What is a Tax Free Investment for NRI in India?
A tax-free investment for NRIs in India refers to an investment option that allows Non-Resident Indians (NRIs) to earn returns while reducing taxes under NRI taxation rules. Popular tax-saving options include NRE Fixed Deposits, NPS, ELSS, and tax-free bonds. These NRI investments are a great way to save taxes while earning safe and steady returns in India.
NOTE: NRIs are not subject to tax on income earned outside India; only income earned or received in India is taxable.
Tax Exempted Income for NRIs in India
The following types of Income are tax exempted for NRIs in India-
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Interest on NRE and FCNR Accounts: Interest earned on Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts is completely tax-free in India.
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Interest on Notified Bonds and Government Savings Certificates: Interest from specified bonds and government-issued savings certificates is also exempt from tax for NRIs.
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Dividends from Indian Companies: Dividends from shares of Indian companies are tax-exempt. However, they are subject to TDS at a 20% rate.
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Long-Term Capital Gains (LTCG): LTCG from equity shares and equity-oriented mutual funds is taxed at 12.5% for amounts exceeding ₹1.25 lakh annually.
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Tax Exemptions Under Sections 54, 54EC, and 54F: NRIs can claim exemptions under these sections for Long-Term Capital Gains (LTCG):
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Section 54: For gains from selling house property if reinvested in another house.
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Section 54F: For gains from selling any asset other than house property if reinvested in a house.
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Section 54EC: For gains reinvested in specified bonds.
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Claiming TDS Refund on Capital Gains: NRIs can claim capital gains exemptions while filing Income Tax Returns (ITR). The TDS deducted on these gains can be refunded.
Tax Deductions for NRIs in India
Tax deductions for Non-Resident Indians (NRIs) in India allow them to reduce their taxable income and lower their tax liability. NRIs can avail of various deductions under different sections of the Income Tax Act for investments, insurance premiums, education loans, and donations.
It becomes essential for NRIs to understand the provisions can help NRIs optimize their tax obligations in the country:
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Deductions Under Section 80C
The NRIs are eligible to claim most deductions under Section 80C. For the Financial Year 2024-25 (AY 2025-26), an individual can claim up to maximum ₹1.5 lakh under Section 80C from their gross total income.
List of Deductions for NRIs under Section 80C of the Income Tax Act, 1961 are as follows:
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Life Insurance Premium Payment
The life insurance policy must be purchased in the name of the NRI or in the name of their spouse and children. The premium paid towards the policy must be 10% less than the sum assured amount.
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Children’s Tuition Fees Payment
Tax exemption under Section 80C is applicable on any tuition fees paid towards school, university, college and other educational institutes situated within India for the purpose of full-time education of any two children.
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Principal Repayment on Home Loans
The principal component of home loan repayments for residential properties is eligible for deduction for NRIs in India.
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Stamp Duty and Registration Charges
NRIs can claim a deduction for stamp duty and registration charges incurred while purchasing property in India. These costs are eligible for deduction under Section 80C, subject to the ₹1.5 lakh annual limit.
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Unit Linked Insurance Plan (ULIPs)
ULIP offers the combined benefit of insurance cum investment. The premiums paid towards this investment plan are applicable for tax deduction under Section 80C of Income Tax Act. Moreover, the NRIs can also avail tax deduction on the interest earned towards the NRI investments in ULIP under Section 10(10D) of Income Tax Act. Along with the benefit of life cover, ULIP plans offer an excellent opportunity to gain profitable investment returns, as in ULIP plans a part of the premium is invested in market funds with an objective to gain higher returns.
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NRI Investment in ELSS
Under Section 80C of the Income Tax Act, individuals can claim a deduction for investments made in ELSS, up to a limit of ₹1.5 lakh per financial year. This makes it an attractive option for those looking to reduce their taxable income while also aiming for capital appreciation through equity investments.
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Other Applicable Deductions
Beside deductions U/S 80C that the NRIs can claim, there are other deductions too that come under the income tax laws.
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Deduction from House Property Income for NRIs
NRIs can claim a tax deduction on income from house property which is purchased in India. The tax deduction is also applicable on the interest on home loan and property tax paid.
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Deductions under Section 80D
NRIs can also claim a tax deduction on the premium paid towards health insurance. The deduction up to ₹50,000 can be claimed for self or parents above 60 years and ₹25,000 can be claimed for self, spouse, parents, and dependent children below 60 years of age.
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Deductions under Section 80E
NRIs can claim a full deduction benefit interest paid on an education loan under Section 80E of IT Act. There is no limit on the deduction amount.
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NRI Deductions under Section 80G
NRIs can claim deductions on donations made to eligible charitable institutions, with 50% to 100% of the donation amount being deductible.
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Deductions Under Section 80TTA
NRIs can claim a tax deduction on income from interest on savings bank accounts up to maximum ₹10,000. This deduction is applicable on deposits in savings accounts with bank, post-office and co-operative.
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NRI Deductions under Section 24(b)
NRIs can claim a deduction up to ₹2 lakh on interest paid on home loans for self-occupied properties under Section 24(b). This deduction applies to the interest paid on loans taken for the construction or purchase of a house.
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Section 80CCD(1)
NRIs can claim deductions up to 10% of their gross total income for contributions made to NPS. This is subject to the overall limit of ₹1.5 lakh under Section 80CCE.
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Section 80CCD(1B) - NPS
NRIs can claim an additional deduction of up to ₹50,000 for contributions made to the National Pension System (NPS) over and above the ₹1.5 lakh limit under Section 80C.
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Property Tax Deduction
NRIs who own rental properties in India can deduct the property taxes paid to local authorities from the rental income while calculating the taxable income.
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Tax Exemption on Gifts
Gifts received from relatives (defined broadly, including parents, siblings, children, etc.) or from individuals up to ₹50,000 in a financial year are exempt from tax. However, gifts exceeding this limit from non-relatives are subject to tax under the head "Income from Other Sources."
Double Taxation Avoidance Agreements (DTAA)
NRIs can take advantage of Double Taxation Avoidance Agreements (DTAA) between India and their country of residence. DTAA allows NRIs to avoid being taxed twice on the same income. NRIs may get relief by claiming tax credits or exemptions depending on the agreement with their country.
Advance Tax Payment
NRIs must pay advance tax if their total tax liability exceeds ₹10,000 in a financial year. This includes taxes on income from interest, rental income, or capital gains. Advance tax is payable in four installments during the year.
Conclusion
NRIs have several tax-free investment options in India, such as NRE fixed deposits, FCNR accounts, PPF, and tax-free bonds. These options offer safety, steady returns, and tax benefits, making them ideal for wealth growth. By choosing the right investment based on your financial goals, you can maximize returns while enjoying tax savings. Always check eligibility, lock-in periods, and repatriation rules before investing.
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