Budget 2022: How are NRIs taxed in India and why they want a reduction in TDS this year - Times of India (2024)

NEW DELHI:With the upcoming budget, Indians living abroad are looking for more clarity on the legal definition of of non-resident Indians and relaxation on norms for residential status for NRIs, especially with with regard to Covid-19. Easing the compliance burden and harmonizing the tax provisions are key expectations this year.
How are NRIs taxed in India?
NRI taxation under the Indian Income Tax Act, 1961 applies to those earning income outside the home country.

The income tax rules and perks allowed to them are different from those applicable to resident Indians.
"An NRI’s income taxes in India will depend upon his residential status for the year as per the income tax rules mentioned above. If your status is ‘resident’, your global income is taxable in India. If your status is ‘NRI,’ your income earned or accrued in India is taxable in India. Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on a savings bank account are all examples of income earned or accrued in India. These incomes are taxable for an NRI Income which is earned outside India is not taxable in India. Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO accounts is taxable in the hands of an NRI," explains ClearTax.

ClearTax gives the following example to make this simpler:
Srishti lives and works in the USA. She checked her Form 26AS online and found out that a TDS entry of Rs 20,000 is mentioned. This TDS had been deducted at 30% on interest earned by her in her NRO account. Srishti has no other income in India. Does she have to pay any tax in India, and must she file an income tax return?
Srishti is an Indian citizen and has gone to the US for her job – she will be a resident only if she spends 182 days or more in India.

