Understanding Tax Implications When Moving from India to Another Country

Relocating to another country is an exciting thing to do, but amidst the planning, there’s something that you must consider beforehand. Firstly, understand that as soon as you move, your citizenship remains Indian until you get one from another country. Now, this is where many miss a critical aspect, which is taxes. 

Many Indians assume that once they leave, their tax responsibilities in India automatically end. However, tax for NRIs is governed by specific rules, impacting everything from income earned in India to investments left behind. 

In this blog, let’s break down the implications of tax for NRIs, ensuring you remain financially secure while navigating this transition.

Understanding Your Residential Status

The first step in determining your tax liability is identifying your residential status under the Income Tax Act 1961. This totally depends on the number of days you’ve spent in India during a financial year. Your status determines whether your global income or only income earned in India is taxable.

Here’s some information to help you quickly assess your residential status:

Taxable Income for NRIs

Once you attain Non-Resident Indian (NRI) status, your tax liability in India changes. Unlike resident Indians, NRIs are only taxed on income that is earned or accrued in India. Foreign earnings remain tax-free in India. Here’s a detailed explanation of what’s included in NRI taxable income:

1. Salary Income: Your salary is taxable in India if it is earned in India, meaning you work for an Indian company or government body, even if you are physically abroad. Moreover, if it is credited to an Indian bank (i.e., received in India) account, then tax for NRIs is also applicable.
   
   For example, Raj, an NRI lives in the US but works for an Indian IT company. He receives his salary directly into his Indian bank account. Since the income is received in India, it is taxable. However, if Raj’s salary would have been credited to his US account, it would have not been taxable in India.
   
   
2. Rental Income: If you own any property in India and receive rental income through it, that income then becomes taxable under Income from House Property. The tenant must deduct 30% TDS (Tax Deducted at Source) before transferring the rent to your account.
   
   Let’s take Aman’s example here. He’s an NRI based in Dubai, owns an apartment in Mumbai, which he rents out for ₹50,000 per month. His tenant deducts 30% TDS (₹15,000) and deposits the remaining ₹35,000 into his NRO account. Now, Aman must declare this rental income while filing tax return in India. This is important to not only avoid legal action but also to claim deductions for municipal taxes and a standard 30% deduction for maintenance.
   
   
3. Capital Gains: NRIs are liable to pay capital gains tax if they sell assets like real estate, shares, or mutual funds in India. The tax rate is determined by the fact that gain is short-term or long-term:
   • Short-Term Capital Gains (STCG): Taxed at 15% (for equity shares and mutual funds) or at slab rates (for property and other assets).
   • Long-Term Capital Gains (LTCG): Taxed at 10% (equity) above ₹1 lakh and 20% (property, debt funds) with indexation benefits.
     
     Om, an NRI living in Canada, sells his apartment in Bangalore after 7 years for ₹80 lakh, making a long-term capital gain of ₹30 lakh. Since it’s a long-term asset, he is liable to pay 20% LTCG tax with indexation benefits, reducing his taxable amount.
      
4. Interest on Fixed Deposits (FDs):
   • NRO account interest: Fully taxable at 30% TDS.
   • NRE account interest: Completely tax-free.
   • FCNR account interest: Exempt from tax until you remain an NRI.
     Take Meghna’s example, an NRI living in Singapore. She has two FDs. One in an NRE account earning ₹2 lakh annually and another in an NRO account earning ₹1 lakh annually. The NRE FD interest is tax-free, but the NRO FD interest is taxed at 30% (₹30,000 TDS).
      
5. Business Income: The profits earned by NRIs from business ownership in India are subject to tax. However, if the business operates outside India and has no presence within the country, it is not taxable in India.

For example, as an NRI in the UK, you own a consultancy firm in Delhi that provides services to Indian clients. This income will be fully taxable in India. On the other hand, if your business only caters to UK clients with no Indian operations, it remains untaxed in India.

How to Calculate Taxable Income as an NRI?

By understanding the implications of tax for NRIs and planning wisely, you can reduce your tax burden and ensure compliance with Indian laws. To determine your taxable income in India, follow these steps:

1. Sum up all taxable earnings (Salary, Rental, Capital Gains, NRO Interest, Business Profits).

2. Deduct eligible exemptions and deductions (like ₹2.5 lakh basic exemption, Section 80C, 80D, etc.).

3. Apply the appropriate tax rate based on your income slab under the NRI tax regime.

Exemptions and Deductions on Tax for NRIs

Tax laws allow NRIs to claim certain deductions and exemptions to reduce tax liability and optimise financial planning.

• Section 80C: Investments in life insurance, ELSS, PPF (if opened before becoming NRI).
• Section 80D: Health insurance premiums for self and family.
• Home Loan Interest: NRIs can claim deductions on home loan interest payments.
• DTAA (Double Taxation Avoidance Agreement): If your foreign income is taxed abroad, you can claim relief in India under DTAA agreements.
   

Foreign Income Tax Management Tips

If you continue earning in India while working abroad, you must understand:

• Foreign Tax Credits: If your income is taxed in both India and your new country, you can claim credits under DTAA.
• Banking Compliance: Maintain an NRO account for taxable income and an NRE account for tax-free foreign remittances.
• Filing ITR: Even if you are an NRI, filing an Income Tax Return (ITR) is mandatory if your Indian income exceeds ₹2.5 lakh in a financial year.

Conclusion

Relocating abroad offers financial opportunities, but tax obligations still apply. By understanding how to calculate taxable income and utilising exemptions, NRIs can manage their finances efficiently. As saving opportunities, you may explore our term and market-linked insurance plans for amazing returns.

At Canara HSBC Life Insurance we provide tailored solutions to help NRIs secure their financial future. Stay informed and plan wisely to ensure tax compliance while enjoying global opportunities.