ITR Filing: India’s tax landscape for Non-Resident Indians (NRIs) has evolved significantly over the years
As per Ministry of External Affairs data, there are more than 35 million non-residents (including NRIs and OCIs) who are based outside India. As such, the announcements in the Indian Union budget 2024 are closely watched by this diaspora considering that many maintain a close connection with India and also have significant investments in India. India’s tax landscape for Non-Resident Indians (NRIs) has evolved significantly over the years, with the introduction of various tax regimes aimed at simplifying the structure and enhancing compliance. This article enumerates which tax regime shall be more beneficial for non-resident individuals in India.
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Evolution of Tax Regimes:
Old Tax Regime:
Historically, NRIs were taxed under the old tax regime, which followed a progressive slab-based system with varying rates based on income levels. This regime allowed NRIs to claim deductions and exemptions under various sections of the Income Tax Act, such as investments (Section 80C), health insurance premiums (Section 80D), donations (Section 80G), etc.
Introduction of Concessional / New Tax Regime u/s 115BAC:
In a bid to simplify tax compliance and reduce the tax burden on individuals, including NRIs, section 115BAC was introduced vide Finance Act 2020. This section provides for a concessional tax regime with lower tax rates but restricts most deductions and exemptions available under the old regime.
The tax rates in below table for FY 2023-24 applicable for NRIs would be as follows:
The aforementioned tax rates would be further enhanced by applicable surcharge and health and education cess.
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Key Features and Considerations:
Old Tax Regime:
Higher Deductions and Exemptions: The old regime provides extensive deductions and exemptions such as section 80C, 80D deductions, which significantly reduce taxable income.
Tax-saving Investments: NRIs can invest in various instruments like ELSS and PPF to claim deductions under section 80C, resulting in substantial tax savings.
Beneficial for High-income Earners: The Finance Act 2023 provides for a reduced surcharge of 25% in the new tax regime vis-à-vis 37% in the old tax regime for taxpayers with total income above Rs. 5 crores. Individuals with higher incomes can potentially lower their tax liability under the old regime, especially if they maximize deductions, unless they can benefit from reduced surcharge rates available in the new regime.
New Tax Regime (Default tax regime):
Lower Tax Rates: The new tax regime offers reduced rates compared to the old regime, potentially lowering the tax burden for many taxpayers.
Simplified Tax Structure: With fewer deductions and exemptions, the new regime is easier to comprehend and comply with, requiring less documentation than the old regime.
Investment Flexibility: Unlike the old regime, which mandates investments in specific instruments for claiming deductions, the new regime allows taxpayers the freedom to choose their preferred investment avenues.
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Special Optional Tax Regime for Non-Residents under Chapter XII-A of the IT Act:
Chapter XII-A of the Income Tax Act provides a special optional tax regime for (NRIs) with income derived from specified foreign exchange (FOREX) assets (such as shares of Indian company, debentures and deposits with Indian public company, securities of Central Government, etc). Certain highlights under this regime:
Tax Rates: NRIs can opt for special tax rates where long-term capital gains from specified FOREX assets are taxed at 10%, and investment income is taxed at 20%. Other income is taxed at normal rates.
Restrictions on Deductions and Exemptions: Those opting for this regime cannot avail deductions under Chapter VI-A or indexation benefits. No deductions for expenditures or allowances are allowed for computing investment income.
Exemption from Tax Return: NRIs need not file a tax return under this regime if their income comprises only investment income from FOREX assets and long-term capital gains, provided tax has been deducted at source.
Option Availability: NRIs can choose not to opt for this regime for a particular financial year by declaring their choice to the Assessing Officer along with their tax return.
Continued Benefit upon Becoming Resident: The benefits under Chapter XII-A continue for investment income from specified FOREX assets even after an NRI becomes a resident. This benefit applies until the transfer or conversion of such assets into money.
This optional regime aims to provide NRIs with simplified tax compliance and specific tax rates for income derived from specified FOREX assets, with trade-offs in terms of deductions and filing requirements.
Conclusion;
Choosing between the old tax regime and Section 115BAC involves evaluating income sources, potential deductions, and individual tax planning strategies. Factors such as determination of residential status, investment profile, and financial goals play crucial roles in determining the most beneficial tax regime.
NRIs must consider these aspects carefully to optimize their tax liabilities and ensure compliance with Indian tax laws.
-Dr. Suresh Surana is a CA and founder of tax and risk advisory firm RSM India. Views expressed are personal.
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