Impact of Union Budget’23 on NRIs across the Globe

Hi Friends,

Here is my most awaited blog, requested by many of my NRI clients. In this blog, I have covered six major proposals related to personal taxes announced by our Finance Minister Nirmala Sitharaman in Union Budget on 1st Feb’23. These proposals are going to impact NRIs directly.

First of all, I want to make it clear that budget is just a proposal which may or may not pass as a law. If it is passed as a law then provisions related to it will be applicable from financial year 2023-24 i.e. from next financial year onwards. We will get more clarity on this in next few months when budget will be presented in Rajya Sabha for comments.

It means there will not be any changes in taxes of current financial year i.e F.Y 2022-23 because of this budget. But proposals in this budget is definitely going to impact you in coming few months. It is very important to be aware of these provisions to make right financial decisions and to avoid any notices or penalties in future.

Six important proposals which are directly going to impact NRIs personal taxes in India:

1. No Income Tax if total income earned in India is up to Rs. 7 Lakh:

Budget Proposal: The threshold limit for total income eligible for rebate under Section 87A has been proposed to be increased from INR 5,00,000 to INR 7,00,000 for assessee opting for the new tax regime.

Impact on NRIs: Section 87A is not applicable for Nonresidents which means this change will not impact NRIs.

Explanation: Earlier if resident taxpayer’s income was even above basic exemption limit but if it was below Rs. 5 Lakh then he used to get a rebate of whatever tax was due. There was a rebate applicable up to Rs. 12,500 from taxes. This rebate has been increased to Rs. 25,000 under new tax regime and would be applicable if the total taxable income does not exceed Rs. 7 Lakhs. It will result in less tax liability or more refund as compare to earlier years.

But unfortunately, this section is applicable in case of residents only which means this benefit is not applicable for NRIs.

2. Changes in Tax slab rate under new tax regime:

Budget: In the alternate (New) tax regime under Section 115BAC, a revision to the basic exemption limit and the number of slabs has been proposed. The revised basic exemption limit shall be INR 3,00,000 and for every additional INR 3,00,000 of income, the next slab rate will be applicable. The highest slab rate of 30% shall continue to apply to income above INR 15,00,000.

Impact: I have seen that generally NRIs don’t take health insurance or Life insurance in India, they don’t have salary income on which they can claim HRA, they don’t have home loan etc in India. In that case, opting a new tax regime is a better option for them as it offers concessional slab rate but doesn’t allow any deductions. Now, rates under new tax regime are made more favorable which means that it is going to benefit them more.

Explanation: Presently, Individuals has 2 types of tax slabs for taxing income:

Old Tax regime (Normal Provision):

There will be additional Surcharge on the above, as follows

Over and above rate of taxes & surcharge, there will be cess @ 4% applicable. Hence, Maximum rate of taxes would be around 42.744%

Alternate/ New Tax regime (Special Provision u/s 115BAC )

There is a Special Provisions as applicable up to FY 2022-23 (AY 2023-24)

There will be additional Surcharge on the above, as follows

Over and above rate of taxes & Surcharge, there will be cess @ 4% applicable. Hence, Maximum rate of taxes would be around 42.744%

Under these provisions No deductions will be allowed, i.e., deduction in respect of interest on self-occupied housing loan, Standard deduction from Salary, certain deduction of exempted allowances from Salary, 80C deductions such as Life Insurance premium payments, Tuition Fees payments, Housing loan principal repayments, ELSS mutual fund, NSC of tax saving 5 years bank deposit, PPF, EPF investments etc., or other eligible deductions such as Mediclaim premium payments, donation payments, interest on education loans, interest on electric loans etc., will not be allowed.

This special provision has been proposed to be amended with effect from FY 2023-24 (AY 2024-25)

Tax slab will be as follows

Tax slab will be as follows

Over and above rate of taxes & surcharge, there will be cess @ 4% applicable. Hence, Maximum rate of taxes would be around 39%

Standard Deduction from Salary Income up to Rs. 50,000/- will be allowed if income is declared under these provisions.

However, No Deduction other than Standard Deduction as mentioned will be allowed, i.e., deduction is respect of interest on self-occupied housing loan, certain deduction of exempted allowances from Salary, 80C deductions such as Life Insurance premium payments, Tuition Fees payments, Housing loan principal repayments, ELSS mutual fund, NSC of tax saving 5 years bank deposit, PPF, EPF investments etc., or other eligible deductions such as Mediclaim premium payments, donation payments, interest on education loans, interest on electric loans, etc. will not be allowed.

Further, it is also to be noted that, as on date, normal provisions are default provisions & special provisions u/s 115BAC are optional. However, from AY 2024-25, the special provision u/s 115BAC will be default provisions and if someone wants to opt for normal provisions, then he/she has to file return of income within due date and claim the taxation under normal provisions

3. Tax Collected at Source (TCS) has been increased to 20% (from existing 5%) on certain foreign remittances (except education & medical treatment), without any threshold limit

Budget: The rate of TCS for foreign remittances, for other purposes under LRS and purchase of overseas tour program, is proposed to increase from 5 % to 20 %

Impact: Many NRIs have asked me regarding this proposal as it is related to foreign remittances. But reality is, this proposal is not going to impact NRIs if they are repatriating their own money. They repatriate money under $1 million scheme rather than Liberalised Remittance Scheme(LRS). Above proposed changes are related to LRS schemes and it will impact residents who are transferring money to non-residents or doing foreign remittance for the purpose other than education loan or medical treatment.

