year and beyond.

Reach us at 9845399780 or contactus@righthorizons.in

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How to be tax-free with Income up to Rs 10 lakh

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The Interim Budget 2019 may not have directly touched the income tax slab rates, but a small tweak in income tax rebate is virtually doing the job for many. Salaried employees earning up to Rs 10 lakh in a year can escape paying tax if they use some of the investment and expense related deductions available. In the same breath, non-salaried individuals earning Rs 9.5 lakh do not have to pay a single paisa in income tax. All this is possible because full tax rebate has been given for taxpayers having taxable income of Rs 5 lakh. This means if your total income is more than Rs 5 lakh, all you have to do is to claim deductions so as to bring the taxable income to Rs 5 lakh or below. Read on to know more.

No more taxes

Apart from hiking standard deduction to Rs 50,000 a year, The government has not made any extra income tax deduction related announcements in Interim Budget 2019. By smartly using the norms, all of your income can be made tax-free. Of course, some might argue that claiming Rs 5 lakh as deductions out of Rs 10 lakh income is difficult. Dear friends, life is an art of possibilities. If you know there is a way, you can always succeed.

Before the Budget, taxable income up to Rs 2.5 lakh attracted no tax while taxable income falling between RS 2.5 lakh to Rs 5 lakh attracted 5% tax. In simple terms this means that if your taxable income was Rs 5 lakh, you paid tax on the Rs 2.5 lakh beyond the zero-tax income.

This 5% of Rs 2.5 lakh translated into Rs 12500 and was your income tax liability. The Interim Budget 2019 has given 100% rebate on up to Rs 12500 amount. So, there will be no tax liability for you.

How do individuals earning more than Rs 5 lakh take advantage of the situation? It is easy. If you have a salary income of Rs 10 lakh, you need to claim deductions worth Rs 5 lakh and bring your taxable income part to Rs 5 lakh.

Deduction game

Assume your salary income is Rs 10 lakh. You can make a deduction of up to Rs 2 lakh for interest paid on housing loan for self-occupied property under Section 24. This will reduce your taxable income from Rs 10 lakh to Rs 8 lakh.

Then, there is maximum Rs 1.5 lakh deduction for investments made under Section 80C (like principal paid on housing loan, insurance premium, ELSS, PPF etc.). This brings your taxable income from Rs 8 lakh to Rs 6.5 lakh.

The Interim Budget 2019 has increased the standard deduction for salaried persons to Rs 50,000 (increased from Rs 40,000 earlier). Using this standard deduction, your taxable income falls from Rs 6.5 lakh to Rs 6 lakh.

To encourage National Pension System (NPS), the income tax norms allow us to claim a maximum and separate deduction under Section 80CCD(1B) for additional investment in NPS of Rs 50,000. This when claimed will bring your taxable income from Rs 6 lakh to Rs 5.5 lakh.

Each and every nook

Lastly, you can claim Rs 25,000 medical insurance premium for self & spouse and Rs 25,000 mediclaim premium for your dependent parents. The combined Rs 50,000 premium (under Section 80D)when deduced from your taxable income of Rs 5.5 lakh brings it to the magic figure of Rs 5 lakh.

The process will be similar for non-salaried persons but they will not able to claim the Rs 50,000 standard deduction (available for salaried only). Thus, non-salaried with Rs 9.5 lakh in the above example will pay zero tax.

Below is a a table that shows your example of a salaried person (below 60 years of age).

A) Gross Income – Rs 10,00,000

B) Deductions

i) Deduction for Interest on Housing loan for self-occupied property – sec 24        – Rs 200,000

ii) Deduction – Section 80C (Insurance premium /Principal on housing loan / ELSS / NPS /) – Rs 150,000

iii) Standard Deduction for salaried – Rs 50,000

iv) Deduction under Section 80CCD(1B) – Additional investment in NPS – Rs 50,000

v) Deduction under Section 80D – Mediclaim – Rs 25,000

vi) Deduction for parents (senior citizens Mediclaim) – Rs 25,000

C) Taxable income (A minus B) – Rs 500,000

D) Income tax payable (5% of amount between Rs 2.5 lakh to Rs 5 lakh) – Rs 12500

E) Rebate under section 87A – Rs 12500

F) Net tax payable- Rs 0 (zero)

Do remember that many salaried and non salaried persons can also other deductions available under the Income Tax Act. For instance, interest paid during a financial year on an education loan is allowed as deduction for individuals from the total income under Section 80E. The deduction is provided only for the interest part of the EMI. There is no limit on the maximum amount that is allowed as deduction. If you are paying education loan interest, you can claim the maximum amount per financial year. If the amount is Rs 5 lakh per year, you will not have to do any other investments to come to zero-tax club.

Likewise, taxpayers can use the Section 80G of the Indian Income Tax Act that allows you tax deduction on donations made to any charitable organization. The various donations specified in section 80G are eligible for a deduction of up to either 100% or 50% with or without restriction, as provided in Section 80G.

Reach us at 9845399780 or contactus@righthorizons.com

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