All good things will come to an end. And Indians living in the Gulf countries are no exception; as they have to return home at the end of their job contract or for the pure joy of settling down among their kith and kin.
Taxation is a reality that awaits them after enjoying a near tax-free regime by virtue of their status as non-resident Indians (NRIs).
Those residing in the UAE, Kuwait, Oman and Qatar enjoy the benefit of double taxation avoidance agreement between the host countries and India. Benefits can be derived in the case of dividend income, interest on bank deposits and redemption of mutual funds.
But when it comes to income assessment and tax liability, NRIs are apprehensive and confused as they are still clueless on the frequent changes to various tax rules. The recent amendments in Finance Act 2021 brought in several changes, but only expert tax practitioners can interpret the nuances for better clarity and compliance and for deriving maximum benefits.
Ramanathan Bupathy, chairman of Geojit Financial Services, and former president Institute of Chartered Accountants of India (ICAI), who recently hosted a webinar on NRI Taxation, clarified the changes in rules and provided insights on tax implications when NRI status is changed on return to India for good.
Tax on MF redemptions
As far as income from mutual funds are concerned, NRIs are required to pay tax at flat rate of 20% under the income tax rules. However, units in equity-based Indian mutual funds are not equity shares and, therefore, short-term capital gains arising from sale of the units are not taxable in India in accordance with the provisions of article 13(5) of the India-UAE tax treaty.
As a common practice, companies and mutual fund companies are under obligation to deduct tax at source on income from dividends and mutual fund redemptions. NRIs can claim refund in their tax returns when mutual funds give credit on the tax deducted.
Tax liability on rental income
Rental income in India is taxable, and there is no flat rate or DTAA benefits, and therefore tax has to be deducted at source.
“If you are the owner of a property in India, the resident tenant will deduct tax at source and remit to the government. If the owner is a resident of India he will deduct tax at source at 10% of the rental income, provided the rental income exceeds INR 240,000 (£2,355, $3,212, €2,726) per annum. If the owner is an NRI, the resident tenant will have to deduct tax at the highest slab rate of 30%,” Bupathy said.
“In order to get a lesser rate of TDS, some NRIs adopt the practice of giving a local address in the tenancy contract. However, at the end of the year when the NRI files tax return under his NRI status, the income tax department will raise question to the tenant as to why tax was not deducted at higher rate of 30%.
“That means an NRI should not give a local address when renting out his property in India to a resident of India. The income tax department has to be furnished a lower deduction certificate (LDC) to get tax benefits.”
Three categories of residents
India’s tax regime categorises three types of residents: Residents, non-residents (NRIs) and ‘not ordinarily residents’.
Ordinary residents have to pay tax on their global income; for NRIs, only income in India will be included — for tax purpose — and not global income.
For ‘not ordinarily residents’, income in India is included and income outside India is included only when it accrues or arises from a business controlled from India, or profession set up in India.
The NRI status is crucial in determining and individual’s tax liability. As per the amended rules in 2020, persons residing in India for more than 120 days (brought down from 182 days) in a financial year are considered residents. If an NRI stayed in India for more than 120 days, he would lose his NRI status.
Bupathy suggested that the following types of persons should restrict visit to India to 119 days in a financial year:
- Individuals deriving dividend income from companies in India;
- Individuals deriving income from mutual funds in India;
- Individuals engaged in business controlled from India;
- Individuals engaged in profession set up in India;
- Individuals planning to limit his income from Indian sources to the maximum of INR 1.5m per annum.
Time your return home
He added: “NRIs planning to return to India for good should time their journey in such a way that their tax liability in India is reduced to the minimum as the change of non-resident status to resident will obligate them to pay taxes on their global income, including his end of service benefits such as gratuity.”
It is suggested that NRIs should plan their return to India during the last two months of the financial year, ie in February or March, in which case he will be allowed to retain his NRI status for one year and ‘not ordinarily resident’ status for one more year, and third year onwards he will be considered resident of India.
Another deposit account
Persons residing outside India can open NRE account with banks and interest is exempted from tax so long as he is residing abroad.
The moment he comes back to India on a permanent transfer of residence, he will cease to be a person resident outside India and the interest income from that day onwards on the NRE deposits will be chargeable to tax in India.
Only interest on the deposits, not capital, will be chargeable to tax.
“If the NRI wants to make a small benefit, there another account: RFC account (resident foreign currency account). If they open RFC account, the balance in NRE account can be transferred, and if they come back to India, then interest on the RFC account will get exempted till such time the retained status of ‘not ordinarily resident’. After return to India they can continue to be ‘not ordinarily resident’ , so interest on that account will continue to be exempted from tax for two years. However, there is a catch: The interest rate on RFC account is lower than that on the NRE account.
“Transfer a part of your money to the RFC account and retain the RFC account to benefit from dollar-rupee exchange rate fluctuations. This money will facilitate you to provide for the education of your children abroad and for destination marriage of your children abroad, who you need foreign exchange,” Bupathy said.
Click here to read International Adviser‘s earlier coverage of the webinar: What NRIs need to know about tax liability
