Simplifying Taxes for NRIs in Budget 2024

Introduction

India's tax system, while comprehensive, can be challenging for Non-Resident Indians (NRIs). Navigating the complex rules becomes even harder due to the unequal treatment between residents and non-residents. Although NRIs are taxed only on income generated in India, certain tax provisions impose a heavier financial burden on them, discouraging investment.

With Budget 2024 on the horizon, this is the perfect time for the government to address these disparities and establish a fairer tax system for NRIs.

This article outlines the key tax issues faced by NRIs and suggests practical solutions for the upcoming budget. By addressing these concerns, the government can foster fairness and encourage NRIs to participate more actively in India's economy.

Unequal Treatment of Long-Term Capital Gains (LTCG)

A major challenge for NRIs is the taxation of long-term capital gains (LTCG).

• For resident taxpayers: LTCG up to ₹2,50,000 (₹3,00,000 under the new personal tax regime) is exempt from tax. For example, a resident earning ₹10,000 in LTCG wouldn't pay tax if their total income remains below this threshold.
• For NRIs: Even a small amount of LTCG is fully taxable, creating an unfair system.

NRIs also face

• A flat 10% tax rate on LTCG from unlisted securities or shares of closely held companies, with no indexation (a benefit that adjusts the purchase cost for inflation).
• Residents, taxed at 20% on LTCG, often pay less overall due to the indexation benefit.

This lack of parity adds to the financial strain on NRIs.

Proposed Solutions

• Extend the basic exemption limit for LTCG to NRIs.
• Provide indexation benefits to NRIs, reducing taxable gains.
• Harmonise tax rates and benefits for LTCG between residents and NRIs.

These changes would lower the financial burden on NRIs and encourage investments in India's markets.

Higher Tax on Dividend Income and Surcharges

NRIs face additional challenges with the taxation of dividend income:

• For residents: Dividend income below the basic exemption limit is tax-free.
• For NRIs: Dividend income is taxed at a flat 20%, regardless of their total income.

Additionally, surcharges exacerbate the disparity

• Residents face a maximum surcharge of 15%, but NRIs with taxable income exceeding ₹5 crore pay surcharges as high as 37% (or 25% under the new personal tax regime).

Proposed Solutions

• Apply a slab-based tax system for NRIs, similar to residents, for dividend income.
• Cap the surcharge for NRIs at 15%, aligning it with resident taxpayers.

These adjustments would ease the tax burden on NRIs and promote fairness.

Complicated TDS Rules for Property Sales

Selling property in India is another major hurdle for NRIs, largely due to Tax Deducted at Source (TDS):

• For residents: Buyers deduct 1% TDS if the sale value exceeds ₹50 lakh.
• For NRIs: TDS jumps to 20-30%, depending on the holding period of the property.

This creates significant issues

• The TDS amount often exceeds the actual tax liability, forcing NRIs to file for refunds-an often slow and frustrating process.
• NRIs must apply for a lower tax withholding certificate, which involves delays and cumbersome paperwork.
• Buyers are required to obtain a Tax Deduction and Collection Account Number (TAN), further complicating transactions.

Proposed Solutions

• Align TDS rates for NRIs with those for residents to prevent excessive deductions.
• Simplify and accelerate the process for obtaining lower withholding certificates.
• Eliminate the TAN requirement for buyers dealing with NRIs.

These changes would make real estate transactions simpler and more attractive for NRIs.

Difficulty in Making Tax Payments

Currently, taxes in India can only be paid through an Indian bank account, creating problems for NRIs who may not maintain an account in India. This outdated restriction causes delays and compliance challenges.

Proposed Solution

• Allow NRIs to pay taxes directly from their foreign bank accounts using an updated, user-friendly payment platform.

This reform would modernise the system and improve tax compliance for NRIs.

Challenges with E-verification of Tax Returns

E-verification of tax returns requires a One-Time Password (OTP), which is currently sent only to Indian mobile numbers. This makes it difficult for NRIs living abroad to complete the process.

Proposed Solution

• Expand the OTP system to include foreign mobile numbers for NRIs.

This simple update would make filing tax returns much smoother for NRIs.

Senior Citizen Tax Benefits Excluded for NRIs

In India, resident senior citizens enjoy several tax benefits, such as:

• A ₹50,000 deduction on interest income from term deposits with banks, co-operatives, or post offices.

Unfortunately, non-resident senior citizens are excluded from this benefit, creating an unnecessary disparity.

Proposed Solution

• Extend the ₹50,000 interest income deduction to non-resident senior citizens.

This reform would promote fairness and reduce the tax burden on NRI senior citizens.

Conclusion

India's tax system has undergone several reforms in recent years, showing the government's intent to simplify compliance and address inequities. However, NRIs continue to face unique challenges that need immediate attention.

By addressing issues like unequal LTCG taxation, high dividend tax rates, and complex TDS rules, the government can create a fairer and more investor-friendly system for NRIs.

The proposed reforms-simplifying rules, rationalising tax rates, and extending benefits-would not only reduce the tax burden on NRIs but also encourage them to invest more actively in India's growth story. With Budget 2024 approaching, implementing these changes would be a progressive step toward inclusivity and fairness for NRIs.

The author is a Chartered Accountant and former EY employee, who serves as the Chief Consultant of the NRI Desk and Influencer Desk at AKT Associates. He specialises in offering consultancy services tailored for NRIs and is dedicated to creating educational content to raise awareness within the NRI community.