Indian budget plugs NRI tax loophole

Indian Budget 2019-20 has imposed tax on any sum of money paid or any property situated in India, transferred by a person resident in India to a person outside India, as it would be deemed to accrue or arise in India.

The new tax amendment closes a loophole that NRIs and their relatives, as well as friends, have been able to exploit  for years. The  amendment will take effect from April 1, 2020 and will, apply in relation to the assessment year 2020-21 and subsequent assessment years.

However, gifts from close relatives, as specified in Section 56 of the Indian Income Tax Act and including brothers, sisters and their spouses, will not attract any tax. But acquaintances, friends, and other close family relations would come under the purview of the tax.For tax purposes gift will constitute shares, property, vouchers, cash etc exceeding Rs50,000 made to anyone, apart from the specified relatives or blood relations.

At the moment, gifts given by Indian residents to non-resident Indians — apart from the specified list of relatives —  would be claimed as non-taxable. This is because the earlier tax put the onus on the recipient of the gift to make the disclosure and pay tax. As a gift to NRIs means that income is accrued abroad, it remained outside the tax net.

But now, from 5 July 2019, the origin of the gift, rather than the destination of the gift, will be important for tax purposes. Therefore, all gifts to NRIs, whether it be for studies or a house abroad, will be considered as income accruing (originating) in India and would be taxed as per the normal slab rates applicable to resident Indians.

The onus will also now shift to the NRI receiving the gift to disclose such gifts received if they originate in India and then pay a tax on it. This also means that an NRI would now need to compulsorily file his income-tax returns if the received gift is above Rs50,000 from a person in India, other than someone in the specified relative list.

For instance, if the value of the gift is above Rs1 million, the recipient will have to pay 30 percent tax. Based on the value of the gift, the tax rate would get higher and a gift of Rs20 million or Rs50 million,will be considered in the highest tax rate for super rich and accrue a tax of 35.7 percent and 42.7 percent respectively.

While making gifts to NRIs taxable, the Budget has proposed that in a situation where double tax avoidance agreement (DTAA) exists, the relevant article of applicable DTAA shall continue to apply for such gifts as well.

– Staff Report