Non-Resident Individual Tax Guide for AY 2025-26: Understanding Residential Status, Tax Regimes, and Available Deductions

The taxation landscape for Non-Resident Individuals (NRIs) in India is governed by specific provisions of the Income Tax Act, 1961, which differentiate their tax obligations from those of resident individuals. For the Assessment Year 2025-26, understanding these nuances is crucial for effective compliance and tax planning.

This article provides a detailed overview of the residential status determination, applicable income tax return forms, essential compliance documents, prevailing tax regimes, and available deductions for NRIs, incorporating the latest legislative amendments and relevant judicial interpretations. The primary objective is to offer clarity on the tax implications for individuals who do not qualify as residents of India for tax purposes.

DETERMINING RESIDENTIAL STATUS OF AN INDIVIDUAL:

The cornerstone of an individual's tax liability in India is their residential status, which is determined annually for each previous year. An individual is classified as a 'Resident' in India if they satisfy any of the following basic conditions as per Section 6 of the Income Tax Act, 1961:

· Presence for 182 days or more: If the individual is in India for a period of 182 days or more during the previous year.

· Presence for 60 days or more with historical presence: If the individual is in India for a period of 60 days or more during the previous year AND 365 days or more during the four years immediately preceding the previous year.

An individual who does not satisfy both of these conditions will be treated as a 'Non-Resident' in that previous year. The Income Tax Act provides specific concessions for certain categories of individuals, particularly Indian citizens and Persons of Indian Origin (PIOs).

· Indian Citizens/PIOs Visiting India: For an Indian citizen or a person of Indian origin who visits India during the previous year, the period of 60 days mentioned in condition (2) above is substituted with 182 days. This ensures that short visits do not automatically trigger resident status.

· Indian Citizens Leaving India for Employment/Crew Members: A similar concession is extended to an Indian citizen who leaves India in any previous year as a crew member of an Indian ship or for the purpose of employment outside India. In such cases, the 60-day period in condition (2) is also substituted with 182 days.

The determination of residential status is paramount as it dictates the scope of taxable income. A Non-Resident Individual is generally taxed only on income that accrues or arises in India, or is deemed to accrue or arise in India, or is received in India.

INCOME TAX RETURN (ITR) FORMS APPLICABLE FOR NON-RESIDENT INDIVIDUAL’S:

The choice of ITR form for an NRI depends primarily on the nature of their income. For Assessment Year 2025-26, the following forms are typically applicable:

• ITR-2: This form is applicable for individuals (whether Resident or Non-Resident) and Hindu Undivided Families (HUF) who have income under any head other than "Profits and Gains of Business or Profession." This includes income from salary, house property, capital gains, and other sources.
• ITR-3: This form is applicable for individuals (whether Resident or Non-Resident) and HUFs who have income under the heads Salary/Pension, House Property, Profits or Gains of Business or Profession, Capital Gains, or Income from Other Sources. It is specifically for those who are not eligible for filing ITR-1, ITR-2, or ITR-4.

COMPLIANCE FOR NON-RESIDENT INDIVIDUALS:

NRIs are required to comply with various reporting requirements by furnishing specific forms to the Income Tax Department or other entities:

· FORM 12BB: An employee provides this form to their employer(s) to furnish particulars of claims for deduction of tax under Section 192. This includes evidence or particulars of House Rent Allowance (HRA), Leave Travel Concession (LTC), deduction of interest on borrowed capital, and various tax-saving claims/deductions for calculating Tax Deducted at Source (TDS).

· FORM 16: This is a certificate issued by an employer to an employee under Section 203 of the Income Tax Act, 1961, detailing salary paid, deductions/exemptions, and tax deducted at source for computing tax payable/refundable.

· FORM 16A: This certificate is issued by a deductor to a deductee under Section 203 of the Income Tax Act, 1961, for TDS on income other than salary. It captures the amount of TDS, nature of payments, and the TDS deposited with the Income Tax Department.

· FORM 26AS and Annual Information Statement (AIS): Form 26AS provided by the Income Tax Department (available on the e-Filing Portal), details out the tax deducted/collected at source and AIS provided by the Income Tax Department (accessible via the e-Filing portal), offers a comprehensive view of financial transactions, including tax deducted/collected at source, SFT information, payment of taxes, demand/refund, and other information like pending/completed proceedings and GST information.

