How the budget has changed taxation for NRIs and RNORs

Note that the surprise move of reduction in surcharge rates for high-net-worth individuals is applicable to Non-Resident Indians (NRIs) as well. Thus, the maximum effective tax rate on the highest income slab, which is currently 42.74%, will come down to 39% for those opting for the new tax regime.

Taxability of RNOR receiving gift: In the case of a resident but not ordinarily resident (RNOR), the total income chargeable to income-tax includes: Income which accrues or arises in India; income accruing or arising outside India, if it is derived from a business or profession established or controlled in India; Income which is received in India.

A person is treated as NOR in a financial year if he satisfies any one of the following two conditions. One, if he is a non-resident in India in nine of the 10 previous years preceding that year. Two, if she has stayed in India for a maximum period of 729 days during the seven years preceding that financial year. If his total income is more than this then he is also considered as RNOR 15 lakhs and fulfill other conditions specified in the IT Act.

In case of gifts given by residents outside India to RNORs, it was deemed that the gift was earned outside India (i.e., not received from a business or profession controlled in India) and hence remained outside the tax net.

The Finance Act, 2019 amended the provisions relating to gifts in case of non-residents but did not include RNOR in its purview. Therefore, to bridge this gap, the Budget proposes to tax gift (money) to an RNOR by a person resident in India, at the applicable tax rates in the hands of the RNOR, under the head income from other sources, if the gift is above 50,000.

It is to be noted that gifts from specified relatives will not be taxable under the above provisions.

Relief to mutual fund investors: Withholding tax is currently 20% (plus surcharge and cess) on payments made to non-residents in respect of income from mutual funds, with no provision for claiming treaty benefits.

The Finance Act, 2021 had provided relief to Foreign Institutional Investors (FIIs) by stating that the rate of withholding tax would be the domestic rate or the treaty rate, whichever would be beneficial to FIIs, but the said benefit was not extended to mutual fund investors. (non-corporate).

Therefore, to remove this anomaly, it is now proposed that the rate of withholding tax shall be 20% (including applicable surcharge and cess) and lower than the rates provided under the tax treaty. To claim tax treaty relief, tax residence certificate and self-declaration in Form 10F (if applicable) have to be submitted by non-residents.

TCS on foreign remittance by resident individuals: As per Exchange Control Regulations, a resident individual can remit abroad up to $2,50,000 per financial year for any permitted capital and current account transactions or a combination of both under the Liberalized Remittance Scheme (LRS) Is. ,

Though this is not an amendment which would result in tax being payable in the hands of non-resident persons, yet it may affect their transactions with resident persons.

At present, an authorized dealer (say, a bank) is liable to collect tax at the rate of 5% if he receives the net amount 7 lakh or more in a financial year from a buyer for remittance of funds outside India under LRS (i.e., 7 lakh).

TCS (tax collected at source) rate is proposed to be increased to 20%, except in the case of remittance for education or medical purposes. Thus, any remittance to non-resident persons such as gift, maintenance of relatives abroad, etc. , will attract TCS at 20% under LRS, which the resident can adjust against the income tax payable for that financial year. All amendments, if passed by Parliament, will be effective from 1 April 2023 except the LRS rule, which will come into effect from 1 July 2023.

Mukesh Kumar is a Partner and Sweta is a Senior Manager at M2K Advisors LLP.