Is there a new 20 per cent tax on Indian remittances? Yes, but NRIs needn’t worry

Stock Money Exchange — There are new updates about a certain tax being levied on the money you send back home and this has raised concern among NRIs. Here's what you should know. Image Credit: Ahmed Ramzan/Gulf News

Dubai: Whether you want to send funds abroad to your loved ones, pay your child’s college tuition fees, or just repatriate money, as a Non-Resident Indian (NRI), you would likely be making most of the facility available to remit money back home.

However, there were new updates about a certain tax being levied on the money you send back home and this has raised concern among NRIs. But before we decode what this looming tax change means for remittances and why it shouldn’t worry NRIs, let’s recap how rules apply currently.

As per existing norms, Indian residents are permitted to repatriate funds overseas or spend overseas under the Liberalised Remittance Scheme (LRS) up to $250,000 (Dh918,262) per year. NRIs are allowed to repatriate up to $1 million (Dh3.67 million) per year.

How can you define the Liberalised Remittance Scheme (LRS)?

Before making an international transaction, AN Indian resident needs to convert the currency for the purpose of investing or spending abroad. The rules governing such transactions come under the ambit of the 'Liberalised Remittance Scheme' (LRS).

As the name suggests, LRS is all about the remittances (investing abroad) that an Indian resident is allowed to make in India. However, in addition to remittances, one can also avail foreign exchange facility (medical expense or while travelling), which also comes under the purview of the LRS.

The most important details NRIs are to keep in mind is that only resident individuals are eligible to remit funds outside India under the LRS scheme, subject to certain terms and conditions. The scheme is not available to NRIs, corporates, partnership firms, trusts, etc.

Stock Money exchange rupees — If you are an NRI, you also need a declaration to the effect that the total remittances being made by you have not exceeded the limit under the foreign exchange laws. Image Credit: Ahmed Ramzan/Gulf News

Remittance rules vary for NRIs and Indian residents

The procedures for the two categories – repatriating funds overseas under the Liberalised Remittance Scheme (LRS) and remitting funds by Non-resident Indians (NRIs) – vary.

The Liberalised Remittance Scheme (LRS) allows Indian residents to send money abroad without any special permission, provided the purpose of transfer falls under overseas education, travel, medical treatment, gifts, investments in foreign stocks and real estate, among others.

If you are an NRI, you also need a declaration to the effect that the total remittances being made by you have not exceeded the limit under the foreign exchange laws. As an NRI, there will be no tax applicable on your remittance since the remittance is not being made under LRS.

How is tax cut currently on remittances and since when did it apply?

From October 1, 2020, remittances of up to Rs700,000 (Dh33,103) in a financial year are free from tax liability. Amount exceeding Rs700,000 is liable to TCS (Tax Collected at Source) in the hands of the individual at 5 per cent. (TCS is collected by the receiver at the time of receipt of payment.)

Tax — After it was proposed that the tax rate would increase from 5 per cent to 20 per cent on remittances, what does this change mean for residents, non-residents? Image Credit: Pixabay

What does the latest update mean for Indian residents, non-residents?

So after the Indian government proposed a tax provision on overseas remittances in 2020, a year later it was proposed that the tax rate would increase from 5 per cent to 20 per cent on remittances made under the LRS. But what does this change mean for residents, non-residents?

The above increase in the remittance tax rate from to 20 per cent, which will come into effect from July 1, 2023, will have a significant impact on the overseas remittances made only by Indian residents under the relevant remittance scheme (LRS), but not NRIs as LRS does not apply to them.

However, the move, which the government expects to generate around Rs20 billion (Dh900 million) in revenue from, will increase the cost of Indian residents remitting funds for individuals residing abroad, especially those who frequently use the remittance scheme (LRS) for various transactions.

The increase in the tax rate may also discourage Indian residents from using the scheme to invest in foreign stocks and real estate and this would in turn impact the Indian stock markets, which have all seen significant investment from Indian residents in recent years.

However, Indian residents who have paid tax at the rate of 20 per cent will be able to claim a credit for the same while computing their final tax liability. Also, it is mandatory for resident individuals to provide PAN (Permanent Account Number) for all transactions made under the LRS scheme.

Why is the new tax charge coming into effect?

There are many individuals in India who send money regularly outside India under the LRS scheme or travel to foreign countries, however they do not file the tax returns or the income shown in their respective returns are less than the amount spent on such foreign tours or remittances. In order to make these individuals accountable and explain the sources of such unexplained income, the government came up with this new law.

Here is the table showing the old and new provisions regarding the tax provisions:

Verdict: Do NRIs need to worry about the remittance tax rule change? No, here’s why

As there have been several speculations, stating that there will be 20 per cent tax on the foreign outward remittance without specifying the eligibility, creating panic on NRIs, it needs to be made clear that these rules of LRS are only applicable to resident Indians and not NRIs.

So NRIs can continue enjoying the $1 million (Dh3.67 million) limit of overseas fund repatriation, subject to prior conditions specified to them. As an NRI, you do not need to be worried on this tax, however if you are receiving money from India from your relatives or friends then you need to keep all these points in your mind.

In conclusion, while the increase in the tax rate on LRS remittances from 5 per cent to 20 per cent will discourage Indian residents from using the scheme for transactions that originate from India, it is still important for them to carefully evaluate the costs and benefits of using LRS, while taking into consideration the new tax provisions that will apply from July 1.

Dixit Jain

The writer is Managing Director at The Tax Experts DMCC, a Dubai-based advisor specialising in NRI tax, international tax, FEMA (Foreign Exchange Management Act) and UAE VAT (value-added tax) laws, alongside accounting and other related consulting services.