Taxability of long-term capital gain
While computing tax payable on long-term capital gains, benefit of basic exemption limit of Rs 250,000 (Rs 300,000 under the default new personal tax regime) is limited to only resident taxpayers. As a result, even if a non-resident derives only a nominal long term capital gains of, let’s say, Rs 10,000, he will end up paying tax on such income in India. On the other hand, a resident taxpayer will have the cushion to save tax up to the basic threshold not chargeable to tax.
Similarly, if a NRI earns any long-term capital gain from an unlisted security or shares of a closely held company (as defined under the laws) the said gain will be taxable at a flat rate of 10%, without giving the benefit of indexation (mechanism to convert your original cost to real cost by applying a government notified inflation factor). Under the same scenario, a resident taxpayer can use indexation to adjust the cost price for inflation in computing the long- term capital gain on securities or shares acquired long ago and thereby save some tax outflow, even if the applicable tax rate on resident taxpayers is 20%.
The forthcoming Budget could look at rationalising the benefit of indexation and similar rates for both resident and non-resident taxpayers for the same source of income.
Taxability of dividend and applicable surcharge
An NRI earning dividend from shares held in a company in India has to pay tax on it at a special flat rate of 20% which can be higher than what a resident taxpayer would pay. This is because a resident taxpayer enjoys slab rate benefit and therefore will pay nil tax till the time the aggregate dividend income earned in a financial year is within the basic exemption threshold, provided there is no other source of income.
High income resident individuals face an income tax surcharge of up to 15% on income above specified levels. Against this, NRIs have to pay an income tax surcharge of up to 37% (25% under new personal tax regime) where the taxable income exceeds Rs 5 crore. Rationalising the special rate of tax on dividend income and capping the surcharge to a maximum of 15% even for non-residents would provide relief.
TDS on sale of property
TDS is another area where non-resident Indians face challenges. As per existing tax provisions, if the seller of a property is a resident of India, then the buyer needs to deduct and deposit TDS at the rate of 1% of the sale consideration, if it is Rs 50 lakh or more. Along with this, the buyer needs to issue a challan-cum-statement in Form 26QB to the seller. However, if the seller is a non-resident of India (in tax parlance), then the buyer is required to withhold tax at the rate of 20-30% depending on the period for which the property has been held by the seller.
TDS at higher rates often results in the taxpayer having to claim tax refund as even obtaining a lower tax withholding certificate from the tax authorities is a time-consuming process.
Additionally, the buyer will be required to obtain a tax deduction and collection account number (TAN) while depositing the TDS with the income tax department and reporting of such transaction will be a tedious job.
Suitable change in the law to make this simple for non-resident sellers will make real estate transactions smoother for them and thereby encourage investments in India.
NRIs can’t pay tax from foreign bank account
Currently, tax payments in India are possible only through an Indian bank account which results in practical difficulty for a non-resident taxpayer who is not holding any Indian bank account. Accordingly, introducing the necessary changes on the payment platform and enabling tax payments from overseas bank accounts would remove this challenge for NRIs.
E-verification of tax returns via OTP to foreign numbers
Another practical difficulty faced by NRIs relates to e-verification of documents via OTP. Currently, OTP for e-verification of income tax returns can only go to Indian mobile numbers. If the e-verification process is expanded to allow sending of OTP to foreign mobile numbers for the purpose of verification of income tax return and/or Form 67 (a form for claiming foreign tax credit) etc. it would make ITR filing and tax compliance in India easier for NRIs.
Extend senior citizen tax benefits to NRIs also
Resident senior citizens holding term deposits with banks, co-operative society or post office in India are eligible to claim a deduction up to Rs. 50,000 from their gross total income while computing their tax liability. However, no such benefit is available for non-resident senior citizens taxpayers. NRIs should also be provided the facility of claiming this deduction to remove any disparity with residents.
The Indian government is making consistent efforts over the last couple of years to simplify the compliance requirements in India and remove any disparity under the law. Implementation of these much-needed changes to bring in greater parity between residents and NRIs would be a welcome move. By doing so, it will also encourage investors to invest more in the Indian market without any undue hardship.
(This article has been written by Deepika Mathur, Executive Director, with inputs from Abhay Chaturvedi, Associate Director, at Deloitte India. (Views expressed are personal))
Note: The tax rates discussed in the article will be further increased by a tax surcharge, if applicable, and 4 % cess.