There has been a continuous effort in the past decade or so to make the income tax laws simpler, consistent and taxpayer-friendly.
The effort has resulted in faster processing of refunds and improving compliance. However, no steps have been taken to reduce the discriminatory treatment meted out to the non-resident Indians (NRIs). They are not only charged a higher tax rate, but also deprived of many deductions or exemptions that resident Indians enjoy. Here are some of the changes in income tax laws that can help attract NRIs.
Lower basic exemption
Resident senior citizens (above 60 years) and super senior citizens (above 80 years) have a basic tax exemption of Rs 2.5 lakh and Rs 5 lakh, respectively. However, for senior citizens and super senior NRIs, this limit is much lower at Rs 2 lakh only.
Besides, NRIs cannot adjust the taxable capital gains against the basic exemption limit. If an NRI earns Rs 2 lakh capital gains and no other income, the full amount is taxed at the applicable rate. Unlike a resident Indian, he cannot adjust this income against the basic exemption limit of Rs 2 lakh.
Not eligible for deductions
NRIs are not eligible for certain deductions enjoyed by resident Indians. These include:
NRIs don't get any tax benefit if they suffer from a disability. Under Section 80U, a resident Indian can claim deduction of up to Rs 50,000 if he suffers from a disability. The deduction is Rs 1 lakh if the disability is severe. They are also not eligible for the deduction if they have a disabled dependant. Under Section 80DD, resident taxpayers can claim a deduction of Rs 50,000 for the treatment of a disabled dependant. Again, the deduction is higher at Rs 1 lakh in case of severe disability. However, these benefits are not extended to NRI taxpayers.
The discrimination extends to medical treatment as well. Under Section 80DDB, resident taxpayers can claim a deduction of up to Rs 40,000 for the treatment of dependants with specified diseases. The deduction is higher at Rs 60,000 in case of senior citizens. However, NRIs are again not eligible for this tax benefit. They may be paying for the treatment of their dependants, but won't get any tax deduction.
Even writers have not been spared. While resident Indian authors of non-textbooks can claim a deduction for royalty income of up to Rs 3 lakh from their taxable income, this benefit is not extended to the author if he is an NRI.
Problems of TDS
NRIs are also subjected to a higher TDS (tax deducted at source) rate and have fewer options to avoid it.
This year's budget has changed the TDS laws relating to property transactions. When a resident Indian purchases a property valued at over Rs 50 lakh, he has to deduct 1% TDS and deposit it with the government. However, if the property belongs to an NRI, the TDS is 20% even if the property is worth less than Rs 50 lakh. This makes it doubly difficult for NRIs to sell real estate.
Resident Indians can avoid the TDS on bank interest by submitting the Form 15G or 15H. However, NRIs are not permitted to submit Form 15G for their NRO deposits in banks, and TDS is mandatory. The problem doesn't end here. The TDS rate for NRO deposits is 30.9% compared with 10.3% for fixed deposits for resident Indians.
The TDS is applicable for a resident Indian if the interest exceeds Rs 10,000 in a year per bank branch. However, this threshold limit does not apply to NRO deposits. Even Rs 1,000 is subjected to TDS at the rate of 30.9%. The interest earned on all other investments, such as corporate deposits and bonds, is subject to a 20.6% TDS, whereas the rate for resident Indians is only 10.3%.
No TDS is applicable on shortterm or long-term capital gains earned by resident Indians when they sell mutual funds or stocks. However, for NRIs, there is a 15% TDS (plus 3% cess) on short-term capital gains from shares and mutual funds if the securities transaction tax (STT) has been paid. If no STT has been paid, the TDS rate is higher at 30.9%. They are even subjected to a 10% TDS on long-term gains from shares and mutual funds.
Rental and other income
While resident Indians are liable to pay TDS at the rate of 10% on rental income obtained from land and buildings, this rate is higher at 30%, along with a cess of 3%, for the nonresident Indians. All other taxable incomes of an NRI are also subject to a 30% TDS, besides the cess.
