As the Indian government gears up to present Budget 2024, the non-resident Indian (NRI) community eagerly anticipates potential tax reforms that could ease their financial burdens. NRIs contribute significantly to the Indian economy, and addressing their unique tax challenges would not only provide relief but also encourage further investments. In this blog post, we’ll explore six major tax issues faced by NRIs, such as TDS on property sale and disparity in long-term capital gains (LTCG), and discuss how the upcoming budget could address these concerns.
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Introduction
India’s tax system can be complex, especially for NRIs who must navigate different rules compared to resident taxpayers. Despite being taxed on income sourced from India, NRIs often face less favorable tax conditions. Whether it’s the TDS on property sales, disparity in LTCG tax treatment, or the higher surcharges on income, these issues create significant challenges. As Budget 2024 approaches, there’s hope that the government will address these disparities and create a more equitable tax environment for NRIs.
Disparity in Long-Term Capital Gains (LTCG)
One of the major issues NRIs face is the taxability of long-term capital gains (LTCG). For resident taxpayers, there’s a basic exemption limit of Rs 250,000 (or Rs 300,000 under the new personal tax regime). This means a resident taxpayer with a nominal LTCG of Rs 10,000 would not pay any tax if their total income remains below this threshold. However, NRIs do not benefit from this exemption. Even a small LTCG amount is fully taxable for them, which creates a disparity.
Additionally, NRIs face a flat 10% tax rate on LTCG from unlisted securities or shares of closely held companies without the benefit of indexation. In contrast, resident taxpayers can adjust the cost price for inflation, thanks to indexation, and pay a 20% tax rate, which often results in lower taxable gains. This difference in treatment is another significant pain point for NRIs.
Potential Solution in Budget 2024: Rationalizing the tax treatment by extending the benefit of the basic exemption limit and indexation to NRIs would create a fairer system. Aligning the tax rates and benefits for both residents and NRIs could remove this disparity and provide much-needed relief.
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Taxability of Dividend Income and Applicable Surcharge
Dividend income is another area where NRIs face a higher tax burden compared to resident taxpayers. While resident taxpayers benefit from the slab rate system, allowing them to pay nil tax on dividends within the basic exemption limit, NRIs are taxed at a flat 20% rate. This can be significantly higher, especially if the NRI’s total income is otherwise minimal.
Moreover, the surcharge on income can be particularly punitive for NRIs. High-income residents face a surcharge of up to 15%, but for NRIs, this surcharge can go up to 37% (25% under the new personal tax regime) if their taxable income exceeds Rs 5 crore. This stark difference in surcharge rates adds to the financial strain.
Potential Solution in Budget 2024: Rationalizing the special rate of tax on dividend income and capping the surcharge to a maximum of 15% for NRIs would provide significant relief. This change would also create parity and make the tax system more equitable.
TDS on Property Sale
TDS on property sales is another challenging area for NRIs. When a resident sells property, the buyer deducts 1% TDS if the sale consideration is Rs 50 lakh or more. However, if the seller is an NRI, the TDS rate jumps to 20-30%, depending on the holding period of the property. This higher TDS rate often results in the NRI needing to claim a tax refund, as the deducted amount exceeds their actual tax liability.
Obtaining a lower tax withholding certificate from the tax authorities is an option, but it is a time-consuming and cumbersome process. Additionally, the buyer must obtain a tax deduction and collection account number (TAN) and deal with the complexities of TDS compliance, making real estate transactions more burdensome for both parties.
Potential Solution in Budget 2024: Simplifying the TDS process by aligning the rates for residents and NRIs and making it easier to obtain lower tax withholding certificates would streamline real estate transactions. This change would encourage more NRI investments in Indian real estate.
Enabling Tax Payments from Foreign Bank Accounts
Currently, tax payments in India can only be made through an Indian bank account. This requirement creates practical difficulties for NRIs who may not have an Indian bank account. This constraint can lead to delays and complications in tax compliance.
Potential Solution in Budget 2024: Introducing changes to the payment platform to allow tax payments from overseas bank accounts would remove this challenge for NRIs. Enabling this flexibility would make tax compliance smoother and more convenient.
E-verification of Tax Returns via OTP to Foreign Numbers
E-verification of documents via OTP (one-time password) is another area where NRIs face challenges. Currently, OTPs for e-verification can only be sent to Indian mobile numbers. This restriction makes it difficult for NRIs to complete the verification process, especially when they are abroad.
Potential Solution in Budget 2024: Expanding the e-verification process to include OTPs sent to foreign mobile numbers would greatly ease the process for NRIs. This change would facilitate easier ITR filing and tax compliance for the NRI community.
Extending Senior Citizen Tax Benefits to NRIs
Resident senior citizens enjoy tax benefits on term deposits with banks, co-operative societies, or post offices in India, allowing them to claim a deduction of up to Rs 50,000 from their gross total income. However, non-resident senior citizens do not enjoy this benefit, creating a disparity.
Potential Solution in Budget 2024: Extending the facility of claiming this deduction to non-resident senior citizens would remove the disparity and provide them with the same financial relief available to resident senior citizens.
Conclusion
The Indian government has been making consistent efforts to simplify tax compliance and remove disparities under the law. Implementing these much-needed changes in Budget 2024 would bring greater parity between residents and NRIs, providing significant relief and encouraging more investments in India. By addressing the issues related to TDS on property sales, disparity in LTCG, and other tax challenges, the government can create a more equitable and investor-friendly tax environment.
We hope these changes are considered in the upcoming budget, making tax compliance easier and fairer for NRIs. If you have any thoughts or suggestions on this topic, please leave a comment below. Your insights and experiences are valuable to us!