Almost, in every budget government introduced some changes in the income tax act which can be beneficial for you or disadvantage for you. For example, as we already know that from the finance act, 2018, the government notified the section 112A in which if an assessee is having a long term capital gain on sale of shares or equity-oriented mutual fund or unit of business trust, that would be taxation @ 10% flat on which STT has been paid on sale and chapter VI-A deductions shall also be not available to the assessee. Before this, it was exempted for all assessee and we saw a major downfall in the market the next day when the budget 2018 was announced.
Likewise, there are some amendments that are also announced in budget 2019 for example, procedures by proposing the introduction of the faceless assessment system, levy of TDS on cash payments above the threshold limit, and promoting digital payments. However, in this article, I will explain all the important changes made in the finance act 2019 which is relevant for Non-resident individuals. In case, if you want to know more about the general changes in union budget 2019, then you can refer to our previous article. So, let’s begin.
1. Tax on the gift received to Non-resident in India received from a resident of India
Before the amendment, if a non-resident received any gift from a resident of India then such a gift was exempted in the hands of such Non-resident.
Normally, as per section 56(2)(x) of the income tax act, 1961, where a person received any gift from another person and the market value of such gift exceeds Rs.50,000, then the value of such gift shall be taxable in the hands of recipient as the income from other sources. This section also specifies some of the exceptions on which this provision shall not be applicable.
Although the gift received by NR from a resident was not mentioned in the exception of section 56(2)(x), still it was exempted till the date of 5th July 2019 on which the final budget 2019 was introduced by our finance minister. Now after the amendment, if the NRI is receiving the only gift and not any other income then also he needs to declare such income in his ITR and need to pay tax on that income.
Now, the amendment looks quite simple, but there are some clarifications which are as follows:
- The Payer (resident) can be an individual or HUF or AOP/BOI, artificial juridical person, firm, LLP, company or any other person.
- The Non-resident can be an individual or a foreign company.
- The income arises outside India. The transaction is not covered by any of the exceptions specified by section 56(2)(x).
2. Exemption Of Interest Income Of Rupee Denominated Bonds (RDB)
Before explaining the amendment, I think it’s important for you to know that what is Rupee denominated Bonds (RDB). For example, an NRI invests $100000 on bonds in an Indian company which gives him the rate of interest of @10%. Now, at the time of investment, the rate was 70 rupee per dollar and at the time of redemption of bonds, the rate was 75 rupee per dollar. So, just because of the change in foreign currency, the Indian company has to bear the loss of (75-70) X 100000 = 500000. To save from this loss, the company starts issuing rupee-denominated bonds in which the NRI shall also have to invest in rupee and bear the loss of foreign exchange by itself. So, there is a risk element for the NR to invest in these bonds and due to this government has introduced a big benefit in respect of these bonds in this budget which states that
The interest income in respect of rupee-denominated bonds shall be exempted in the hands of Non-resident if the following conditions are satisfied:
- Interest is payable to a non-resident a foreign company.
- It is payable by an Indian company or a business trust.
- It is payable in respect of money borrowed from a source outside India by way of the issue of rupee-denominated bonds.
- Rupee-denominated Bond must be taken between 17 September 2018 to 31st March 2019.
This was the case of redemption, but what if the nonresident sold these shares before redemption, well as per section 47(viiab), the government has also exempted such sale. Hence as per this section, transfer of a capital asset, being bonds or Global Depository Receipts [referred to in section 115AC(1)] or rupee-denominated bond of an Indian company or derivative, made by a non-resident shall not be regarded as transfer and hence will not attract Capital Gain.
3. Exemption from linking of PAN with aadhar number
Although this exemption is not new I think it is important for you to know about this. Well, in the past few months before, we are hearing from a lot of people that it is compulsory to link your aadhar number with your PAN number, otherwise, your PAN number becomes invalid. Guess what, this condition is not applicable for a person who is not a citizen of India. Hence, as per section 139AA of the income tax act, the following person is not required to link their aadhar with their PAN number:
- A person who is not a citizen of India
- An individual resident who attains the age of 80 years or more at any time during the previous year.
- Those people who are Non-resident as per Income Tax laws.
- A resident of states of Assam, Meghalaya, and J&K.
