What do Indian expats expect from interim Budget 2024?

The Indian government is set to unveil its budget on February 1. The BJP-led government will present an interim budget as the country is scheduled for general elections later this year.

While the budget is an interim one, expectations are high that the Indian government will present bold reforms to boost investment and increase participation in the economy – domestically and from beyond the country’s shores.

The Indian diaspora, with strong ties to the home country, sent remittances of $125bn in 2023 – the highest in the world, according to World Bank data.

This community – made up of non-resident Indians (NRI) as well as People of Indian Origin (PIO), face a considerable tax burden due to the tax slab make-up legislated by the Indian government.

With the unveiling of Budget 2024 just round the corner, the NRI community hopes that the Tax Deducted at Source (TDS) process as well as the tax bracket is re-worked to provide relief.

Here are some priorities that would be welcomed by the NRI community:

Expectations for Budget 2024

1.Compliance to be aided by digitalisation

Digitalisation of processes, helped by the linking of the Aadhar card, has changed the way Indians pay the tax-man. However, NRIs continue to face labyrinthine documentation requirements – from deciphering complex TDS provisions, potential compliance hurdles as well as lack of access to timely recourse in the event of setbacks. Those anticipating the upcoming budget hope the Indian government provides clarity in regulations, reduces paperwork, and prioritises user-friendly digital interfaces to fasten the process.

2. Tax exemption bracket

As per the new tax regime under the Income Tax Act introduced by the government, the exemption limit is INR2,50,00. The hope is that the exemption limit is raised by iNR50,000, given the rise in inflation across multiple countries.

3. Tax regime: Old or new?

The Indian government reworked the tax regime in 2020, but also kept the old one. It then gave the option to tax payers to choose which regime to adhere to. The old one – much more complex yet has considerable exemptions factored in, or the new and simpler one with minimal exemptions regime. While this seem like a flexible way to do things, the new regime curtails on significant tax breaks and hence have not been adopted en masse.

Old Tax Slabs	Rates	New Tax Slabs	Income Tax Rates
Up to Rs 2.5 lakh	Nil	Up to Rs. 3 lakh	Nil
Rs. 2.5 lakh to Rs. 5 lakh	5%	Rs. 3 lakh to Rs. 6 lakh	5%
Rs. 5 lakh to Rs. 10 lakh	20%	Rs. 6 lakh to Rs. 9 lakh	10%
Above Rs. 10 lakh	30%	Rs. 9 lakh to Rs. 12 lakh	15%
–	–	Rs. 12 lakh to Rs. 15 lakh	20%
–	–	Above Rs. 15 lakh	30%

 

4. Double taxation

NRIs for many years, had to bear the burden of being tax doubly, based on salaries in both countries i.e. India and the country of residence. The government has over the past decade instituted Double Tax Avoidance Agreements (DTAA) with multiple countries, however, the interpretation and application for these processes continue to be complex.

If Budget 2024 provides clarity and reduces the scope of the DTAA, NRIs will benefit by being not taxed for their income earned abroad.

5. Seamless reparation of funds

With an extremely international population, Indians undertake significant reparation of funds – such as transferring the sale proceeds back to the foreign account. Especially in the case of the sale of property, NRIs face considerable taxation as well as an exhaustive process.

6. Proceeds of investments

From its well performing stock market, to its growing crypto exchanges, 2023 saw the Indian economy pay dividends across various investment portfolios. While NRIs participate in the market given the plethora of investment opportunities available, taxing proceeds and managing the flow of funds remains prohibitively expensive for this segment of the population.

7. Interest from NRO accounts

An NRI with a Non-resident Ordinary (NRO) bank account in India is taxed at a maximum slab rate of 30 per cent through TDS. Therefore, even though the NRI may not have any active source of income in India other than interest from such NRO bank account, the income suffers tax deduction at a maximum rate. This rate is prohibitive and the refund claim process lengthy.

The income tax liability of an NRI in India is determined by their residential status for the year. NRIs need to determine their residential tax status in India based on their duration of stay during the fiscal year when filing their ITR.

Taxation for NRIs

NRIs who have a total income exceeding the basic exemption limit of INR250,000 under the old regime or INR300,000 under the new regime, before any deductions or exemptions, are obligated to file their tax returns in India by July 31 of the following year after the end of the relevant financial year.

An NRI will have to pay tax only on the following income:

> Income generated from a business connection in India, income from any property, asset, or source of income in India, such as rental income from a property located in India, capital gains from the sale of a capital asset (such as shares or immovable property) situated in India, and salary income earned for services rendered in India.

Dividend income from Indian companies, even if received from outside India, is considered as income that has accrued or originated in India.

> Interest income from fixed deposits and savings accounts held in Indian bank accounts is taxable in India.
> Similarly, royalties or fees for technical services received from a resident are also treated as income that has accrued or originated in India, unless such royalties or fees are related to a business, profession, or other source of income carried out by the payer outside India.
> Income earned outside of India is not subject to taxation within India. The interest earned on an NRE account and FCNR account is exempt from taxes. However, the interest earned on NRO accounts is taxable for non-resident Indians.

How is residential status determined?

The Finance Act 2020 and Finance Act 2021 changed the criteria for determining the residential status of individuals.

Till the end of financial year 2019-20, NRIs (both Indian citizens and Persons of Indian Origin) included those individuals who, visited India for less than 182 days in a financial year. The Finance Act 2020 reduced this period to 120 days where the total income (except foreign sourced income) of the visiting individuals during the financial year is more than INR1.5m.

One is considered an Indian resident for a financial year if:
> If they are in India for at least 6 months (182 days) during a given financial year.
> If a taxpayer was in India for 2 months (60 days) in the previous year and lived in India for a total of one year (365 days) within the last four years.

Exceptions: If a taxpayer is an Indian citizen working overseas or a crew member on an Indian ship, he  will only be considered a resident if they spend at least 182 days in India. This condition also applies to a Person of Indian Origin (PIO) who visits India.

However, the second condition does not apply to these individuals.

An NRI is exempt from filing returns under sub-Section(1) of Section 139 if:
> Total income in the previous fiscal year was only investment income or income by way of long-term capital gains, or both.
> TDS under the provisions of Chapter XVII-B has been deducted from such income.

NRIs can opt for the old tax regime or the new regime with a lower tax rate under Section 115BAC of the Income-tax Act.

Under the former, they can avail of the following exemptions:

• Section 80C up to Rs 1.5 lakh (Tuition fee, premium for LIC policies, Ulips, ELSS, and home loan’s principal amount)
• Section 80D (premium on medical insurance)
• Section 80E (interest on education loan)
• Section 80G (earmarked donations)
• Section 80TTA (interest on savings bank account)

However, NRIs are not allowed any investment in the Senior Citizens (Savings Scheme, certificates of deposit (NSCs), five-year Post Office Deposit Scheme, and the PPF.