New Tax Code for Not Required Indians (NRIs)!

The New Income Tax Code proposed by Pranab Kumar Mukherjee if passed, will become the New Income Tax Act, in place of the current Income Tax Act of 1961, with effect from April 1, 2011.

One of the biggest changes proposed in the New Code is the removal of the Resident, but not Ordinarily Resident Status.

The difference between Resident, Non-resident, and Not Ordinarily Resident in the existing IT Act

Tax assessee may be resident or non-resident. Residents are further subdivided into two sub-categories - (a) resident and ordinarily resident, and (b) resident but not ordinarily resident. To determine which category you fall into, apply the following tests to the tax year from April 1 to March 31.

Resident
A Resident is one who falls into either of these two categories:

1. Is in India for 182 days in the year or more, OR
2. In the preceding four years was in India for 365 days or more, and in the current tax year is in India for a total of 60 days or more

This applies to citizens of any nationality. However the period of 60 days in the second clause above will be extended to 182 days for those who fall into one of these two categories:

1. an Indian citizen who left India in any year for employment outside India, OR
2. an Indian citizen or a foreign citizen of Indian origin (NRI), who is outside India, comes on a visit to India

Non-Resident
A tax assessee is non-resident if he or she is not a Resident as-per the section above.

Resident but Not Ordinarily Resident
A Resident is "not Ordinarily Resident" if he or she fulfils either of these two conditions:

1. Has been a Non-Resident in India for 9 out of 10 preceding years, OR
2. During the 7 preceding years been in India for a total of 729 days or less

Residency Rules in the New Direct Taxes Code

4.9 Under the Code, the residential status of an individual in a financial year will continue to be determined on the basis of his stay in India during the financial year and the earlier years. He would be a resident in India if,-

 

(a) he is in India for 182 days or more during the financial year; or

(b) he is in India for 365 days or more during the four years immediately preceding the financial year and for 60 days or more in the financial year.

 

4.10 The residency of an individual will be determined only on the basis of the test specified in sub para (a) of para 4.9 in the case of,-

 

(a) an Indian citizen who leaves India during the financial year for the purpose of employment outside India with an employer;

(b) an Indian citizen who leaves India as a member of a crew of an Indian ship; and

(c) an Indian citizen or a person of Indian origin, who comes to India on a visit during the financial year.

 

An exemption has been provided to individuals with respect to the income sourced outside India, and not derived from a business controlled or profession set up in India. This exemption will be available from the financial year in which the individual becomes a resident and the succeeding year, if such individual is a non resident for nine years immediately preceding the financial year in which he has become resident.

Effectively, returning Indians who has been out of India for many years will be liable to tax on his income worldwide, maximum within the 3^rd or 4^th year of his return to India.

The Non Resident assessee can file their tax returns/handle tax matters through a Representative Assessee (an Authorized Agent of the Individual).

Under the New Tax Code the tax liability of the NRIs/PIOs could shoot up to 10 times. In the case of residents the shelter of slab rates is available. Thus, income between Rs 160,000 and Rs 10 lakh (Rs 1 million) is to be taxed at the rate of 10 percent, between Rs 10 lakh and Rs 25 lakh (Rs 2.5 million) is to be taxed at the rate of 20 percent, and only income beyond Rs. 25 lakh is to be taxed at the rate of 30 percent. In other words, Indian residents will pay 30 percent tax on capital gains only if such gains are above Rs 25 lakh'. This tiered system of tax is not available to NRIs under the Direct Tax Code.

30% flat tax on all capital gains

The fully exempt Long term Capital Gains (forget distinction between short term and Long Term Capital Gains) on equity and equity mutual funds will be taxed at a flat rate of 30%. For most of the investors in equities, taxes shoot up from zero to 30%. Long term Capital Gains on equity and Equity mutual funds will be taxed at 30%. All capital gains earned by a non-resident will attract a flat tax of 30 per cent, irrespective of the amount of capital gains. While a resident Indian will be required to pay tax of Rs 3.84 lakh on his taxable income of Rs 25 lakh, an NRI earning equivalent capital gains will be called upon to pay almost double tax of Rs 7.5 lakh.

New section 13 (2) provides that such 'special income' shall be computed in accordance with the provisions of the Ninth Schedule, the drafting of which is literally hair-raising. It provides that the amount of accrual or receipt shall be computed as the taxable income, and no loss, allowance or deduction shall be allowed, as the same shall be presumed to have been granted. It means that if an NRI sells a capital asset purchased for Rs 10 lakh at Rs 30 lakh, he will be required to pay tax of Rs 9 lakh at 30 per cent on the gross sale consideration of Rs 30 lakh without any deduction even for the cost of acquisition of Rs 10 lakh (not to mention any benefit of indexation on the same).

Presumptive Rent on House Property

In Income from House Property, elimination of tax deduction and presumptive rate of taxation will hit the investors badly. For let out or deemed let out properties, tax will be payable on the higher of the actual or "presumptive rent". Presumptive rent is 6% of the rentable value stipulated by the local Authority. If no rentable value is fixed 6% of the cost of construction or acquisition of the property will be the presumptive rent.

Take the case of a tenant who is paying a rent of Rs 25,000 per month on a property that costs say Rs 1 crore (Rs 10 million). That translates into an annual rent of Rs 300,000, or 3 percent of the property cost. Under the Direct Tax Code, irrespective of whether or not the landlord is receiving Rs 300,000 as rent, he will have to pay tax as if he is receiving Rs 600,000 (6 percent of a Rs 1 crore).

* The other change under the Direct Tax Code is that there is no relief even if the property lies vacant. Currently, no tax is payable for the period in which rent is not received, on account of the fact that the property was not let out or there was no tenant. This will change under the Direct Tax Code, and rent will be payable even when the property lies vacant.

20% flat tax on interest & other investment income

A relief is that the interest tax exemption on NRE and FCNR deposits to continue. But take note: All other interests – interests from NRO accounts will be taxed at a flat rate of 20% without the basic exemptions available to residents. For eg. An NRI who currently earns Rs 200,000 as NRO interest. With the current basic exemption limit of Rs 160,000, only Rs 40,000 will be taxed at the rate of 10 percent, resulting in a tax liability of Rs. 4,000. But under the new Code, its flat 20 per cent tax rate without any protection, his new tax liability will be Rs 40,000 ten times of the earlier amount!