To be eligible for NRI status the person should be a non-resident under the Income Tax Act. He should be a citizen of India or his parents or grandparents should have been born in undivided India. NRIs based outside India can continue to enjoy non-resident status in India if their presence in India is more than 60 days but less than 182 days, even if their stay in India during the past four financial years is 365 days or more.
The Government of India has entered into tax treaties or Double Tax Avoidance Agreements (DTAA) with several countries where Indians reside in large numbers. NRIs can benefit from this tax because these tax treaties often provide lower tax rates and exemptions in addition to those available under the domestic tax provisions.
NRIs are taxable on income accrued or received in India. Income earned and received outside India is not taxable in India. If an NRI comes back to India and loses his NRI status, he will not be subject to tax in India on his world-wide income if either of the following two conditions are satisfied:
1. He has been in India for not more than 729 days during the preceding seven financial years;
2. He has qualified as a non-resident for nine out of 10 preceding financial years.
An NRI coming back to India after a long stay overseas may be exempted from tax for first two years only if the above mentioned conditions are satisfied.
The Income-Tax Act has provided procedure under section 197 whereby an NRI can apply to the Assessing officer to issue specific certificate authorizing the payer of income to deduct tax at a lower rate or nil rate as the case may be. The NRI should estimate his income, tax liability and likely TDS and then apply for partial or complete Tax Exemption Certificate. Any NRI from whose income the tax is likely to be deducted can apply to obtain exemption for tax deduction on the basis that his/her income in India is less than Rs.1, 50,000/- per year or if the likely to be deducted tax is more than the estimated tax liability.
The following two deductions are available under the Income Tax Act, 1961.
Standard Deduction: 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
Interest on Borrowed capital: Interest on borrowed capital is permitted as deduction if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property. If the person has occupied more than one house then in that case only one house (according to his choice) is treated as self-occupied and all other houses will be "deemed to be let out".