200311 tax nri
India Budget 2021: India to allow NRIs to set one-man companies and this will free up investment flows into country as well as of NRI talent Image Credit: Reuters

Dubai: For Non-Resident Indians (NRIs) living in the UAE, how does the changes announced in the India Budget 2021 affect your personal finances and investments in India? Let’s find out.

One key takeaway made by tax consultants and experts who studied closely the latest India Budget – announced on Monday – is that it brought about more clarity involving better procedures on how NRI income will be taxed in the coming year.

Lookback: How NRI income is taxed in India
If your status is ‘NRI’, your income which is earned or accrued in India is taxable in India. Income which is earned outside India is not taxable in India. Interest earned on an NRE account and FCNR (Foreign Currency Non Resident Account) account is tax-free. Interest on NRO account is taxable for an NRI.

(An NRE account is a bank account opened in India in the name of an NRI, to park his foreign earnings; whereas, an NRO account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India.)

Tweaks made to double-taxation rules – does it affect you?

NRIs were hoping for some regulatory relaxation from the latest 2021 India Budget, as currently, whenever they returned to India, they faced issues with accrued income in foreign retirement accounts, while also facing hardships in getting credit for taxes paid in India in foreign jurisdictions.

The India Budget has proposed alterations to double-taxation rules to ease matters for NRIs.

“The government is to notify rules to eliminate double tax for NRIs on foreign retirement funds,” wrote Dixit Jain, managing director at The Tax Experts DMCC. “This will give much needed clarity on how the retirement funds, especially annuity schemes, will be taxed.”

Generally, an NRI is liable to pay tax on his income in the country where he has earned it (source country) and in the country of his residence (residence country).

If a UK resident has a source of income in India, then he or she will be liable to tax in India and the UK on the same income. Noting the issues faced by NRIs with the accrued taxes, it was asserted on Monday that difficulties were faced due to the mismatch in the taxation period between the two countries.

As a result the Indian government was prompted to eliminate such double taxes, which also provides much-needed clarity when it comes to any income an NRI earns from their Indian pension plans.

How does the new rule affect income from retirement funds?

The recent regulation only affects policies that are linked to Indian annuities or insurance policies or contracts that are signed with brokers in India.

What are annuities?
An annuity plan is a contract between an individual and an insurance company, whereby the insurer promises to pay an amount at regular intervals to the individual in return for a lump-sum payment or a series of payments.

The insurer invests the money received and pays back the returns generated from it to the individual. There are different types of annuity plans depending on the nature of payments.

To promote retirement planning, the Indian government has allowed several tax benefits on contributing to an immediate annuity plan (plans purchased with a lump sum and the annuity payments start immediately either for a specified period or lifetime).

The lump-sum amount paid for an immediate annuity plan is eligible for tax deductions, allowing individuals to claim a tax deduction for contributions made to pension funds.

However, the maximum deduction that can be claimed is Rs150,000 (Dh7,536) during a year on costs incurred in buying a new policy or continuing an existing plan that pays pension or a periodical annuity.

The deductions under the section are not limited to residents of the country, but can also be claimed by non-resident Indians who contribute towards a pension plan.

With the new amendment brought on by the India Budget 2021, NRIs whose retirement income was double-taxed, won’t be anymore.

This is, as mentioned above, because there were repeated instances wherein issues were faced in getting credit for taxes paid in India, abroad, and problems with their regularly accumulated incomes in their foreign retirement accounts due to mismatch in the taxation period of the two countries.

Does the proposed double-taxation changes affect mutual funds?

The government proposed changes linked to double-taxation only applies to insurance policies that are linked to annuities and not mutual fund investments. Currently how taxation rules stand when it comes to mutual funds, depends on the type of fund and its holding period.

For stock mutual funds, a holding period of less than one year is short term and a tax of 15 per cent on short-term profits is applied. Earlier long-term profits were tax-free, but after April, 2018, long-term gains attract tax at 10 per cent if capital gains are more than Rs100,000 (Dh5,024) during a year.

As of now, debt or bond mutual funds held for less than three years are considered short term and in this case, profits are added to the income of the NRI – which is then taxed at 30 per cent. When held for more than three years, holding period becomes long term and considered long-term investments.

If NRIs fear that they have to pay tax twice on the same mutual fund income, keep in mind that under the Double Tax Avoidance Agreement (DTAA), NRIs can avoid paying taxes twice. India has a DTAA agreement with several countries like the UAE, US, UK, Canada, Australia and several others.

What has changed if you earn dividends in Indian companies?

In the 2021-2022 India Budget, relief was also proposed for those who hold investment stakes in India-based firms and those who receive shareholder income in the form of dividends.

In last year’s Indian Budget, the Dividend Distribution Tax (DDT) was abolished for companies, while making dividend payment taxable at the hand of the receiver. The move was among the most talked-about decisions of the government at the beginning of 2020.

Although this helped the cash-starved economy save some and increase cash-flow in the South Asian country, for investors this meant more taxes. This was also trouble for promoters with high shareholdings, as a higher dividend would result in them paying more as taxes.

As of now, dividends earned by investors with an annual income of Rs50 million (Dh2.5 million) or more are taxed at 43 per cent. The change made shareholders who were in the higher tax slab pay more tax on the dividend received.

Earlier, retail investors got away without paying any taxes. Prior to the budget of 2020, dividends issued by the listed entities were taxable in the hands of the recipient if they received more than Rs1 million (Dh50,255) at the rate of 10 per cent.

On Monday, in a bid to provide ease of compliance, it was proposed to exempt dividend payments from the tax incurred at the income source, known as TDS (Tax Deducted at Source).

What is TDS (Tax Deducted at Source)?
Tax collected at source (TCS) is the tax a seller collects from any buyer at the time of sale – in this case it’s between the company that provides the dividend and the dividend-receiving shareholder.

What has changed with reference to dividends with the 2021 India Budget?

Currently, the company distributing dividends in case the amount of dividend exceeds Rs5,000 (Dh251) per shareholder, withheld 20 per cent of the income when it came to non-resident shareholders. However, with the recent proposal, it implies that such a ‘withholding rate’ is no longer in effect.

With the Budget managing to abolish tax on dividends, analysts now say that retail investors might now start looking at stock investments for dividends as a replacement for fixed income (bonds) too.

Tax deduction from dividends is mandatory for every Indian company or a company that declares and makes payment of dividends within India.

With the latest change, no tax shall be deducted from the payment of dividend to an individual shareholder, should the payment be made by any mode other than cash and the aggregate amount of dividend paid or distributed to him during a financial year does not exceed Rs5,000 (Dh251).