Every year, for years now, it has been seen that budget brings a lot of anxiety, expectations, fear, curiosity. Be it, resident or non-resident taxpayer. In the 75th Year of Independence, Budget was announced on February 01.
Welcoming the same on inclusive governance policies for all-round capital spend on health, infrastructure, easy of compliance and the digital economy.
The budget, which focused on six areas, included health and well-being; physical and financial capital and infrastructure; inclusive development for an aspirational India; reinvigorating human capital, innovation and R&D; and minimum government with maximum governance.
The measures announced will undoubtedly go a long way in making our country self-reliant and a progressive one.
Classifying the announcements:
1. Retirement Funds for NRI:
NRIs, while coming back, face issues related to accrued income in their foreign country retirement accounts, which mainly occurs due to mismatch in taxation periods. For countries which levy a direct tax, the issue has been with claiming credit for Indian taxed paid in foreign jurisdictions under DTAA laws. Finance Minister announced the removal of hardships on such funds. According to the memorandum explaining the provisions of Finance Bill, 2021, a mismatch was recorded in the year of taxability of withdrawal from retirement funds that were opened while residing in foreign countries. Currently, the withdrawal may be taxed on receipt basis in foreign countries, while on an accrual basis in India. In order to address the mismatch in the taxation of income from the notified overseas retirement fund, the government has proposed a new section 89A to the Income-tax Act, 1961. After the amendment, the income of such “specified person” from the “specified account” will be taxed in the manner and the year as prescribed by the Central Government. The expression “specified person” will be defined as the person residing in India but opened the “specified account” while resident in that foreign country. The finance ministry has proposed to define “specified account” as an account maintained by NRIs in a foreign nation for retirement benefits. The income from such account is not taxable on an accrual basis and is taxed by the foreign country at the time of withdrawal or
Redemption. The amendment will take effect from April 1, 2022, and will accordingly apply to the assessment year 2022-23 and subsequent assessment years.
2. TDS on Dividends:
In the 2021-2022 India Budget, relief was also proposed for those who hold investment stakes in India-based firms and those who receive shareholder income in the form of dividends. In the last Indian Budget of 2020, the Dividend Distribution Tax (DDT) was abolished for companies, while making dividend payment taxable at the hand of the receiver. The move was among the most talked-about decisions of the government at the beginning of 2020. Although this helped the cash-starved economy save some and increase cash-flow in the country, for investors, this meant more taxes. Earlier, retail investors got away without paying any taxes. Prior to the Budget of 2020, dividends issued by the listed entities were taxable in the hands of the recipient if they received more than Rs 1 million at the rate of 10 per cent. It is now proposed to exempt dividend payments from the tax incurred at the income source, known as TDS (Tax Deducted at Source). Currently, the company distributing dividends in case the amount of dividend exceeds Rs5,000 per shareholder, withheld 20 per cent of the income when it came to non-resident shareholders. However, with the recent proposal, it implies that such a ‘withholding rate’ is no longer in effect. However, the same doesn’t mean to be tax-free. During the calculation of annual income, dividend income is to be added to total income, and tax liability is to be ascertained.
3. Ease of Doing Business :
One significant step forward is the permission to set up One Person Companies (OPCs) in India. An OPC is a corporate entity with a single person. It offers several advantages, such as easier compliances and minimum requirements, even as it enjoys the legal status of a company and gets the same access to capital. Earlier NRIs were allowed to be Director / Shareholder in private limited companies, where One Director / Shareholder mandatorily needed to be resident of India.
This move will not only boost the ease of doing business in India but could also, be a shot in the arm for startups. Many projects, especially those in the IT sector, need to be run as a company and not individually. Entrepreneurs will find the OPC route very convenient.
Reduction in Assessment / Scrutiny Years
The FM also reduced the time limit for reopening income tax assessment cases to 3 years from the previous 6 years. This is the best relief considering the difficulty NRIs face in fetching old records that go up to 6 Years. Maintaining documents for 3 years is way convenient. However, it remains 10 years for severe tax fraud cases involving concealment of INR 50 lakh or more. This will give relief to innocent NRIs who were sometimes pulled up for alleged tax evasion in previous years, resulting in lengthy litigation.
4. Exemption from Filing Tax Return for Senior Citizen Above 75 Years Age:
For Senior Citizen aged 75 and above, having only interest and pension income with the same bank would be exempted from filing tax returns. His tax liability would be adjusted as per TDS deducted. Its to be noted that the exemption is for only not filing the tax returns, not on tax liability.
5. Taxation of ULIPs:
If the annual premium of your new ULIP investment is more than Rs 2.5 lakh the return that you will get will no longer be tax-exempt. The tax exemption shall be available under Section 10(10D) only for maturity proceed of the ULIPs having annual premium up to Rs. 2.5 lakh. In case of ULIPs having yearly premium more than Rs 2.5 lakh the income/return on maturity shall be treated as capital gain and charged accordingly under section 112A, however the cap of Rs. 2.5 lakh on the annual premium of ULIP shall be applicable only for the policies taken on or after 01.02.2021 The new taxation rule will apply only on new ULIPs so you do not need to worry about your existing ULIPs where you can keep investing the premium till maturity of the policy. However, in the case of new ULIPs, buying multiple policies will also not help. If the premium is payable for more than one ULIP, the aggregate premium for such policies should be considered to compare with the threshold of Rs 2.5 lakh
6. Unfulfilled Wishes:
In the invitation to respond for suggestions in the budget, I had tried to write well to the Honourable FM to reduce the TDS rates on transactions pertaining to NRIs mostly while selling an immovable property and interest income on NRO accounts. However, Though the Budget has also proposed reducing NRIs tax-related problems, some of the long-standing demands remain unfulfilled. The raising of the tax audit limit for NRIs from Rs 5 crore to Rs 10 crore is a welcome step. Even so, the TDS rules continue to be a significant pain point for NRIs.
NRIs have to shell out 15% on short-term gains from stocks and equity funds and even higher for gains from debt funds and debentures, gold and property. Even long-term gains from property and gold are subject to 20% TDS. On bank deposits, NRIs have to cough up 30% TDS. Hopefully, the government will ease the TDS rules for NRIs, thereby encouraging investments in India.
This coming financial year is of utmost importance for the economy for India, considering the economy to expand by 11% plus growth rate. Yes, India is moving gradually to $5-trillion economy that will benefit everyone.