4. Exemption Under Section 54 Extended To Purchase/Construction Of Two Residential Houses
This section is applicable to all individual assessee which includes Non-residents. As per section 54 of the income tax act, 1961, Capital gain arising from the transfer of a house property is exempt under section 54, if the following conditions are satisfied –
- The property (which is transferred) is a residential house property.
- The transferor is an individual or a Hindu undivided family.
- The property (which is transferred) is a long-term capital asset.
- To avail of exemption, the assessee will have to purchase/construct 2 residential house properties in India within a specified time limit. If the new property is not purchased/constructed till the due date of submission of return of income, the amount should be deposited in Capital Gains Deposit Account Scheme and investment in a new property can be made by withdrawing from the deposit account.
Exemption under section 54 is the amount of investment in the new property or the capital gain, whichever is lower.
The time limit for investment is:
Purchase of residential property, 1 year before the transfer of residential property or 2 years after the transfer of residential property or construct 3 years after the date of transfer of residential property.
This was the same, so where’s the amendment, you may not notice that, but earlier, the exemption will be given to the assessee when he invested on 1 residential property in India within the specified time which has been increased from 1 to 2 residential property. The amendment is not finished yet. Assessee can claim the exemption from 2 residential properties only when the gain from the sale of capital assets being residential property shall not exceed Rs.2 Crore. In other words, if a long term capital asset (being a residential house property) is transferred by an individual (or HUF) and the amount of long-term capital gain (after indexation) exceeds Rs. 2 crores, the assessee cannot claim the benefit of investment in construction purchase of two residential house properties.
The aforesaid option can be exercised only once in a lifetime. In other words, if an assessee exercises the aforesaid option (of investment in two residential house properties) for the assessment year 2020-21 he shall not be subsequently entitled to exercise the same option for the assessment year 2021-22 (or any subsequent assessment year). However, in the future, he can continue to claim section 54 exemption by investing in the purchase/construction of one residential house property.
5. Notional Rent On Second Self-Occupied Property Exempt From Tax
If a person has occupied one house property for his own residential purposes, it is not chargeable to income tax. The annual value of such property is taken as nil and interest on capital which was borrowed to finance the purchase, construction, etc., of such property is deductible (subject to satisfaction of a few conditions) up to Rs. 2,00,000. If a person has occupied more than one house property for his residential purposes, only one property (according to his own choice) is treated as self-occupied property (the annual value of such property is taken as nil, interest liability is deductible up to Rs. 2,00,000 subject to a few conditions). In such a case, income from other self-occupied property/properties will be calculated as if such property /properties are “deemed to be let out”.
The aforesaid provision has been amended to exempt notional income pertaining to two self-occupied residential house properties. Salient features of the amendment (applicable from the assessment year 2020-21) are given below
- If a person occupies only one house property for his own residential purposes, the annual value of such property will be nil (as earlier). Interest on borrowed capital will again be deductible up to Rs. 2,00,000(subject to a few conditions).
- If a person occupies two house properties for his own residential purposes, the annual value of both the properties will be taken as nil. Total interest in aggregate on capital borrowed for the purpose of purchase/construction of these properties will be deductible up to Rs. 2,00,000 (subject to the same conditions as were specified earlier).
- Although, If an assessee occupies more than 2 house properties for his own residential purposes, then only 2 properties (according to his own choice) will be treated as self-occupied properties and other houses will be “deemed to be let out”. In this case of two self-occupied properties (as selected by the assessee), the annual value will be nil and aggregate interest on capital borrowed shall be deductible up to Rs. 2,00,000 (subject to similar conditions as were applicable earlier). In the case of 3rd property which is “deemed to be let out” properties, taxable income will be calculated as if such properties are let out properties.
6. Increase in Rate of Tax
The surcharge rate has been increased and now the rate shall be 25% on the total taxable income exceeding 2 crores but up to 5 crore and 37% where the taxable income exceeds Rs.5 crore. That means the effective tax rates for such assessee shall be 35.88% to 39% for income between Rs.2 crores to Rs.5 crores and from 35.88% to 42.744% for income above Rs.5 crores.
Although, there are other small amendments also introduced in the budget I have tried to focus on the most common and most important changes. I hope this article will help all my NRI friends to calculate their tax liability for this assessment year (AY 2020-21). Still, if you have any doubts in this regard or any other queries in respect of NRI taxation then you can contact us on the number mentioned on our website. We will be happy to assist you.