The Union Budget 2024, announced by Finance Minister Nirmala Sitharaman on July 23, introduced several tax reforms and adjustments to align the tax structures for residents and Non-Resident Indians (NRIs). These changes are expected to have significant impacts on NRI investors. These adjustments represent a significant shift in the tax obligations for NRIs, necessitating a reassessment of their investment strategies to account for the increased tax liabilities.
Impact of Increased Tax Rate on LTCG and STCG for NRI Investors
Budget 2024's changes to the short-term capital gains (STCG) tax rate and capital gains exemption limit are part of its efforts to rationalise and simplify the capital gains tax system. The finance minister has revised the Long-Term Capital Gains (LTCG) and STCG tax rates that would directly affect NRI investors:
What has changed?
LTCG Exemption Limit: The exemption limit on certain listed financial assets has been raised from Rs 1 lakh to Rs 1.25 lakh. However, the tax rate on gains exceeding this limit has increased from 10 per cent to 12.5 per cent.
STCG on Certain Assets: The tax rate on short-term capital gains for some assets has been increased from 15 per cent to 20 per cent.
“At present, for Non-residents, even for unlisted shares, long-term capital gains tax is 10% without any benefit for exchange fluctuation or indexation benefit, which will now be increased to 12.5% without any benefit for indexation,” says CA (Dr.) Suresh Surana. For NRIs, this could mean higher tax liabilities on their investments in Indian equities and other specified assets, potentially reducing their overall returns.
Says CA Manas Chugh (Osgan Consultant Tax), “NRIs which find real estate as the most promising asset to invest in India shall be re-evaluating their decision as the indexation benefit has been removed in the case of LTCG. However, in other LTCG (not referred to in Clauses (33) and (36) of Section 10), the tax rate is reduced from 20 per cent to 12.5 per cent.”
Removal of Angel Tax
At present, in case a company, which is not a public company, issues shares to a resident or non-resident person at a price that exceeds the fair value of the shares, such excess is taxable in the hands of the Indian company (commonly referred as “Angel Tax”).
The valuation rules prescribe that such shares would be valued at either the net asset value, discounted free cash flow method, or other prescribed methods. As in the case of any valuation, there is a lot of subjectivity on the fair valuation methods adopted (such as business assumptions, future projections, discounting rates, market value of underlying investments, etc.). This resulted in widespread litigation.
“The proposal in the Finance (No. 2) Bill 2024 to abolish the Angel tax is a welcome measure as it would remove the genuine concerns of investors (specifically for non-residents) as the potential tax and litigation exposure on investment in an Indian company’s shares will be put to rest,” Dr (CA) Surana states.
Buyback re-characterised as Dividend
The Budget has proposed that the income from the buy-back of shares by companies should now be chargeable in the hands of the recipient investor as a dividend, instead of the current regime of additional income tax in the hands of the company. Further, the cost of such shares shall be treated as a capital loss to the investor for set-off. “This move may have an impact on the residential status of a non-resident as the entire proceeds from buy-back would be categorised as taxable income and would be counted in Rs 1.5 million limit while determining the residential status for an individual,” CA (Dr.) Surana states.
Pointing towards a positive outlook, CA (Dr.) Surana says, “There are several procedural reforms such as a reduction in the period up to which assessments can be reopened, settlement of disputed tax demands, and so on. Overall, the Union Budget 2024 for non-residents is positive due to the overall economic outlook and growth of the Indian economy and the focus on fiscal stability.”
Tax Deducted at Source (TDS) Affecting NRIs
The Finance Bill 2024 introduced several changes to the TDS framework to improve compliance and ease of doing business:
Simplified TDS Rates: The new structure proposes a reduction in the multiplicity of TDS rates and thresholds. However, there are no changes in TDS rates for salaries, virtual digital assets, lottery winnings, and other specified categories.
“The 5 per cent TDS rate on many payments is being merged into the 2 per cent TDS rate and the 20 per cent TDS rate on the repurchase of units by mutual funds or UTI is being withdrawn. TDS rate on e-commerce operators is proposed to be reduced from one to 0.1 per cent,” Sitharaman said in her speech.
“The adjustments in tax rates for NRIs have been aligned with the TDS rates, ensuring consistent tax treatment and compliance requirements. Therefore the NRIs shall be liable for more deduction of taxes which necessitate careful planning and adjustment in investment strategies to manage the increased tax liabilities effectively,” CA Chugh states.
New Tax Slabs Under the New Regime, & Standard Deduction Hike
Budget 2024 has revised the new tax slabs as follows:
Rs 0-3 lakh: Nil
Rs 3-7 lakh: 5%
Rs 7-10 lakh: 10%
Rs 10-12 lakh: 15%
Rs 12-15 lakh: 20%
Rs 15 lakh and above: 30%
The standard deduction has been enhanced from Rs 50,000 to Rs 75,000. This legislative amendment is set to facilitate significant tax savings for Non-Resident Indians (NRIs).
“Specifically, an NRI with an income falling within the 30 per cent tax bracket stands to achieve a maximum tax saving of Rs 17,500. This reform is anticipated to be favorably received by the NRI community, given its impact on reducing their income tax liabilities,” CA Chugh remarks.
Revision of the Income Tax Act: What Should NRI Investors Look Out For?
Finance Minister Nirmala Sitharaman announced a comprehensive review of the Income-tax Act, 1961, in Budget 2024. This is to be completed within the coming six months. This review aims to simplify the tax code, which would ease compliance for individuals and businesses alike, reducing the complexities and ambiguities that often lead to disputes and litigation.
“The revision in the IT Act provides hope to the NRI investors that will simplify the interpretation of the law and encourage them to take advantage of India’s demography,” CA Chugh states.
Elimination of Indexation Benefit from Real Estate: Impact on NRIs
The Union Budget 2024 surprised many in the investor community with a comprehensive overhaul of the capital gains tax regime. However, the removal of the indexation benefit for real estate can significantly impact NRIs who own long-held properties in India. The government announced that long-term capital gains (LTCG) on real estate will now be taxed at 12.5 per cent instead of 20 per cent, but has removed the indexation benefit. Previously, the indexation benefit allowed the purchase price of the property to be adjusted for inflation when calculating gains, thereby reducing the taxable amount.
Without indexation, the taxable gains increase, leading to higher tax liabilities. As real estate is the most favored asset class for NRIs, the removal of the indexation benefit will significantly impact their tax calculations.
CA Chugh explains, “For investors with a holding period of 3-4 years, this change may be beneficial, as the impact of indexation over such a short period is minimal. However, for long-term investors, the removal of the indexation benefit is detrimental.”
He states that historical data shows that real estate typically yields returns of 8-12 per cent per year. Under the previous regime, these gains, when adjusted for inflation, resulted in a lower taxable amount. This calls for the NRI community to evaluate the taxation impact on the real estate investment while making a decision.
Determination of Residential Status
CA (Dr.) Surana states, “For the determination of residential status for tax purposes particularly in the case of NRIs, far-reaching changes have been made over the past 4 years.”
These changes included a reduced period of stay up to 119 days (instead of 181 days) in a financial year in cases where the taxable income in India exceeded Rs. 1.5 million. Also, in the case of Indian citizens whose taxable income in India exceeded Rs. 1.5 million, the need for tax residency in another country became necessary for maintaining non-resident status.
However, in the Budget 2024, there has been no change in provisions for the determination of residential status related to non-residents.
All in all Budget 2024 brings notable changes for NRI investors, particularly with increased taxes on capital gains and the removal of indexation benefits for real estate. These adjustments necessitate careful financial planning and consideration of tax treaty benefits to minimise the impact on overall investment returns.
