The year 2020 was marked by the negative effects of the Covid-19 pandemic around the world – but from the point of view of NRI taxation, it has been a pandemic of residence status since April 1, 2020.
Amendments to the Finance Act 2021 have sparked a debate on the criteria used to define NRI status, qualification of residents but not habitually resident (RNOR), treatment of different incomes in liability, withholding tax, applicable tax rates and taxation under double taxation treaties for NRIs in the Gulf region.
Ramanathan Bupathy, Chairman of Geojit Financial Services and past President of the Institute of Chartered Accountants of India (ICAI), recently hosted a webinar on NRI Taxation 2021.
In it, he explained various tax rules, procedures, tax calculation, compliance, reporting requirements, dividend tax, mutual fund income, capital gains tax, tax on income from bank deposits and tax implications of returning to India and tax withholding tax at source according to the latest change in regulations.
Dividend Income Confusion
The rules on dividend income change quite often, and there has been a lot of confusion around tax liability on dividend income.
NRIs that invest in stocks generate dividend income in India and many are unsure whether dividend income is taxable.
For dividends declared on or after April 1, 2020, tax liability has been transferred to the shareholder; which means that the individual shareholder has to pay taxes. There were doubts whether dividend income up to INR 1 million (£ 9,680, $ 13,409, 11,337) € would be exempt from tax.
Bupathy clarified that as of April 1, 2020, that INR 1 million limit will no longer exist, meaning that all dividend income will be taxable.
When companies deduct taxes
Companies are required to deduct withholding tax on dividend income. For residents, 10% tax is deducted, for NRIs the tax rate is 20% plus surcharge and educational accounting.
However, for NRIs residing in countries that have signed DTAAs with India – the United Arab Emirates, Kuwait, Oman, and Qatar – the tax on dividend income is 10% plus education fees.
In the case of Saudi Arabia, it is 5%. However, since there is no DTAA between India and Bahrain, NRIs resident there have to pay a dividend tax of 20% plus surcharge and educational settlement.
"If there is a double taxation agreement, the assessor can either choose the tax rate according to the income tax law or the tax rate according to the applicable DTAA, depending on what is favorable for him," says Bupathy.
If an NRI takes advantage of a DTAA, they must present documents such as a self-certified PAN card, beneficiary declaration, tax certificate and a self-certified passport copy.
“If you own multiple companies, it is a tedious process to get these documents out to each of the companies. Such NRIs can file their income tax return at the end of the year and request reimbursement by submitting the lower deduction certificate. "
If the documents are not presented, the companies will deduct the tax of 20% and refuse the DTAA service.
Bupathy clarified that with a reduced tax rate for calculating dividend income, Assesses would not be able to claim any expense on income if he borrowed money for stock investment purposes.
This means that interest on the borrowed amount cannot be claimed as a deduction.
Interest on bank balances
NRIs typically maintain two types of accounts: NRE accounts (non-resident external accounts) and NRO accounts (non-resident ordinary accounts).
There are two sub-types under NRE accounts: NRE rupee accounts and NRE-FCNR accounts (foreign currency – non-repatriable).
Interest on NRE accounts is completely tax-free.
Interest is taxable on the NGO account.
Banks deduct 30% tax, and NRIs can request a refund while filing their tax returns. As with dividend tax, NRIs resident in DTAA countries are only charged 12.5% tax on income from NRE deposits.
The tax expert advised NRIs against making joint investments and keeping joint accounts with banks.
In the event of unfortunate events such as death, the bereaved can withdraw the money and investments.
However, joint investments with TDS and DTAA can create complications as individuals have different sources of income and need to be treated differently.
To avoid such complications, it is suggested that the other person be made a nominee rather than a joint owner for ease of transferability.