The Indian government imposed a tax on remittances by resident individuals in India with effect from 1 October.
Though it does not directly affect NRIs, it will be significant for them if they remit money from India or are sent funds from other parties.
Those who receive money for investment purposes will have to pay tax at 5% if the remittances are above INR700,000 ($9,529, £7,357, €8,089).
This tax is collected at source by the remitting banks and deposited with the government.
Though the scheme was to take effect from April 2020, it was postponed to October 2020 due to the pandemic.
Foreign tour package
In February 2020, the government proposed the introduction of 5% tax on overseas remittances under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI).
As per RBI regulations, Indian residents can remit up to $250,000 under the LRS every year for various purposes; such as medical treatment, gifts, maintenance of relatives abroad, foreign education and investment in real estate, stocks and bonds.
Payments for foreign tour packages are also subject to 5% tax without any exemption threshold; and include business tours, family tours and religious tours, covering all expenses related to travel, lodging and boarding.
For education-related foreign remittances funded by loans, the tax will be just 0.5% for any amount above INR700,000; which takes into account the significant number of Indian students who take loans to pursue education abroad.
In case of a person remitting funds abroad under LRS or buying a foreign tour package who does not have Permanent Account Number (PAN) card or Aadhar card; the rate of tax will be 10% instead of 5%.
PAN cards are mandatory for all taxpayers and Aadhar is the unique ID national identity card linked to all bank transactions.
Netting tax evaders
“The new law is introduced to widen the tax net and to track such remittances as the authorities found that individuals have been increasingly using the LRS route to remit money abroad by invading the tax. Now, while remitting money overseas, the lenders are required to collect 5% tax for depositing with the government,” said R Ramesh, chief executive, Veracity Consulting.
The LRS remittance scheme applies only to Indian residents.
NRIs can remit up to $1m outside of India per financial year from balances held in an NRO account.
Remittance exceeding that sum will require special permission from the RBI.
“Since NRIs transfer money under the $1m scheme, they can transfer up to $1m from NRO to NRE or foreign account, provided the money was initially sent from NRE account, abroad, or any investment income made in India, on which tax has already been paid to the Indian government,” said AS Elavarasan, chairman of chartered accountants and auditing firm ASPA Management Consultancy, Dubai.
Investors hit
Though NRIs are not directly impacted by the new tax rules, Indian residents who invest in foreign stocks, bonds or property will find their upfront cost and expenses going up as the tax element will increase their costs.
For example, anyone remitting $9,500 or above for buying stocks or property abroad will have to pay the tax, which will be collected by the banks.
Individuals can open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme, but will have to pay 5% remittance tax if the investments are above the threshold limit.
Here also, the investors will have to bear the extra cost on account of the tax.
Investors remitting less than INR700,000 per year will see no impact of these rules.
Investment advisers are of the view that the new tax should not be seen as stumbling block for investing in foreign stocks, as investors can claim back the taxes collected at source while filing tax returns.
