Union Budget 2013: Important proposals related to NRIs – Highlights Analyzed

On February 28, Indian Budget 2013 was presented in the Parliament. I have selected 15 major proposals that could affect NRIs and have analyzed them as follows:

1. Tax credit of Rs. 2,000 for Individuals with income upto 5 lakhs:
The budget proposes to give tax credit of Rs. 2,000 to individuals with total income up to 5 lakhs. However, it is not available for NRIs.

2. Surcharge @ 10% for income > Rs. 1 Crore:
NRIs having taxable income of more than Rs. 1 crore will have to pay 10% surcharge on Income tax. The effective marginal rate of tax will increase from 30.9% to 33.99%.

3. Surcharge on Dividend Distribution Tax increased:
Surcharge on Dividend Distribution Tax increased from 5% to 10%, effectively increasing DDT paid by companies from 16.2225% to 16.995%.

4. Tax on Distributed Earnings on Debt Mutual Funds increased from 12.5% to 25%:
While dividend income still continues to be tax free in the hands of recipients. Any NRI investing in debt mutual fund with dividend or dividend reinvestment option will receive less amount of dividend due to higher taxes being paid by the mutual fund schemes. The tax on dividend on debt schemes would be 28.325% (25% + 2.5% surcharge + 0.825% education cess).

5. TDS @ 1% on Transfer of Immovable Properties (except agricultural land) of over Rs. 50 lakhs:
While TDS rules are applicable for sale of any immovable property by NRIs, NRI buying property also needs to comply with the TDS provisions. For any purchase of immovable property of over Rs. 50 lakhs, NRIs will be required to get TAN (in addition to having a PAN), deduct TDS, deposit TDS, issue TDS certificate to the seller.

6. Tax on royalty and fees for technical services to non-residents increased from 10% to 25%:
If you are a NRI receiving royalties or fees for technical services from India, you will have to pay tax at 25%. However, if there is a Double Tax Avodance Agreement (DTAA) between country of your residence and India, you will still be taxed as mention in the DTAA.

7. Tax on interest from rupee-denominated infrastructure bonds decreased from 20% to 5%:
Tax on interest on long term infrastructure bonds in foreign currency was previously reduced to 5%. The benefit was extended to NRIs for investment made through a designated bank account in rupee denominated long term infrastructure bonds.

8. 20% Withholding tax on Distribution of Profits through Shares Buy Back:
Unlisted companies will have to withhold 20% tax on distributed profits i.e. price of buyback less amount received on issue of shares, through shares buy back. This was introduced to curb the companies using shares back shares route instead of paying dividend route to save dividend distribution taxes. If you are a NRI Shareholder of such companies, your shares buy back amount will be reduced by 20% withholding tax.

9. Security Transaction Tax (STT) Reduced:

Security Current  STT Proposed STT
Equity futures 0.017% 0.01%
MF/ETF redemptions at fund counters 0.25 % 0.001%
MF/ETF purchase/sale on exchanges 0.1 % 0.001%, only on Seller

The reduction in Securities Transaction Tax (STT) will decrease cost of acquisition and increase net sales amount, however, it will be by very small amount.

10. Additional Interest deduction of Rs. 100,000 to First Time Buyers:
NRIs who are the First Time buyers can get an additional interest deduction of Rs. 100,000. If 100,000 interest deduction is not exhausted during the year, it can be claimed next year i.e. 2014-15. However, this deduction is available only to first time buyers and only if the value of residential house and value of loan does not exceed Rs. 40 lakhs and Rs. 25 lakhs respectively.

11. Customs Duty: Increase in limit for importing duty free gold:
Duty free gold limit increased for male Passenger and female passenger was increased from 10,000 and 20,000 to Rs. 50,000 and Rs. 100,000 respectively. NRIs can bring more gold into India without paying customs duty.

12. Service Tax:
a. Levy of Service Tax on Air conditioned restaurants:
NRIs dining in the air conditioned restaurants will have to pay for their meals due to levy of service tax on Air conditioned restaurants.

b. Abatement reduced from 75% to 70% for certain properties:
NRIs buying homes or flats with a carper area of 2,000 sq. ft. or more or for the price of Rs. 1 Crore or more have to pay higher service tax as the service tax abatement to builders was reduced for such properties.

13. Wealth Tax: Change in the definition of Urban Land:

Capital Asset Old Definition New Definition
Urban Land: Within 8 kilometers from the local limits of any municipality as specified by the Central Government, Within 2 k.m. from any municipality with population of 10,000 – 100,000; or
Within 6 k.m. from any municipality with population of 100,000-1,000,000; or
Within 8 k.m. from any municipality with population of more than 1,000,000

With growing population and rocketing land prices, change in definition could have far reaching effects for NRI owning Urban Land as the value of such asset would be included in calculation of Taxable Wealth. As a result, NRIs may have to comply with the Wealth Tax Act by paying Wealth Tax and filing Wealth Tax returns.

