2020 was marked by the adverse impact of the covid-19 pandemic all over the world – but from an NRI taxation perspective, as of 1 April 2020, it has been a residency status ‘pandemic’.
Amendments to the Finance Act 2021 have given rise to debate on the criteria used to define NRI status, qualification of people who are resident but not ordinarily resident (RNOR), treatment of various incomes for liability, tax deducted at source, applicable tax rates and taxation under double taxation avoidance agreements for NRIs in the Gulf region.
Ramanathan Bupathy, chairman of Geojit Financial Services, and former president Institute of Chartered Accountants of India (ICAI), recently hosted a webinar on NRI Taxation 2021.
In it, he clarified various taxation rules, procedures, tax computation, compliance, reporting requirements, dividend tax, income from mutual funds, capital gain tax, tax on income from bank deposits and tax implications at the time of return to India and tax deducted at source as per the latest amendment in rules.
Dividend income confusion
Rules on dividend income get changed fairly often and there has been a great deal of confusion as far as tax liability on dividend income is concerned.
NRIs who invest in shares derive dividend income in India and many are confused about whether dividend income is chargeable to tax.
For dividends declared on or after 1 April 2020, the tax liability has been shifted to the shareholder; which means the individual shareholder has to pay tax. There has been doubt whether dividend income up to INR 1m (£9,680, $13,409, €11,337) is exempted from tax.
Bupathy clarified that, from 1 April 2020, this INR 1m limit no longer exists, which means all dividend income is chargeable to tax.
When companies deduct tax
Companies are required to deduct tax at source on dividend income. For residents they deduct tax at 10%, and for NRIs the tax rate is 20% plus surcharge and education cess.
However, for NRIs residing in countries that have signed double taxation avoidance agreements (DTAA) with India – the UAE, Kuwait, Oman and Qatar – the tax on dividend income is 10% plus education cess.
In the case of Saudi Arabia, it is 5%. However, as there is no DTAA between India and Bahrain, NRIs residing there have to pay dividend tax at 20%, plus surcharge and education cess.
“If there is a double taxation avoidance agreement, the assessee can choose either the tax rate as per the income tax law or the tax rate as per the applicable DTAA, whichever is favourable to him,” Bupathy said.
If an NRI is availing the benefits of a DTAA, he has to furnish documents such as self-attested PAN card, beneficiary declaration, tax residency certificate and self-attested passport copy.
“If you are shareholder of more companies, it is a cumbersome process to furnish these documents to each of the companies. Such NRIs can file their income tax returns at the end of the year and claim refund by furnishing the lower deduction certificate.”
If the documents are not furnished, the companies will deduct tax at 20% and will deny the benefit under DTAA.
Bupathy clarified that when assessees are given a concessional rate of tax for computing the dividend income, they cannot claim expenses for the income if he has borrowed money for the purpose of investing in shares.
This means, thatinterest on the amount borrowed cannot be claimed as a deduction.
Interest on bank deposits
NRIs usually maintain two types of accounts: NRE (non-resident external) and NRO (non resident ordinary) accounts.
Under NRE accounts there are two sub-types: NRE Rupee Account and NRE FCNR (foreign currency non repatriable) account.
Interest on NRE accounts is fully exempted.
In the case of NRO account, interest is chargeable to tax.
Banks will deduct tax at the higher slab of 30%, and NRIs can claim a refund while filing their tax returns. Like in the case of dividend tax, NRIs residing in DTAA countries are charged only 12.5% tax on income from NRE deposits.
The taxation expert advised NRIs against having joint investments and operating joint accounts with banks.
In the event of any unfortunate events such as death, the survivor can withdraw the money and investments.
However, joint investments may create complications as far as TDS and DTAA are concerned, as the individuals have different sources of income and have to be treated differently.
In order to avoid such complications, it is suggested to make the other person a nominee rather than a joint holder for easier transferability.