India is currently the third largest global economy with a GDP of US$ 11.321 trillion (purchasing power parity method) and US$ 3.202 trillion (exchange rate method). There are over 28 million non-resident Indians (NRIs) who have settled outside India primarily concentrated in the US, UK, UAE, Saudi Arabia, Canada, Singapore, Hong Kong and other countries. The NRIs have always played an enormous role in India’s growth and economic progress and continue to significant economic, financial and social nexus with India.
NRIs have significant financial interest in India evidenced by investment in business enterprises, listed shares, deposits with bank, immovable properties, etc. There have been major changes in regulations in India regarding determination of tax status, scope of taxable income, cross border reporting obligations, tax treaties and other aspects which have great relevance for NRIs. These include:
- The Finance Act, 2020 has widened the definition of “tax residence” in case of Indian citizens and persons of Indian origin having taxable income exceeding Rs.1.5 million in India. Further, in case of Indian citizens having Indian taxable income exceeding Rs 1.5 million, who are not liable to tax in any other country or territory by reason of their domicile or residence or any other criteria of similar nature, shall be deemed to residents of India for tax purposes. However, such persons shall be treated as Resident but Not Ordinarily Resident (RNOR) and their global income will not be subject to tax.
- Dividends income from Indian companies shall be taxable in India now but the benefit of Double Taxation Avoidance Agreements can be claimed for the lower withholding taxes. Such withholding tax may eligible for foreign tax credit in the home country of NRIs.
- New optional personal tax regime has been introduced which provides for more liberalized tax rate slabs but does not permit the deductions under Chapter VIA or interest on self-occupied house property.
- Applicability of Multilateral Instruments (MLI) which may restrict the benefits available under the Double Taxation Avoidance Agreements
- The foreign direct investment regulations have been liberalized for certain sectors.
- Regulations regarding remittances by NRIs in respect of sale proceeds of immovable properties, gifting of immovable properties, remittances under US$ 1 million scheme and remittances on account of current account convertibility are relevant.
The understanding of the Indian tax system and foreign exchange laws are critical to ensure that you are complying with the applicable regulations and are able to ascertain your tax incidence, reporting obligations and repatriation related entitlements and restrictions.
We are pleased to release the Publication on “Destination India - Changing Tax & Foreign Investment Regulations for Non Resident Indians’ authored by Dr Suresh Surana. This provides an overview of the existing regime of tax laws, foreign exchange law and practices in India as well as the recent changes in lucid language. The taxation aspects are governed by Income Tax Act, 1961 (‘ITA’) whereas the Foreign Exchange Management Act, 1999 (‘FEMA’) regulates remittances and investments by NRIs in India.