14. 15% Investment Allowance to Manufacturing Companies:
NRI planning invest over 100 Crores in a manufacturing operation of a Company  for new or expansion of project will get 15% of the total investment made in new Plant or Machinery in India during April 1, 2013 to March 31, 2015 as investment allowance.

15. Other:
i. TRC (Tax Residency Certificate) is necessary but not sufficient for claiming DTAA benefits.
ii. Donations to National Children Fund eligible for 100 percent deduction.
iii. Modified provisions of GAAR effective from 1/4/2016.
iv. Direct Taxes Code (DTC) Bill to be presented by end of the Budget Session
v. A number of administrative measures were proposed:
- Extension of refund banker system to refund more than Rs. 50,000
- Technology based processing of returns and refunds
- Extension of e-payment through more banks
- Expansion in the scope of Annual Information Returns (AIR) by Income-tax Department
- Mandatory e-filing for more categories of assessees

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)

Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.
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10 Responses to Union Budget 2013: Important proposals related to NRIs – Highlights Analyzed

  1. Bhupinder Panesar says:

    Hi Naresh, I’m looking to sell my property in India of over 30 years. As I understand I would need to pay log term capital gains tax (20%) on (sale price – indexed cost of purchase) before I can take sales proceeds out of India into the UK. Are there any changes to this resulting from the new budget?

    Many Thanks

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      There is no change in the tax laws in the budget. You would need to pay tax (buyer would deduct TDS) before the money can be remitted abroad (UK). Thanks.

  2. prady says:

    Hi Jigar you seem to have answer for everything.

    Me and my husband have bought a flat in Pune this month and have done 3 initial payments in month of september ( 3rd, 10th and 23rd) to the builder. I have questions regarding the TDS.

    1. In case of joint ownership is the TDS payable by both. if yes how do we divide the TDS amount? my husband is the first owner and I am the 2nd owner on the form.

    2. If one pays 3 installments in a month while paying TDS online does it need to be filled 3 times as per the payments, as the challan form asks for Date of Payment/Credit* (Date of Payment to the Transferor/Seller) and Date of Tax Deduction* or can we pay the total of that month together?

    3. If we have to fill it 3 times what these dates will be? will both of them remain same?

    and if we have to pay just once the total amount paid for the 3 installments what date will go for the date of credit and date of tax deduction?

  3. What type of documents required to purchase nri property in India and what is the legal procedure please guide us

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Everything, including the document requirement, is the same if you buy a property from a resident or NRI. However, in the case of property purchased from NRI, you also need to comply with the TDS provisions. Please note that the 1% TDS on purchase of property of 50 lakhs or more apply to resident seller and not NRI seller. If you are buying property from NRI, you need to deduct tax @ 20.6% on profit/gain amount. If NRI’s profit or gain can not be fairly ascertained, you would deduct the tax of 20.6% on the sale proceeds unless NRI obtain a certificate from Income Tax officer for lower deduction of TDS. Thanks.

  4. sridharan says:

    Sir,

    Please clarify 3% to be added for service tax on Foreign Exchange transactions. will you explain in detail with suitable example?.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      3% is the education cess that is added to almost all the taxes including income tax and service tax. Also, the 3% is not on the gross amount but only of the tax amount. So, while service tax is 12%, the effective service tax would be 12%+0.36% (3% of 12%)= 12.36%. The same calculation is applied to income tax slab rates and the effective slab rate of 10%, 20% and 30% would be 10.3%, 20.6% and 30.9% respectively, after applying cess. Thanks.

  5. Anita says:

    Hi,

    Wanted to know if an Oci card holder and a pan card holder sells property to a prospective buyer will he end up paying tax on the purchase value?

  6. Vijay Sethi says:

    Sir,
    with reference to Union Budget.
    Is an NRI same as a USA citizen with a PIO/OCI card?
    Reason for asking is that I have been refused purchase of SBI dynamic Debt fund as I am a PIO/OCI card holder.
    Thank you for your reply in advance.

    Vijay Sethi

  7. saty says:

    Dear Patel,

    Can you please clarify the following:
    Want to relocate to India ( NRI for 15 yrs) –
    1. NRE FDs are put in for 5 yrs & 10 yrs period – when will the NRE FD interest be taxed ??
    2. Can i keep them as NRE FD’s?
    3 What is the tax rate if the interest earned is 10-15 lacs?
    request reply.

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