NRI Savings and Investment Options and Tax Treatment

Table of Contents

• What savings and investment options are available for NRIs?
• Non-Resident External (NRE) Account
• Non-Resident Ordinary (NRO) Account
• Foreign Currency Non-Resident (FCNR) Account
• Mutual Funds
• Real Estate
• Public Provident Fund (PPF)
• National Pension Scheme (NPS)
• Tier-1 Account
• Tier-2 Account
• Who is considered an NRI?
• What is the Tax Treatment for NRIs?
• What types of NRI income is taxable?
• Are there any Tax Exemptions and Deductions for NRIs?
• How can NRIs avoid double taxation?
• Retirement Planning and Tax Considerations
• Conclusion

In this detailed writeup, we discuss various savings and investment options available to Non-Resident Indians (NRIs) to grow their hard-earned money in their home country. We then deep dive into the tax implications for NRIs for their savings invested in India, listing various exemptions and deductions available to NRIs as well as useful tips related to taxation.

In recent years, the NRI (Non-Resident Indian) population around the world has seen a massive surge. This has benefited India in a great way as it has brought whopping investments in the country. In 2018 alone, India was the top receiver of remittances (around $78 million) in the world. Out of this, the southern states of Kerala, Maharashtra, and Karnataka had the biggest share of remittances which was around 58.7 percent of total remittances.

These stats clearly state that Non-Resident Indians are one of the key contributors to the Indian economy. To provide a further boost to remittances sent to India, the Indian government has eased tax regulations while increasing the saving and investment options for NRIs.

In this post, we will study savings and investment options available to NRIs, as well as their associated tax treatment. We will only consider non-institutional (or individual) investors for this purpose.

What savings and investment options are available for NRIs?

Below we list some good savings and investment options that NRIs can put their money in.

Non-Resident External (NRE) Account

NRIs can freely transfer their money into an NRE account that is held in Indian Rupees. The sole condition for an NRE account is that it can only be used to transfer and store overseas money in Indian Rupees. The interest earned from this account is taxed as per the respective foreign country tax rules. The interest rate of this account varies based on the time and amount of the investment. This account can be of type savings, current, or fixed deposit.

Non-Resident Ordinary (NRO) Account

An NRO account is used by NRIs to manage their Indian income and is also held in Indian Rupees. All the income from the Indian sources can be deposited in this account. The account can also be held jointly with an Indian resident. Repatriation from this account is allowed only after the RBI approval. This account can also be of type saving, current, or fixed deposit.

Foreign Currency Non-Resident (FCNR) Account

An FCNR account is meant for storing foreign currency. Also, it can only be in the form of a term deposit of 1-5 years. The withdrawal of money from this account is not taxed in India as per the Indian government tax rules. Also, the interest earned on this account is taxed in the foreign country where the NRI resides.

For a more detailed comparison of NRE, NRO and FCNR accounts, you can check out this article.

Mutual Funds

Mutual funds are another attractive investment option for NRIs as they have relatively high returns as compared to a fixed deposit account. However, mutual funds are also a bit risky as compared to bank accounts and fixed deposits. The key advantage of mutual funds is that investors can pick a number of funds that they want to invest in as per their budget and preferences. All one needs is an NRO or NRE account to fund the purchase.

Real Estate

Real Estate is a prime investment option for NRIs. The investments made by Non-Resident Indians in the Indian Real Estate market is expected to hit the $13 billion mark by 2021. Big metropolitan cities of India like Delhi, Kolkata, and Mumbai are seeing a boost in the price of real estate property. Buying a house in prime locations could yield high returns in the future. As the future of real estate is booming in India, it is a good option for Non-Resident Indians to invest in this sector for future savings.

One thing to note here is that if an NRI decides to sell their property in India and if there is a profit on the sale, the capital gains on the sale of the property are taxable in India.

Public Provident Fund (PPF)

The motive of the PPF account is to let one save money for the future. The scheme is supported by the Indian government and allows both residents and non-residents to invest in it. The PPF scheme is a good option for Non-Resident Indians because it has a lock period of 15 years. This means that one cannot withdraw money from the PPF account during that tenure. One can invest 1.5 lakh per year, and a PPF account also offers tax benefits. Investors can earn an interest of around 8% per annum in their PPF account balance.

National Pension Scheme (NPS)

The National Pension Scheme is a great initiative taken by the Indian government to help people plan their retirement. This scheme is meant for people between 18-60 years of age. An NRI can make his or her investment in the scheme and can get tax benefits.

The NPS scheme features two accounts called Tier-1 and Tier-2.