As always, July is the time for filing tax returns in India. As a Non Resident Indian, you would typically need to file a tax return in India if you have income that arises in India. This year, the income tax department has made two important changes that you must be aware of. These changes apply to residents as well as non residents.
Change number 1: Mandatory efile if taxable income over Rs 5 lakh
Until last year, that is, for tax returns until financial year 2011-2012, it was mandatory to efile returns where the taxable income was over Rs 10 lakh. This year, the limit has been further reduced. If you had taxable income in India that exceeded Rs 5 lakh in 2012-13, you must efile your tax returns.
You can either do it yourself using online efiling portals or take the help of assisted tax preparers. The income tax department provides a free method to upload your tax return online. If you are looking for a more user friendly approach, paid efiling portals might be a good choice. Many of these paid service providers do offer special packages for NRIs.
If you are not comfortable doing the entire filing by yourself, you can choose to go to assisted preparers. You can get professional advice along with help with efiling your tax return.
Change number 2: Match your tax credits
From this year, the Income Tax department has introduced a system by way of which you can match your income tax credits with your actual tax return. The tax credit statement is available in the form of Form 26AS.
"This statement provides details of all taxes deducted on your behalf or paid by you during the year. What you file in your tax return must match exactly with the details on Form 26AS. If there is a mismatch, you will get a show cause notice from the Income Tax department seeking clarification," explains Ankur Sharma, CEO of Taxspanner.com.
He adds, "There can be two reasons why there is a mismatch. First, on the part of the tax deductor. He may have misquoted the PAN number or may have made a delayed deposit of the tax deducted. In such case, you would need to contact the tax deductor and ask him to rectify the error. The other reason could be that you have entered incorrect details while filing your tax return. You can easily rectify this error by matching it with your Form 26AS."
Form 26AS contains:
-Details of tax deducted on behalf of the taxpayer by deductors -Details of tax collected on behalf of the taxpayer by collectors -Advance tax/self assessment tax/regular assessment tax, etc. deposited by the taxpayers -Details of paid refund received during the financial year -Details of the high value transactions in respect of shares, mutual fund etc.
This statement is generated through a valid Permanent Account Number (PAN). For NRIs, important income sources that would be reflected in Form 26AS include interest on NRO bank deposits and other bonds, capital gains on sale of securities on an Indian stock exchange, tax deducted, if any on rental income or sale of property etc.
You can access your Form 26AS in several ways. You can view the form on the Income Tax website - https://incometaxindiaefiling.gov.in. You must register at the portal and click on 'View Tax Credit Statement (From 26AS)' in "My Account". The facility is available free of cost.
Alternately, you can view the form through your bank using net banking facility. The Income Tax department has authorised some banks for this purpose. You can find a list here. The facility is available for free of cost.
You can also access the form through the TRACES website.
Some online efiling portals like taxspanner.com too have a facility to validate the tax credit from Form 26AS.
"Any return filed by an individual has to have minimum prescribed income/loss details. It must reconcile with the information already available with the department. Remember that the income tax return form is a legal declaration and a binding document in which ignorance or casual mistakes are equivalent to "income concealment". Hence, the minimum return clearance criteria for seamless processing of ITR would be matching data," Sharma concludes.
With effect from financial year 2012-13, India made it mandatory for all foreigners, including non-residents to obtain a Tax Residency Certificate with certain prescribed details from their country of residence in order to claim benefits of the Double Taxation Avoidance Agreement (DTAA).
The complete notification for this was released in September 2012, and hence financial year 2013-14 is the first full year when this will become applicable.
Let us quickly look at what the treaty benefits are and then go on to understand how Indian Americans can get the TRC from the US Internal Revenue Service (IRS).
To put it in a nutshell, the India-US DTAA allows residents of the US who have income from India to pay a lower amount of tax in India provided tax on the same is paid in the US.
The table below will give you a snapshot of common incomes that have treaty benefits:
"Sections 90(4) and 90A(4) in this regard say that foreign vendors must 'obtain' a Tax Residency Certificate. What this means is that the NRI must obtain this certificate and keep it with him. If he claims the treaty benefits at the time of filing his tax returns, then he must be ready to present the TRC at the time of assessment.
