Here's How India's New Income Tax Bill Affects NRIs And Their Foreign Income
Since the Indian government is set to introduce the new Income Tax Bill, there are many changes expected to be implemented on the taxability of Non-Resident Indians (NRIs).
According to tax experts, the bill may propose classifying NRIs who earn Rs 15 lakh or more in India but do not pay taxes elsewhere as “residents” for tax purposes. This move is expected to have major implications for NRIs and their tax obligations in India.
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Under the current tax regime, NRIs are not taxed on their global income. Instead, they are only taxed on the income earned within India. However, the existing laws have created confusion and ambiguity, leading to disputes and litigation.
NRIs were not considered residents for tax purposes unless they spent more than 182 days in India, as per the old tax regime, but it has now changed.
If an NRI stays for 120 or more days and earns ₹15 lakh or more in India, they will be taxed as a Resident. This means they will be taxed on their global income, not just on the income earned in India and staying too long will burden high tax liability.
Previously, only income earned within India was subject to taxation. However, under the new regulations, India may tax foreign passive income earned by NRIs who qualify as Residents but Not ordinary residents (RNOR).
The following foreign incomes may be subject to taxation in India:
- Interest earned from foreign bank accounts
- Dividends from foreign stocks
- Capital gains from selling foreign assets
NRIs who thought their foreign earnings were exempt from Indian taxation need to reassess their financial situation as per the new bill.
NRIs and residents have to disclose all foreign assets and bank accounts in their tax filings. The following foreign assets and accounts must be reported, and failure to disclose foreign assets and accounts can result in severe penalties:
- Foreign bank accounts
- Offshore real estate
- Foreign stocks, ETFs, and mutual funds
- Cryptocurrency holdings on foreign exchanges
NRIs will be required to report their foreign crypto transactions, including those made through foreign exchanges.
Withdrawals from foreign retirement accounts, such as 401(k) in the US or Superannuation in Australia, may be taxed in India.
The bill may propose a special 2-year tax relief for NRIs who return to India. During this period, their foreign income earned before returning to India will not be taxed.
The Liberalised Remittance Scheme (LRS) is now under stricter tracking. If you’re sending ₹7 lakh or more abroad, be prepared for a higher Tax Collected at Source (TCS).
This means you’ll need to pay more taxes when transferring money overseas. Additionally, Indian authorities will be keeping a closer eye on your overseas investments.
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On the bright side, foreign education and medical remittances will still qualify for a lower TCS rate, but you’ll need to provide more documentation to prove eligibility.
If you have a foreign business with Indian clients, you may now be taxable in India, even if you don’t have a physical office here. This new rule is called the Significant Economic Presence (SEP) rule.
This rule applies to:
- Foreign software and IT companies with Indian customers
- E-commerce platforms that sell to Indian customers
- Consultants and freelancers who earn money from Indian clients
If an NRI claims DTAA benefits ((Double Tax Avoidance Agreement), it has to be prepared to submit more documentation.
The NRI should report all foreign taxes paid, and refunds received and declare DTAA-covered income in a specific format. The misuse of DTAA benefits can lead to penalties and legal action.
Foreign income earned before returning to India will not be subject to taxation in India. Resident but Not Ordinarily Resident (RNOR) will be granted RNOR status for 2 years, allowing them to adjust their tax status.
Following the 2-year RNOR period, returning NRIs’ global income may be subject to taxation in India. This means that if you return to India, you get tax benefits but only for 2 years.
If you fail to comply with the new tax regulations, you may face severe consequences. Hiding foreign income can result in a 300% penalty and even imprisonment.
Similarly, failing to disclose foreign assets can lead to criminal charges under anti-black money laws. Additionally, if you don’t report foreign transactions exceeding ₹50L, your income may be seized.