Tier-1 Account

The Tier-1 account is locked until retirement, which means that one cannot withdraw anything before retirement. If an NRI retires before 60, he or she will be allowed to withdraw 20% of the amount. And the rest will be invested in an annuity plan. If an NRI retires after 60, he or she can withdraw 40% and rest goes into an annuity plan. The annuity plan offers a fixed yearly payment for life after a lump sum amount has been deposited.

Tier-2 Account

The Tier-2 account can only be held by those who already have a Tier-1 account. Unlike a Tier-1 account, a Tier-2 account allows one to easily deposit or withdraw cash whenever required.

Who is considered an NRI?

Based on guidelines from Section 6 of the Indian Income Tax Act, a person of Indian origin gains the status of a Non-Resident Indian for tax purposes if both of the below conditions are met:

• He or she did not live in India for a minimum of 182 days in the current tax year
• He or she neither lived in India for at least 60 days in the previous tax year, nor for at least 365 days in the last 4 years

If the above conditions are true, then the person is an NRI from a taxation perspective. If the above conditions are not met, one is considered as the resident of India and is thus levied with taxes in India.

What is the Tax Treatment for NRIs?

Below we list some important points from Foreign Exchange Management Act (FEMA) regulations that provide guidance around tax treatment for Non-Resident Indians.

• Persons who clearly meet the criteria for NRIs are exempt from taxation in India in general, and need to pay taxes on their income from Indian savings and investments in their foreign country of residence.
• If a person has a taxable income above 15 lakhs and stays in India for more than 120 days or a total of 365 days in the last 4 years, then he or she will be considered as a resident individual and will be levied with taxes in India.
• In such a case, the person will only be levied with taxes on Indian income, and not on income from foreign sources.
• The individuals that fall in this category are considered as Resident but Not Ordinarily Resident (RNOR). And as per recent norms, the income from foreign sources of RNOR category will not be taxed.

What types of NRI income is taxable?

Here are some NRI incomes types that attract potential taxes in India:

• Salary that an NRI receives for work done in India
• Rent from a property that an NRI has rented in India - If the NRI has a home loan, he or she can get a tax deduction as well as a deduction for property taxes paid
• Interest income from fixed deposits and savings accounts
• Income from a business in India
• Capital gains on assets located within India

Are there any Tax Exemptions and Deductions for NRIs?

Just like the residents of India, a Non-Resident Indian also enjoys certain tax exemptions and deductions. The maximum deduction that an NRI can get is capped at 1.5 lakh Rupees. Below we list tax exemptions and deductions applicable to NRIs as per Section 80C of Indian Tax Code:

• Interest from NRE and FCNR accounts is tax-free in India
• Payment of life insurance premiums for policies that are held by the NRI, or their spouse or child
• Educational expenses - Under section 80E, an NRI can claim a deduction paid on the interest of an education loan
• Repayments of home loan for property owned by an NRI
• Stamp duty, registration fees, and other expenses for property owned by an NRI
• Deduction for health insurance premiums for policies for self, child, or spouse
• Up to Rupees 1.5 lakh investments in Mutual Fund Equity Linked Savings Scheme (ELSS)

How can NRIs avoid double taxation?

Double taxation means paying tax on the same income twice. Generally, this happens in cases where an individual lives in multiple countries in the same financial year, and earns income in those countries. Such situations, depending on tax residency status in the countries of stay, may result in an individual paying taxes on the same income as part of multiple tax returns filed in the respective countries. NRIs could also run into such situations depending on how long they stay in India and their country of foreign residence.

To avoid such situations for NRIs, the Indian Government has established Double Tax Avoidance Agreement (DTAA) treaties with numerous countries. Such agreements help NRIs get a refund on the double tax paid. It is important to keep all relevant tax returns, proof of tax payments, etc. to avail DTAA tax relief.

Retirement Planning and Tax Considerations

NRIs who are in a foreign country may plan to come back to their home country in their old age. As there are many savings options for NRIs in India, they can easily plan their life after retirement in India.

Some key tips to for NRIs to plan for a potential life after retirement in India:-

• Health insurance is the number one thing that NRIs need to keep in check while planning their retirement.
• Never underestimate the power of inflation. With time, inflation is rising, so its best to choose wise investments to grow one's savings and plan accordingly.
• Keep various tax implications in mind while planning retirement.

Conclusion

There are numerous attractive savings and investments options for NRIs grow their hard-earned money in India. Additionally, the Indian Government has been continuously improving taxation laws to allow NRIs to save taxes on their earnings in India.

From a strategic perspective, NRI investments have also supported the Indian economy in a significant way; this is also part of the reason why the government is taking a plethora of initiatives to encourage NRI savings and investments in India. From that standpoint, it's a win-win situation for both NRIs and their home country!