Understanding Income Calculation In India – A Complete Overview For NRIs And Inv

1. Understanding Income Calculation In India – A Complete Overview For NRIs And Investors Taxation in India involves the systematic assessment of income earned by individuals and entities from various sources. For Non-Resident Indians (NRIs), understanding how income is classified and taxed is especially important due to multiple income streams across borders. The Indian tax system categorizes income under specific heads and allows certain deductions and exemptions to determine taxable income accurately. By understanding these classifications and the applicable tax rules, NRIs can ensure compliance with Indian laws, avoid double taxation, and plan their finances effectively. This knowledge promotes better financial management and transparency in the reporting of global income. Understanding income calculation in India Any income of a person, except for the income that is specifically exempted from income tax, is segregated into five heads for the calculation of total income. Every head of income allows certain deductions or exemptions and must be adjusted before calculating the income under the respective head. These adjusted figures are then added to calculate the Gross Total Income (GTI).

2. After applying specific deductions, such as those for investments, donations, and insurance, the taxable income is determined. The total income tax payable is then calculated on this taxable income after applying the basic exemption limit and relevant tax rates. Furthermore, any Tax Deducted at Source (TDS), advance tax paid, or foreign tax credit claimed is adjusted to determine whether the taxpayer is eligible for a refund or owes additional tax. Once the final amount is settled, the income tax return can be filed. For NRIs and individuals with global income exposure, investment tax consulting becomes essential to align their investment portfolios and cross-border income streams with the provisions of the Indian Income Tax Act. Income exempt from tax in India for NRIs Certain categories of income are exempt from tax and are therefore not included in the total income calculation. These exemptions are particularly relevant for NRIs, as they may derive income from Indian financial instruments or accounts maintained under FEMA guidelines. The four major sources of income exempt for NRIs (as per the Income Tax Act) are: Proceeds from Life Insurance Policy, provided the policy complies with the exemption criteria or conditions Interest on NRE Account, provided the account is maintained as per FEMA rules Interest on FCNR or RFC Accounts with a Scheduled Bank, provided the account holder qualifies as a non-resident or Not Ordinarily Resident (NOR) under the Income Tax Act Long-Term Capital Gain on Indian Equity and Equity-Based Mutual Funds, up to ₹1,25,000 from FY 2024–25 A professional tax consultant can guide NRIs through these exemptions, ensuring that they take advantage of legitimate tax benefits while remaining compliant with all applicable regulations. The five heads of income Indian taxation laws categorize income into five broad heads. Each head represents a specific nature of income and comes with its own set of deductions, exemptions, and computation methods.

3. 1.Income from salaries When an individual works for an organization under the employer-employee relationship for compensation, the income is called Salary and is taxed under the head ‘Income from salaries’. Income is taxed on an accrual (due) or receipt basis, whichever is earlier. A standard deduction of up to Rs. 50,000 is allowed against the salary or pension income in the Old regime. The standard deduction is increased to Rs. 75,000 for the new income tax regime for F.Y. 2024-25 and F.Y. 2025-26. If the income of an employee after deductions is taxable i.e. more than Rs. 250,000 in the old regime or Rs. 700,000 in the new regime, the employer is required to deduct tax at source (TDS). The limit of Rs. 700,000 is increased to Rs. 12,00,000 from F.Y. 2025-26 under the new regime. The employer would issue a certificate in Form 16 that includes gross income, deductions/exemptions available from salary income, tax deductions and the net income paid. Based on Form 16, the taxpayer would be able to calculate income from salaries. 2.Income from house property When the owner of an immovable property (land or building) gives it out on rent to others, any income received is in the nature of rent and is taxed under the head ‘income from house property’. An individual or an HUF is eligible to claim any two properties as self-occupied. If more than two properties are owned and are not being used in the business or profession or not let out, the additional properties are considered “deemed let-out” and deemed rent is calculated and included as income from house property. Only three deductions are allowed from rental income – municipal tax paid by the owner, 30% of rent as maintenance and interest on money borrowed for acquiring the property. If municipal taxes are paid by the owner, the income from the respective property will be adjusted before calculating 30% deduction for maintenance. Any interest paid on loan taken for self-occupied property is allowed as a deduction up to Rs. 200,000 per year. For let out property, all interest paid is allowed as a deduction without any limit. However, loss from House Property of

4. only Rs. 200,000 can be set off against other income of the respective year and remaining loss is to be carried forward to the subsequent years. 3.Profits and gains of business or profession Any income from carrying on a business or profession is taxed under the head ‘Profit and gains of business or profession’. Total sales or receipts from the business or profession are calculated and expenses for business purposes are deducted and the net income is calculated as per the provisions of the Income Tax Act. From the net profit as per the profit and loss account, adjustments are made for inadmissible expenses debited (e.g. personal expense, book depreciation) and deductible expenses not debited (e.g. tax depreciation) as well as income credited but chargeable under other heads (e.g. rent or capital gain) to calculate the profit and gains of business or profession. 4.Income from capital gains Any income from the sale of a capital asset is taxed under the head ‘Income from capital gains’. Income from transfer of all investments – equity, debt, immovable property, gold, etc. are in the nature of capital gains. The capital gain could be a long-term capital gain or a short-term capital gain depending on the period of holding for a particular capital asset. Since taxation of capital gains is a complex topic involving various indexation benefits, exemptions (like under Sections 54, 54EC, etc.), and holding period rules, professional consulting for the same is very important. NRIs often face additional considerations, such as Double Taxation Avoidance Agreements (DTAA) and foreign tax credits. Professional consulting ensures that capital gains arising from Indian or global assets are efficiently managed and legally optimized. 5.Income from other sources Any other income that is not included in any of the four heads of income is taxed as ‘Income from other sources’. Examples include: Dividend income Interest on loans, deposits, or securities Taxable gifts Pension

5. Rent from non-house property Income from Keyman Insurance Policy Earnings from lotteries or horse races This head acts as a residual category for taxable income that does not fit elsewhere. Importance of deductions and adjustments After income from all heads is computed, the Gross Total Income is derived. Various deductions like Section 80C, 80D, 80G, etc. are applied to calculate the total taxable income. Investments in instruments like PPF, ELSS, National Savings Certificates, health insurance premiums, or charitable donations can also reduce taxable income significantly. Strategic tax planning with the help of a professional consultant ensures individuals maximize these deductions while aligning their investments with long-term financial goals. Why choose professional tax consultants? For NRIs, taxation is more than just filing returns; it involves strategic management of cross-border income, investments, and compliance with both Indian and foreign tax regulations. Professional investment tax consulting helps NRIs: Identify income eligible for tax exemptions in India Avoid double taxation through DTAA provisions Plan investments in tax-efficient instruments Ensure accurate filing and timely repatriation of funds Claim refunds or set off foreign tax credits where applicable An expert US investment tax consultant in India, one like ExpertNRI, provides end-to-end tax consulting, covering both US and Indian tax implications for NRIs, ensuring that all global income and investment decisions comply with international tax laws. Understanding how income is classified and taxed in India empowers individuals to make informed financial decisions and stay compliant with the law. By correctly assessing income under the five heads—salary, house property, business or profession, capital gains, and other sources—and utilizing eligible deductions and exemptions, taxpayers can ensure accurate filing and efficient tax management. For NRIs, being aware of income exemptions and cross-border taxation rules helps in optimizing returns and maintaining transparency. A clear

6. understanding of these principles forms the foundation for responsible financial planning and smooth interaction with India’s taxation framework. Read more article: Understanding Income Calculation In India – A Complete Overview For NRIs And Investors