HOW ARE NRIS TAXED IN INDIA AFTER BUDGET 2024? A LAYMAN'S GUIDE

For Non-Resident Indians (NRIs), taxation in India often feels like a maze—be it dealing with capital gains, property transactions, or even understanding who qualifies as a non-resident.

With the Union Budget 2024 introducing new changes in taxation, this guide aims to break down what NRIs need to know, using real-life examples and insights from tax experts.

Who qualifies as an NRI?

An NRI (Non-Resident Indian) is someone who resides outside India for more than 182 days in a financial year or has been outside India for more than 365 days over the last four financial years, spending less than 60 days in India in the current year.

Based on this residency status, NRIs are taxed on their income earned or received in India.

However, it is essential to note that an NRI's global income is not taxed unless they qualify as a resident under Indian tax laws. This often leads to confusion, especially with the recent changes in the tax regime outlined in the 2024 Budget. So, let's dive into the key updates and what they mean for NRIs.

Below is a complete breakdown of the key changes for NRIs in Budget 2024, based on inputs received from experts.

Key changes in income tax for NRIs

Ritika Nayyar, Partner at Singhania & Co, said while NRIs continue to be taxed on their worldwide income if they meet residency criteria, there are several notable changes.

Nayyar noted that the Budget 2024 increased the standard deduction for those opting for the new tax regime, from Rs 50,000 to Rs 75,000. This offers some relief in reducing overall tax liability for NRIs.

Higher tax on short-term capital gains

For NRIs who invest in stocks, equity mutual funds, or business trusts, short-term capital gains tax rates have risen from 15% to 20%, effective from July 23, 2024.

This increase may impact NRIs involved in frequent trading, as the higher rates apply to short-term profits in Indian markets.

Mitesh Jain, Partner at Economic Laws Practice, expands on this, pointing out that "the tax rate on short-term capital gains has increased by 33%, which could discourage NRIs from engaging in short-term trading activities. The gap between short-term and long-term gains has widened from 5% to 7.5%, making it less attractive for quick gains."

Uniform long-term capital gains (LTCG) tax rate

A significant change in the Budget 2024 is the standardisation of the LTCG tax rate for NRIs.

This is now a flat 12.5% across all long-term capital assets, a move that simplifies tax calculations but impacts various asset categories uniformly.

Simplified holding periods

Starting from FY 2024-25, the holding period for determining whether an asset is short-term or long-term has been streamlined.

For listed securities, a holding period of more than 12 months qualifies as long-term, while for other assets, the threshold is 24 months.

LTCG exemption limit raised

Another relief comes in the form of an increased exemption limit for LTCG on the sale of equity shares or units. This has been raised from Rs 1 lakh to Rs 1.25 lakh per year, though the tax rate has also gone up from 10% to 12.5%.

According to Mitesh Jain, this increase in the exemption limit offers a minor relief of Rs 3,125, but the overall hike in tax rates results in a higher liability for most investors.

Indexation benefit removed

One of the biggest blows for NRIs is the removal of the indexation benefit, a tool that adjusts the purchase price of an asset for inflation.

Ritika Nayyar, Partner at Singhania & Co, explains, "Non-residents can no longer benefit from indexation, resulting in a higher tax liability, particularly for those investing in real estate."

According to Kunal Savani, Partner at Cyril Amarchand Mangaldas, "For NRIs who acquire or inherit properties before July 2024, they can still choose between 20% tax with indexation or 12.5% without it, but for properties acquired later, indexation is no longer an option."

"This could lead to higher tax outflows, especially for NRIs holding ancestral properties," Mitesh Jain added.

Let's break it down with examples:

Example 1: Modest appreciation in property value

Scenario: Mr. A, an NRI, bought a property in 2001 for Rs 15 lakh and sold it in 2024 for Rs 80 lakh.

Old Regime (with Indexation): Indexed cost = Rs 54.45 lakh; LTCG = Rs 25.55 lakh; Tax at 20% = Rs 5.11 lakh.

New Regime (without Indexation): LTCG = Rs 65 lakh; Tax at 12.5% = Rs 8.12 lakh.

Conclusion: Mr. A will see higher tax liability under the new regime.

Example 2: Significant appreciation in property value

Scenario: Mr. A sold another property for Rs 1.25 crore in 2024.

Old Regime: LTCG = Rs 70.55 lakh; Tax at 20% = Rs 14.11 lakh.

New Regime: LTCG = Rs 1.10 crore; Tax at 12.5% = Rs 13.75 lakh.

Conclusion: In this case, the new regime results in lower tax liability.

Impact on NRI investments

As Mitesh Jain highlighted, NRIs will see higher tax rates on both long-term and short-term capital gains from listed shares and securities. The long-term tax rate has jumped from 10% to 12.5%, while the short-term rate has gone up from 15% to 20%.

This hike, along with the increase in Securities Transaction Tax (STT) on futures and options transactions by 60%, may discourage frequent trading by NRIs in the equity and index segments.

Experts also noted that real estate has always been a favourite investment for NRIs, but with the removal of indexation and a uniform tax rate, the landscape has shifted.

Kunal Savani, Partner, Cyril Amarchand Mangaldas, said, "Without indexation, the purchase price isn't adjusted for inflation, which can lead to a heavier tax burden for NRIs."

Buyback tax abolished

A significant change in the Finance Act (No. 2) 2024 is the abolition of the buyback tax from October 1, 2024. However, the consideration received from buybacks after this date will be taxed as dividends.

While this increases cash flow for investors, NRIs in the highest tax bracket will face higher taxes, rising from 20% to 30% on buybacks, noted Mitesh Jain.

Expert's take

Simply put, the changes in Budget 2024 offer a mix of relief and challenges for NRIs. While the removal of indexation and higher tax rates will likely increase tax liabilities, certain benefits such as increased exemptions and simplified tax slabs may offer some cushion.

"NRIs must carefully assess the impact of these changes on their investment strategies and tax liabilities to make informed financial decisions," Jain concluded.

2024-08-21T07:56:45Z dg43tfdfdgfd