Let’s say, A resident father wants to gift money to his NRI son by transferring funds from his resident account in India to son’s overseas bank account. This transaction will come under LRS scheme and higher TCS is going to be deducted.

Explanation: First of all, we should understand what is LRS (Liberalised Remittance Scheme). Under LRS, all resident individuals are allowed to freely remit out of India up to USD 2,50,000 per financial year. It means a resident can remit money to his non-resident relative under this LRS scheme, provided provisions of this scheme is fulfilled. There are proposed amendments, applicable from 01st July, 2023, in respect of rate of TCS applicable towards remittance under LRS Scheme.

The details of amendments are as follows

This scheme is applicable when resident remit funds out of India. Hence, this proposed change in TCS will not impact NRIs if they are remitting money to their overseas bank account from their NRO account in India.

4. TDS on certain income paid to NRIs will be deducted at rate of 20% or rate specified in the tax treaty, whichever is lower.

Budget: For certain income paid to non-residents or foreign companies, TDS will be deducted at a specified rate of 20% or the rate specified in a tax treaty, whichever is lower. This relief will be available if the payee provides a tax residency certificate.

Impact: By this proposal it is made clear that NRIs have option to get TDS deducted at lower rate by taking DTAA benefit. But to claim this benefit they have to submit Tax residency certificate and form 10F to deductor. As per my practical experience, getting Tax Residency Certificate, submitting Form 10F, claiming DTAA relief, dealing with Banks/financial institutions is still a cumbersome process in India, especially for NRIs as they are out of India. NRIs should go for it only if it is making huge difference in their finances.

Explanation: Financial institutions has to deduct TDS while doing payments of dividend, interest etc on investments (like mutual funds, equity shares, NRO accounts)done by NRIs in India. Chances are rates specified in DTAA (signed between Indian and country of residence of NRI) are less than standard TDS rate applicable as per domestic law. NRIs have given this option that they can ask the deductors to deduct TDS at the concessional rates provided in tax treaty. This relief will be available only if the NRI provides Tax Residency Certificate and Form 10F to the deductor.

5. Taxation of Gift received by RNOR outside of India

Budget: Section 9 is amended to provide that gifts received by an RNOR shall also be deemed to accrue or arise in India.

Impact: If an NRI receives any gift outside India from a resident who is not his relative then it is taxable in India. Logically same rule should be applied for Resident and Not Ordinarily Residents (RNOR). But as it was not written in law, people used to misinterpret it. Now, through this proposal it is made clear that gift received out of India by RNOR from non-relative resident will also be considered as income accrued in India and will be taxable in India.

Explanation: Earlier gifts by a resident person to a non-resident outside India are claimed to be non-taxable in India as the income does not accrue or arise in India. To ensure that such gifts made by residents to a non-resident person are subjected to tax in India, the Finance Act, 2019 has inserted a new clause (viii) under Section 9 of the Income-tax Act to provide that any income arising outside India, being money paid without consideration on or after 05 July 2019, by a person resident in India to a non-resident or a foreign company shall be deemed to accrue or arise in India.Thereby, Gift in the form of money is received by non-resident outside of India from residents, would become taxable in India in the hands of non-resident

This provision is now extended to state that, if RNOR receives GIFT in the form of money in outside of India from a resident, that also would become taxable in India in the hands of such RNOR.

6. Update of KYC and providing correct information by account holder

Budget: A penalty of Rs. 5,000 will be imposed on financial establishments for submitting inaccurate SFTs(Specified Financial Transaction) as a result of incorrect information provided by account holders. The financial institution has the right to recover the fine from the account holder.

Impact: This proposal is very important and will impact all NRIs indirectly. Through this proposal NRIs who are still maintaining saving accounts in India can end up paying huge penalties. It is advisable for all NRIs to update their KYC in India at the earliest and maintain only NRO and NRE account in India.

Explanation: Presently all financial institutions has to submit a statement for any specified financial transaction (SFT) or a reportable account on behalf of account holders. The information was collected on self-certification basis but no penalty was specified for submitting a false self-certification by account holders which led to furnishing of an incorrect statement by financial institutions. Now, to make the account holder responsible for his self-certification, this budget introduced additional penalty of Rs. 5,000 for any inaccuracy due to false or inaccurate information submitted by the account holder. While the penalty is on the financial institutions, they are also allowed to recover the amount from the account holder.

In short, if an NRI or a Resident provides inaccurate detail regarding their citizenship, residential status, country of tax residency etc then they may have to pay penalty of Rs. 5000. This penalty can be huge for someone who has multiple accounts in India and have different insurance policies, mutual fund investments etc.

Person leaving India for education or job or immigration also must inform bank and other financial institutions about the change in status of residential status etc. All information provided should be accurate and updated.

In this blog, I have mentioned six major proposed provisions of personal tax for F.Y 23-24 which are going to impact NRIs in a huge way. There are many other proposed provisions which may impact residents and non-residents both, I will cover them in my next blog.

Disclaimer: This is my interpretation of the proposal and as time will pass we will get more and more clarity on this. As an NRI taxation expert, I believe its my responsibility to keep NRIs informed about changes or proposed changes in Income Tax Law which can impact their personal taxes in India. Please take professional advice in case you have any doubts.

Or You can write to me at ushma@nricaservices.com or Call/Whatsapp me at +91 9910075924.