BackTax, regulatory considerations for HNIs in India
Finance Act 2020 has made dividend fully taxable in the hands of shareholders
PremiumIn the recent past, several amendments have been introduced on the income tax and regulatory fronts, which impact high net-worth individuals (HNIs). Here are some key implications of the changes:
Change in residency provisions: Some HNIs earn income outside India by carrying out business or professional activities in India; however, depending on their period of stay, they may remain non-resident in India as well as abroad. The Finance Act, 2020, amended certain residency conditions with effect from financial year 2020-21 (FY21). The amended laws say that an Indian citizen having a total income—other than from foreign sources—exceeding ₹15 lakh during a particular FY shall be deemed to be a resident of India, albeit a not ordinarily resident (NOR) for that FY, if he/she is not liable to tax in any other country by reason of his/her domicile or residence or any other criteria of similar nature.
Further, the extended threshold of 182 days available to Indian citizens and persons of Indian origin (PIO) for triggering residency during visits to India has been truncated for persons having a total income, other than income from foreign sources, exceeding ₹15 lakh during an FY, qualifying them as NOR if their stay is between 120 to 182 days. However, what constitutes as visits is not well defined.
Taxability of dividend in the hands of shareholder: The Finance Act, 2020, abolished the dividend distribution tax payable in respect of dividends declared, distributed or paid by a domestic company after 31 March 2020, and accordingly, such dividend was made fully taxable in the hands of the shareholders (including individuals). The Finance Act had also imposed a withholding tax at the rate of 10% on all dividends paid by an Indian company to a resident shareholder whereas the rate to non-resident shareholders is 20% (plus applicable surcharge and cess). While the taxpayers are now required to pay taxes on dividend income at the applicable tax rates, some relief has been granted by restricting the surcharge rates to a maximum of 15%, which could have otherwise gone up to 37% in case of HNIs.
Capital gains tax on listed shares: Long-term capital gain (LTCG) on equity shares listed on a stock exchange, which were earlier tax-free, are now under the tax lens. Effective 1 April 2018, LTCG of more than ₹1 lakh on the sale of equity shares will attract a tax of 10% and the benefit of indexation will not be available, as per prescribed rules. The surcharge has favourably been restricted to up to 15%, which is some relief.
Taxability of excess employer’s contribution to retiral schemes: Prior to Finance Act, 2020. the contributions made by the employer to the account of an employee under the provident fund (PF), National Pension System (NPS) and approved superannuation fund were exempt from taxation in the hands of the employee up to a specified salary threshold. The Finance Act, 2020, capped the exemption to employer contributions to aforesaid funds within ₹7.5 lakh per annum. Any employer contribution above this threshold to such retiral schemes (including any accretion thereto) has been brought into the ambit of taxation.
Taxability of unit-linked insurance policy (ULIP) proceeds: Finance Act, 2021, amendment provided that for a ULIP taken on or after 1 February 2021, the maturity proceeds of the policy, with annual premium of over ₹2.5 lakh ,will not be eligible for exemption under Section 10(10D) of the Act and would be taxable at par with other equity-oriented mutual funds. Accordingly, the capital gains provisions would also apply on sale or redemption of such ULIP.
Applicability of tax collected at source (TCS): Several resident HNIs use the liberalized remittance scheme (LRS) route for outward investments in securities and properties. With effect from 1 October 2020, an authorized dealer is required to collect TCS at the rate of 5% on any amount or aggregate of amounts being remitted outside India (other than for the purpose of purchase of overseas tour programme package) under the LRS route if exceeding ₹7 lakh in any FY. However, where the amount being remitted out is towards prescribed education loan, 0.5% TCS rate shall apply instead of 5%. Further, the seller of overseas tour programme package is required to collect TCS at the rate of 5% irrespective of any monetary threshold.
Tax credit for the TCS shall be available at the time of filing the income tax return, hence it may result in a cash-flow constraint at the time of remittance.
Parizad Sirwalla is partner and head, Global Mobility Services- Tax, KPMG in India.
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