· FORM 10E: This form is for furnishing particulars of income for claiming relief under Section 89(1) when salary is paid in arrears or advance, or for gratuity, compensation on termination, or commutation of pension.

· FORM 3CB-3CD: Required from taxpayers who need to obtain a report from an Accountant under Section 92E for entering into an international transaction or specified domestic transaction. It must be furnished one month before the due date for furnishing the return of income under Section 139(1).

· FORM 3CEB: Required from taxpayers who need to obtain a report from an Accountant under Section 92E for entering into an international transaction or specified domestic transaction. It must be furnished one month before the due date for furnishing the return of income under Section 139(1).

· FORM 3CE: Submitted by taxpayers who are required to obtain a report from an Accountant under Section 44DA for receipt of specified incomes from specified persons, such as royalty or fees for technical services from the Government or an Indian concern. This form is also due one month before the return filing deadline.

TAX REGIME FOR AY 2025-26:

The Finance Act 2024 has made the new tax regime under Section 115BAC the default option for individuals, HUFs, AOPs, BOIs, or Artificial Juridical Persons, effective from AY 2024-25. However, eligible taxpayers retain the option to opt out and choose to be taxed under the old tax regime.

NEW TAX REGIME U/S 115BAC(1A):

Under this regime, taxpayers forgo most exemptions and deductions but benefit from lower tax rates.

• Non-Business Cases: The option to change the default tax regime can be exercised every year directly in the ITR, which must be filed on or before the due date specified under Section 139(1).
• Business and Profession Cases: Assessees must furnish Form 10-IEA on or before the due date under Section 139(1) for furnishing the return of income. Withdrawal of this option (re-entering the default regime) is available only once in a lifetime in a subsequent assessment year.

TAX RATES FOR NON-RESIDENT INDIVIDUALS (NEW TAX REGIME):

DEDUCTIONS FOR NON-RESIDENT INDIVIDUALS:

The new tax regime offers very limited deductions. For NRIs, the primary deduction available is:

• Section 24(b) – Deduction from Income from House Property: Interest paid on housing loan for a let-out property is allowed as an actual value deduction without any specific limit. However, any loss under the head "Income from house property" cannot be set off against other heads of income in Schedule CYLA and cannot be carried forward to subsequent years.

ADDITIONAL CONSIDERATIONS FOR NON-RESIDENT INDIVIDUALS:

India has entered into Double Taxation Avoidance Agreements (DTAAs) with numerous countries to prevent double taxation of income. For NRIs, DTAA provisions play a critical role, as they often provide more beneficial tax treatment than the domestic law. Where a DTAA exists, the NRI can choose to be governed by either the provisions of the Income Tax Act, 1961, or the DTAA, whichever is more advantageous. This is a fundamental principle ensuring fairness and promoting international trade and investment.

It is imperative for NRIs to understand that their tax liability in India is restricted to income that has a nexus with India. This includes:

• Income accrued or arisen in India.
• Income deemed to accrue or arise in India.
• Income received in India.

Income earned outside India, which does not fall into these categories, is generally not taxable in India for an NRI. The concept of "income deemed to accrue or arise in India" under Section 9 of the Income Tax Act is particularly complex and has been a subject of extensive litigation. Courts, including the Income Tax Appellate Tribunal in cases like Dy Cit 11 (3)(1), Mumbai vs Total Oil India Pvt Ltd., Mumbai (2023), have consistently held that for income to be deemed to accrue or arise in India, a clear and direct nexus with Indian operations or assets must be established, and mere indirect connection may not suffice.

Moreover, a PermanentAccount Number (PAN) is mandatory for NRIs engaging in financial transactions in India, including opening bank accounts, investing in mutual funds, property transactions, and filing income tax returns. While Aadhaar is primarily for residents, PAN is essential for all taxpayers, including NRIs, for tax compliance.

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The taxation framework for Non-Resident Individuals in India for Assessment Year 2025-26 is comprehensive and dynamic, reflecting the government's efforts to streamline tax administration while also addressing global tax avoidance. From the intricate rules governing residential status to the new tax regimes and the complex of compliance forms, NRIs must navigate this landscape with diligence.

Proactive tax planning, a thorough understanding of applicable provisions, and adherence to income tax is indispensable for NRIs to ensure compliance, optimize their tax liability, and avoid potential legal repercussions. The availability of DTAAs further adds a layer of complexity and opportunity, necessitating a careful evaluation of their provisions to leverage the most beneficial tax treatment.

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