TAX ALERT - NRIs AND RNOR – FINANCE BILL 2023
Key Changes as proposed in the Finance Bill by the Finance Minister of India on 01.02.2023 in Parliament are as under:-
Once the bill is approved by both house of Parliament and signed by the President of India the proposed changes/amendments will become part and partial of the statute and accordingly, all the amendments if passed, by the parliament will be effective from 1 April 2023 except the LRS rule, which will come into effect from 1 July 2023.
1. TAX RELIEF FOR HIGH NET WORTH IN INDIVIDUAL
The maximum effective tax rate on the highest income slab, which is currently at 42.74%, will come down to 39% for those opting for the new tax regime. The reduction of surcharge rates is applicable to non-resident Indians (NRIs) as well.
2.TAXABILITY OF RNOR RECEIVING GIFTS:
In the case of a resident but not ordinarily resident (RNOR), the scope of total income chargeable to income tax includes: the income which accrues or arises in India; income accruing or arising outside India if it is derived from a business controlled in or profession set up in India; income which is received in India.
An individual is considered an NOR in a financial year if he/she satisfies either of the two conditions.
If he/she is a non-resident in India in nine out of the 10 previous years preceding that year.
If he/she has been in India for a maximum of 729 days during the seven years preceding that financial year. He/she is also considered RNOR if he/she has total income of more than ₹15 lakh and meet other conditions specified in the IT Act.
As per prevailing law, the Finance Act, 2019, amended the provisions relating to gift in the case of non-residents but did not include RNOR in the ambit. Therefore, to plug this loop hole, the finance bill proposed to tax gift (money) by a person resident in India to RNOR, in the hands of RNOR under the head income from other sources at applicable tax rates, if the gift amount is above INR50,000. However, the gifts from specified relatives would not be taxable under the above provisions.
3.RELIEF TO MUTUAL FUND INVESTORS:
The withholding tax on payments made to non-residents with respect to income from mutual funds is currently at 20% (plus surcharge and cess) without any provision to claim treaty benefit.
The Finance Act, 2021, had provided relief to foreign institutional investors (FIIs) by stating that the withholding tax rate would be the domestic rate or the treaty rate, whichever is beneficial to FIIs, but the said benefit was not extended to mutual fund investors (non corporates).
Therefore, to remove this anomaly, it is now proposed that the rate of withholding tax would be the lower of 20% (plus applicable surcharge and cess) and rates provided under the tax treaty. To claim the tax treaty relief, tax residency certificate and self-declaration in form 10F (if applicable) would have to be furnished by the non-residents.
4.TCS ON FOREIGN REMITTANCES:
As per Liberalized Remittance Scheme (LRS), a resident individual may remit abroad up to $2,50,000 per financial year for permitted capital and current account transactions or a combination of both.
The Finance Minister has proposed significant changes to the provisions related to tax collected at source (TCS). TCS is a tax where the seller collects tax amount from the buyer at its specified rate and deposit the same with the Government. The existing TCS rate under LRS is 5% on the amount of remittance above Rs. 7,00,000 and this rate has been proposed to increased to 20% in the Finance Bill except in case of remittances towards education or medical purposes. Thus, any remittance to non-resident individuals such as gifts, maintenance of relatives abroad etc. would be covered by the proposed enhance rate of TCS. The resident can adjust TCS against the income tax payable for that financial year.