Dubai: For Non-Resident Indians (NRIs) living in the UAE, how does the changes announced in the India Budget 2023 affect your personal finances? While there weren’t a whole lot of changes announced, there were a few that can help boost gains made on investments in India.
Some moderations in compliance requirements and rate of taxes applied to certain sources of income in India were expected in Budget 2023 given that the government has been steadily increasing its focus on simplifying the taxation system for NRIs.
“Overall, it was a good budget for the country, focused at a macro level on how to give a boost to the economy. For NRIs, I was expecting more reliefs but there was nothing much in the Budget for them,” opined Dixit Jain, managing director at The Tax Experts DMCC, a Dubai-based tax advisory.
Overall, it was a good budget for the country, focused on how to give a boost to the economy. For NRIs, however, I was expecting more reliefs
Top NRI expectation which was met this Indian Budget?
“However, one of the factors I liked was the clarification on Double Taxation Avoidance Agreements (DTAA) benefit on income from units of mutual funds where now NRIs can apply for Tax Residency Certificate (TRC) and get the benefit straight away.”
(A Tax Residency Certificate (TRC) helps you evade double taxation. It is a levy of tax on the same income by two or more nations. To claim income tax relief under the DTAA treaty, a Tax Residency Certificate (TRC) is mandatory from the tax authority of your resident country.)
Ahead of the 2023-24 Budget, experts were of the expectation that there may not be any major change in the taxation system other than fine tuning the existing direct and indirect taxation regimes – and that’s precisely what unraveled this time around.
In the most generic sense, a tax rebate is a refund that you are eligible for in case the taxes you pay exceed your liability. For instance, if your tax liability amounts to Rs30,000, but the government is paid taxes amounting to Rs40,000 on your behalf, you qualify for a rebate or refund for the excess.
So when putting the current hike in tax rebate limit to Rs700,000 into perspective, people earning up to Rs700,000 in India annually will not pay any income tax in the new tax regime as the personal income tax rebate limit has been increased to Rs700,000 from Rs500,000.
4 ways NRIs can benefit from changes made in this Budget
1. Double tax benefits on income from mutual fund investments
“NRIs are normally subject to 20 per cent tax on any income made from mutual fund investments at the time of distribution,” added Jain.
“Now, they can get the Tax Residency Certificate (TRC) and avail the lower rate of tax deduction on such income tax the time of distribution itself. This will come in effect from April 1, 2023.”
2. Extending provision of gifts made to NRIs with RNOR status
It was earlier decided in 2019 that NRIs receiving monetary gifts more than Rs50,000 (Dh2,240) from non-relatives were liable to be taxed on such receipt of gifts, assuming such monetary gifts were accrued in India.
“In this Budget, those with ‘Resident but Not Ordinary Resident’ (RNOR) status have also been added to this norm on NRIs receiving monetary gifts,” Jain further explained, while adding that this change will come in effect from April 1, 2024.
(Resident but Not Ordinary Resident (RNOR) status is given to those people who have been Non-Resident in India during 9 out of 10 financial years preceding that year, or people who have been in India during 7 previous years preceding that year for a period of total 729 days or less.)
3. NRI income on transfer of Offshore Derivative Instruments (ODI) is tax exempt
When it comes to investing in Offshore Derivative Instruments (ODIs), it’s the IFSC Banking Unit (IBU) which makes the investments in permissible Indian assets, on behalf of NRI or overseas investors.
Investors use derivatives to hedge a position, increase leverage, or speculate on an asset's movement. Derivatives can be bought or sold over the counter or on an exchange. There are many types of derivative contracts including options, swaps, and futures or forward contracts.
“Income earned by the IBU on such investments is taxed as capital gains, interest, dividend under section 115AD of the Act. After the payment of tax, the IBU passes such income to the ODI holders,” explained Jain.
“Presently, the tax exemption is only on the transfer of ODIs and not on the distribution of income to the non-resident ODI holders. Hence, this distributed income is taxed twice in India i.e. first when received by the IBU and second, when the income is distributed to non-resident ODI holders.”
Therefore, in order to remove the double taxation, it is proposed to amend the norm to also provide exemption to any income distributed on the offshore derivative instruments, entered into with an offshore banking unit of an International Financial Services Centre.
4. Tax deduction of 5 per cent on interest income of non-resident by business trusts lowered
Up until now, when an NRI invests through a business trust, it was required that the body deducts and deposits tax at the rate of 5 per cent on interest income of the non-resident investors.
However, queries have been received that in some cases rate of deduction may be required to be reduced due to some exemptions, like for example the exemption allowed to notify Sovereign Wealth Funds and Pension Funds.
“Since a certificate for lower deduction cannot be obtained in such cases, benefit of exemption is not available at the time of tax deduction,” said Jain.
“To remove this difficulty, it is proposed to amend the norm to provide that the sums on which tax is required to be deducted shall also be eligible for certificate for deduction at lower rate. This will come in effect from April 1, 2023.”