Unlike ordinary resident Indian taxpayers, non-resident Indians (NRIS) are restricted from getting tax deductions under Section 80C of the Income Tax Act, 1961. They cannot open a new Public Provident Fund (PPF) account that would exempt them from tax from returns on investments. Nor can they open a new National Savings Certificates (NSC) which may provide attractive tax savings.
What are the options?
They can choose a five-year tax-saving fixed deposits from their bank. These offer around 7.0-7.5 per cent per year. Earned interest is taxed according to total income which means that high-earning individuals can be taxed as high 30 percent - leaving them with paltry interest.
Non-resident Indians can also buy Unit Linked Insurance Plans (ULIPs) or traditional life insurance policies and claim tax breaks under Section 80C. However, since these products are primarily insurance-based that only happen to carry some saving or investment elements, most financial experts recommend that you avoid them.
So if you’re an NRI, what's your solution?
Equity Linked Savings Scheme (ELSS)
An Equity Linked Savings Scheme (ELSS) is a diversified equity mutual fund that has a majority of its savings invested in equities. Since it is an equity fund, returns from an ELSS fund reflect returns from its stock markets, which can make it also somewhat risky.
Its core benefits are that it doesn't just help you save tax, but also gives you an opportunity to grow your money, since the ELSS qualifies for tax exemptions under Section 80C of the Indian Income Tax Act.
More specifically, when you invest in an ELSS, you can claim up to Rs.1,50,000 as a deduction from your gross total income in any financial year.
So let's say you've saved Rs.7,50,000, ordinary you’d be taxed 75,00 tax. Set up an ELSS, and you only have to pay 45,000 - which means you save 30,000.
Other reasons for choosing an ELSS
Along with the tax deductions, an ELSS offers you the following benefits:
Note that as with all mutual schemes, terms are subject to market risks, trustees and your net asset value. You may want to hire professional guidance. You’d certainly want to read the documents carefully and know your options