The finance minister presented the union budget in the parliament on 1 February. While the hue and cry of the non-resident individuals with respect to leniency in withholding tax rates and reviewing the residency conditions have not been heard, there are some key changes that should be noted. We have covered the said changes in this article.
Note that the surprise move in the reduction of surcharge rates for high-net-worth individuals is applicable to non-resident Indians (NRIs) as well. Thus, the maximum effective tax rate on the highest income slab, which is currently at 42.74%, will come down to 39% for those opting for the new tax regime.
Taxability of RNOR receiving gifts: In the case of a resident but not ordinarily resident (RNOR), the scope of total income chargeable to income tax includes: the income which accrues or arises in India; income accruing or arising outside India if it is derived from a business controlled in or profession set up in India; income which is received in India.
An individual is considered an NOR in a financial year if she satisfies either of the following two conditions. One, if she is a non-resident in India in nine out of the 10 previous years preceding that year. Two, if she has been in India for a maximum of 729 days during the seven years preceding that financial year. She is also considered RNOR if she has total income of more than ₹15 lakh and meet other conditions specified in the IT Act.
In the case of gifts made by residents to RNOR outside India, it was considered that the gift accrued outside India (i.e., not derived out of a business controlled in or profession set up in India) and hence remained outside the tax net.
The Finance Act, 2019, amended the provisions relating to gift in the case of non-residents but did not include RNOR in the ambit. Therefore, to plug this gap, budget proposed to tax gift (money) by a person resident in India to RNOR, in the hands of RNOR under the head income from other sources at applicable tax rates, if the gift is above ₹50,000.
It is to be noted that gifts from specified relatives would not be taxable under the above provisions.
Relief to mutual fund investors: The withholding tax on payments made to non-residents with respect to income from mutual funds is currently at 20% (plus surcharge and cess) without any provision to claim treaty benefit.
The Finance Act, 2021, had provided relief to foreign institutional investors (FIIs) by stating that the withholding tax rate would be the domestic rate or the treaty rate, whichever is beneficial to FIIs, but the said benefit was not extended to mutual fund investors (non corporates).
Therefore, to remove this anomaly, it is now proposed that the rate of withholding tax would be the lower of 20% (plus applicable surcharge and cess) and rates provided under the tax treaty. To claim the tax treaty relief, tax residency certificate and self-declaration in form 10F (if applicable) would have to be furnished by the non-residents.
TCS on foreign remittances by resident individuals: As per the exchange control regulations, a resident individual may remit abroad up to $2,50,000 per financial year for any permitted capital and current account transactions or a combination of both under the Liberalized Remittance Scheme (LRS).
Though this is not an amendment which would result in taxability in the hands of the non-resident individuals, it may still impact their transactions with resident individuals.
Currently, an authorized dealer (say, a bank) is liable to collect tax at the rate of 5% if he receives an aggregate amount of ₹7 lakh or more in a financial year from a buyer for remittance out of India under LRS (i.e., on the amount in excess of ₹7 lakh).
The TCS (tax collected at source) rate is proposed to be increased to 20%, except in case of remittances towards education or medical purposes.. Thus, any remittance to non-resident individuals such as gifts, maintenance of relatives abroad, etc., under LRS would attract TCS at 20%, which the resident can adjust against the income tax payable for that financial year. All the amendments if passed in the parliament will be effective from 1 April 2023 except the LRS rule, which will come into effect from 1 July 2023.
Mukesh Kumar M is partner and Swetha A is senior manager at M2K Advisors LLP.