However, if he is claiming the treaty benefits at the time of Tax Deduction at Source (TDS), then the payer may ask him to furnish the TRC in order to deduct tax at the lower rate," explains Vineet Agarwal, Director - Tax, KPMG India.
Tax Residency Certificate
The IRS issues this on Form 6166. Form 6166 is a letter printed on US Department of Treasury stationery certifying that the individuals or entities listed are residents of the United States for purposes of the income tax laws of the United States.
In order to obtain this certificate, you must fill up Form 8802, Application for United States Residency Certificate.
When to apply: If you need the Tax Residency Certificate for 2013, you can apply now. "The TRC will be available only for one calendar year at a time. So if you need one for financial year 2013-2014, you will need to get two certificates, one for 2013 and one for 2014," explains Roy Vargis, CPA and promoter of IndiaCPA.com.
There are a few challenges here. First is that the IRS will issue the TRC for a future year only after Dec 1 of the earlier year. That means, if you need a TRC for 2014, you can apply only after 1st December 2013. So this is something NRIs must remember and act on later on to get their 2014 TRC.
Secondly, "If someone was deputed to US recently or is a recent migrant, he will not be eligible to file Form 6166 for TRC. The certificate will be issued only if a US tax return was filed. If for the current year you filed a 1040NR (a non resident return), then too you will not be eligible for the TRC," Vargis explains. In such case, you would need to pay tax in India and then claim credit in your US tax returns.
"To take this a step further, if you were a dual resident, a resident of US and India, your application for TRC may be denied. This is possible in a situation where you were either a Green Card holder or a Citizen of US living in India. In this situation, the application should be submitted with evidence to establish that you are a resident of the US under the tie breaker provision of the US India DTAA Article 4(2). Do note that US Citizens or Green Card holders who do not have a substantial presence or permanent home in the US during the tax year are not entitled to treaty benefits," Vargis adds.
Documents: The IRS needs to know that you are indeed a US tax payer. So if you are applying for the TRC for 2013, then you should have filed your 2012 returns. Since the due date for tax returns for 2012 just passed, it is possible that the IRS may not have your tax return in their system. In such cases, it will be useful if you included a copy of the income tax return with your Form 8802. Write "COPY — do not process" on the tax return.
In addition, you must also sign a 'Penalties of Perjury Statements and Attachments' declaring that you would continue to be a US taxpayer in the year for which you are requesting the TRC, that is, for 2013.
Fee: You must pay a user fee of $85 for each Form 8802. The IRS advices applicants to request all forms 6166 on a single form 8802 to avoid paying $85 for processing a second form 8802. This is the first year that India is mandatorily seeking TRCs and there are likely to be teething troubles.
PANAJI: Goa government is working on a facility which will save the Non Resident Indians and Persons of Indian origin from paying their state taxes annually by offering them a depository.
The NRI commissionerate can act as a depository for theNRIs and PIOs, who can deposit their taxes for next three years, Chief Minister Manohar Parrikar told the Legislative Assembly here today.
"The NRI commissionerate can levy some fees and act as a depository," Parrikar told the House.
He said he was fully aware of the difficulties faced by the NRIs who have to spend their entire stay in Goa running around to pay the annual taxes.
"I agree in principle to set up mechanism to collect advance tax from NRIs. The people who live abroad have a headache in paying the taxes," he said, adding that various mechanisms can be worked out to solve their problem.
BJP legislator Glenn Ticlo had raised the issue on the floor of the House asking "whether government can take the advance payment of the tax."
Ticlo said that such a system of advance payment would reduce the inconvenience to the tax payer.
He suggested the mechanism to collect taxes in advance for next three years, instead of annually.
Parrikar said that collecting the advance tax for general population is a complicated issue.
"There are various departments involved in it. Government will take a decision on this aspect (of collecting advance tax from everyone) before end of current financial year," he added.