According to the Income Tax Act of 1961, an annual tax is levied on income by the Central Government of India. This is known as Income Tax. According to the rules applicable to the NRIs under the tax laws of the Indian Government, an NRI is not exempted from paying tax. Although a majority of the NRIs continue to take the benefit of income without paying tax, this is illegal in the eyes of Indian tax laws. This tax is however held valid, only if your source of income is India, if not, you don't need to pay anything as tax. Only if you have directly or indirectly earned anything from India, do you need to pay income tax.
There are a few circumstances, under which you may need to pay tax as an NRI. You need to do so, if you have an income through trade in India. You also need to pay, for income from any kind of property, plot or house in India or any type of family assets.
For those NRIs who earn a salary from India for services in overseas, also need to pay tax. Some NRIs have income through certain extra bonus from Indian companies. They are also entitled to pay tax. Apart from these, for any type of Interest rates paid by an NRI to a bank or government, or for fees under any type of industrial duty, an NRI is also required to pay income tax, pertaining to the tax laws of the Indian Government.
An NRI is however exempted from paying any type of Income Tax, if he does not have any Indian citizen or a resident Indian as his partner in the firm he runs. Again, if in the company of his, there are no shareholders who are either residents of or citizens of India.
Generally, an Indian is required to file income tax returns, if his income exceeds the limits of basic exemption, that is, Rs. 1, 50,000 for a financial year from April to March. For an NRI, it is however, necessary to make an Income Tax return file, even if he earns something below the above mentioned limit, from India, directly or indirectly. Non-filing of Return of Income (ROI) may result in payment of a penalty of Rs. 5000 per year, for an NRI.
If an NRI decides to return to India, it is necessary for him to acquire full information about the different features of Indian Taxation, Foreign Exchange Regulations (FEMA) and regulations related to banking. This would help him to arrange all his financial affairs inside as well as outside India.