Srishti left India on July 3, 2020 and came back to India on March 15, 2021. Therefore, in the financial year that begins on April 1, 2020 and ends on March 31, 2021, Srishti has spent less than 182 days in India. Therefore, Srishti is an NRI for income tax in India.
For Srishti, only her income earned or accrued in India shall be taxable in India. Her income in the USA is not taxable in India since she is an NRI. Interest earned in India is taxable for an NRI (do note that interest on an NRO account is taxable, whereas interest earned on an NRE account is exempt from tax).
Srishti needs to add up all the income she has earned in India only. The interest earned on the NRO account of Rs 70,000 is Srishti’s only income.
For FY 2020-21, the minimum income which is exempt from tax is Rs 2.5 lakh. Since Srishti’s total income in India is less than the minimum exempt amount, she does not have to pay any tax on it.
Now, what are the expectations of NRIs from budget 2022?
Definition of Residential Status
"The criteria for determining residential status as covered in Section 6 of the Income Tax Act (‘ITA’) amongst others, includes an income criterion wherein a income threshold of Rs 1.5 million is considered for the purpose of determining whether an individual qualifies as a ‘resident’ of India for a tax year. The threshold of Rs 1.5 million should be relooked at as the same is very nominal considering today’s day and age. It is advisable that the threshold limit should be increased," says Ritesh Kumar, Partner, IndusLaw.
TDS on property
TDS means the person responsible for making specified payments is liable to deduct a certain percentage of tax before making payment in full to the receiver.
Currently, all the income paid to NRIs in India are subject to the highest tax rate. For example, rent payments are currently subject to a 30 per cent tax. So, NRIs are hoping for a reduction in the rate of tax deduction at source (TDS) to avoid the hassle of claiming refund at a later stage.
Many NRIs own immovable property in India, which is either acquired by themselves or inherited from parents. "When they want to sell such property, the buyer is required to deduct TDS at 20.80% (assuming long term) on the sale consideration. If the NRI seller wants the buyer to deduct TDS only on the capital gain amount, he needs to file an application to the tax department and obtain the lower deduction certificate. This is creating a lot of hassle for NRI sellers because it is a time-consuming process and many times the buyer does not want to wait for the certificate. In such a case, either the deal is cancelled or the buyer deducts TDS on sale consideration which forces the NRI to seek a refund from the government subsequently. Considering this, the government should consider allowing the buyer to deduct TDS based on imputed capital gain instead of sale consideration," said Ashok Shah – Partner, NA Shah Associates.
TDS rules parity between NRI and residents
Citing an example, Archit Gupta of Clear says that "when any person purchases a property whose value is Rs 50 lakh or more, tax shall be deducted at source at 1% by the buyer at the time of payment to the seller. But in the case of NRI, the buyer is required to deduct TDS as per the capital gain tax rates applicable to NRIs. Hence, if the seller of the property is a non-resident Indian, then the buyer should deduct tax at 20% for long-term capital gain (property held for more than 24 months) or at the slab rates applicable to the NRI for short-term capital gains (property held for 24 months or less). However, practically it is not possible to verify the holding period of property of the NRI seller, and hence, on a safer side, the buyer withholds tax at the highest slab rates, i.e. at 30% on the value of the property purchased. The NRI can later claim the refund of excess tax deducted by filing his/her income tax return. Hence, the government may bring parity in TDS rates of the resident sellers and NRI sellers and reduce it to 1% for NRI sellers."
Similarly, if the NRI owns any property in India and earns rental income from the same, the tenant must withhold tax on rent paid to the NRI at the highest tax slab rate of 30%. Such tax withholding at higher rates leads to cash blockage until the income tax return is filed. Hence, the government may provide some relief by reducing the withholding tax rates for NRIs.
Compliance needs to be made easy:
"Pronouncements in the previous budgets have widened the base of NRIs taxable in India. Such pronouncements in relation to determination of residential status of individuals and determination of their tax liability in India, however, have failed to achieve the purpose for which they were pronounced. One believes that it is important for the compliance framework applicable to such non-resident individuals be made easy. This could be brought about through relaxing some of the provisions which require certification for remittance of funds by a non-resident. Similarly, relaxing withholding tax provisions in case of a non-resident selling property in India would be very encouraging. With robust exchange control regulations in place, simplification of tax compliances would achieve the required balance," said Nishant Shah, Partner, Economic Laws Practice.
Simplified tax forms:
"The government is expected to bring out simplified income tax return forms for the NRIs. The Non-resident Indians are required to file ITR-2 and ITR-3, which are complex and lengthy. To promote voluntary compliance, the government may consider introducing simple ITR forms for NRIs with specific income types such as salary, house property, other sources, etc. Presently, resident individuals can file ITR in simple forms like ITR-1 and ITR-4, which is not available to NRIs," said Archit Gupta, Founder and CEO – Clear.
Tax savings from the adjustment of the basic exemption limit with capital gains
The Income Tax Act does not allow adjustment of unexhausted basic exemption limit of Rs 2.5 lakh with the long-term and short-term capital gains. The non-resident Indians have to pay tax on the long-term capital gains and short-term capital gains without adjusting the basic exemption limit.
In contrast, the residents are allowed to adjust the basic exemption limit from long-term or short-term capital gains and pay tax on the balance gain, if any. "It is expected that the government allows the NRIs to adjust the basic exemption limit with the capital gains," said Gupta.
Tax relief for NRIs who have returned/stayed back in India on account Covid-19 pandemic-NRIs who had to return to India on account of the global pandemic or were unable to go back to their host country should be given temporary tax reliefs such as exemption from filing tax return, additional tax deduction, relief from the stringent applicability of the criteria’s for determining their ‘residential status’ under the ITA. This will allow them to regularize their tax affairs in India and overseas, said Kumar.
Increase in remittance
Under the liberalised remittance scheme, all resident individuals are allowed to freely remit $ 2,50,000/- per financial year for permissible capital and current account transaction. "Considering India’s economic position (being one of the fastest growing economies) and stability of India’s forex reserves, it will be welcome move to increase the remittance threshold limit to double if not more. An enhanced investment limit will permit resident individuals to support their families abroad and will also give them an opportunity to invest in lucrative overseas assets," said , Ritesh Kumar, Partner, IndusLaw.