Nowshir Engineer has lived in Dubai for the past 12 years, and like all expats he enjoys the tax- free environment of the UAE. But, Mr Engineer, 37, who is from Mumbai, has to pay taxes on his investments in India.
“NRIs [non-resident Indians] should be willing to pay their taxes,” says Mr Engineer, who is the managing director of Greycells Education. “Be upfront and declare what the assets are in India and don’t try to hive it off to some other family name.” He has properties in Mumbai and Pune, which are rented out, and he pays taxes on this income and on stock market investments that are sold within a year.
He uses the service of a chartered accountant in India to manage his tax returns.
Some Indian expats might be unaware that they are liable to pay taxes in India, or in many cases they may be paying too much tax. So it is important for NRIs who do have income or investments in India to take control of their tax affairs, experts say.
“It’s really natural for an individual in the UAE to feel they are living in a tax free world,” says Vaibhav Sankla, the director of H&R Block in India, a tax services company. “However, if NRIs in the UAE have income in India, then there are tax implications for them in India.”
Not paying taxes owed in India can result in punishments from hefty penalties to prison.
“One should always believe in not burning bridges,” says Mr Sankla. “Many NRIs think of returning to India. NRIs who don’t file returns may well find themselves on the wrong side of the law, especially if they have large value transactions or missed returns, which will attract the attention of the income tax department.”
Investments held by NRIs in India, including property, stocks and interest on savings accounts, are among the assets that are often taxable. There is an annual tax-free allowance of 250,000 rupees (Dh13,770), and beyond this income is taxable.
But Indian expats need not worry about the taxman in India demanding payment on any of their assets or earnings in the UAE.
“She or he is taxed only for his income earned in India,” says Dinesh Rohira, the founder and chief executive of 5nance.com. “The earnings made abroad do not come under the purview of Indian income tax. As long as one maintain the NRI status, the income earned abroad is completely tax-free. But any income or capital gains arising from Indian territory will be liable to be taxed.
“The income can be classified either as the salary that one earn in India, any income or capital gain that is generated from the sale or lease of an asset, interest income from banking accounts or any other instruments or the income or capital gains from capital market instruments that are liable to be taxed.”
There are a number of popular investments on which NRIs may need to pay tax.
“For example, a number of NRIs, in the last eight to 10 years especially, invested in real estate in India,” says Mr Sankla. “These real estate investments are typically rented out, and the rental which is received is taxable income in India. Capital gains on the profit from sale of real estate in India is taxable in India. NRIs should be aware of the stringent withholding tax – tax deducted at source (TDS) – rules applicable to them. For example, their rental income in India is subject to 30 per cent TDS. Even the real estate sale transactions attract 20 per cent or 30 per cent tax.
Interest earned on deposits in NRO bank accounts in India are also taxable, as are capital gains on stocks that are sold within a year of being purchased in India.
“If NRIs have income from any of these sources, they have to file their India income tax returns and report their income,” says Mr Sankla. “Often, income tax is deducted at source and sometimes it is not. If not, they have to pay the taxes on their own.”
Shrey Jain, the founder and chief executive of SAS Online, a brokerage in India, explains the procedure.
“In case an NRI’s taxable income exceeds 500,000 rupees in the previous year, he will have to e-file his income tax return. In case his income is less than the above limit, he has the option to file the return of income in paper form.”
The returns can be filed online through the income tax websites incometaxindiaefiling.gov.in or incometaxindia.gov.in, he adds.
To file returns, NRIs can fie them themselves, hire a chartered accountant, or use a tax services firm.
In instances where tax has been deducted at the source, many Indian expats would be due a tax refund, which can only be claimed if they file their returns.
“Often taxes are deducted at source at a rather high rate, says Mr Sankla. “That would mean that a lot of NRIs if they actually file their return, they can actually claim a refund of some taxes.”
He offers an example.
“An NRI has 5 million rupees in an NRO deposit account and earns interest of 450,000 rupees. Typically, the bank would withhold income tax at the rate of 30 per cent on that 450,000 rupees, so it would withhold income tax of 135,000 rupees. Assuming that the NRI has no other income in India. If the NRI files his income tax return, he can claim some investment related deductions, which will reduce his taxable income to 300,000 rupees [250,000 rupees of which would be exempt from tax]. Income tax on 300,000 rupees is just 5,000 rupees. If he files his income tax return to the Indian tax department, he will end up claiming a tax return of 130,000 rupees, which is a significant amount.”
By being savvy about the kinds of investments they choose Indian expats in the UAE can also benefit.
“NRIs should have fixed deposits in India in NRE accounts rather than an NRO account. NRE accounts have interest rates on par with NRO and the interest is completely tax-free. Unlike an NRO account, the funds in an NRE account are fully repatriable – which means the NRI can far more easily transfer the funds from an NRE account to his account in the UAE.”
Atish Banerjee, 30, from Mumbai, who has lived in Dubai for nine months and works as an art director at an advertising agency, says that he opted for an NRE savings account in India rather than an NRO account because this meant he would not have to pay taxes on the interest.
He explains that he is not deterred from investing in India because of taxes, however.
“Another investment I plan to do sometime in the future is real estate as it appreciates really well in a short span of time,” he says. “Though it will have a property tax, the overall profit will be substantial in the long run.”
Mr Sankla advises NRIs in the UAE to look at other tax-free options.
“There is a tax benefit that many NRIs are not aware of,” he says. India has a double tax avoidance agreement with the UAE. Within that, the income of NRIs from the UAE earned from Indian mutual funds is completely tax-exempt.]
He adds that it is advisable to approach a reputable company in India for tax advice.
Mr Engineer recommends that his fellow Indian expats in the UAE find a good chartered accountant to help them. He says he knows some NRIs who deceitfully invest in products that are intended for resident Indians. “I think this should stop, because one day it will come up as being wrong. Keep everything above board.”
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