Indian tax laws give NRIs a raw deal

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:
Equity investments
The government’s stated intention is to attract investments from NRIs, but they have been denied the benefit of investing in the Rajiv Gandhi Equity Saving Scheme. The newly introduced deduction under Section 80CCG for first-time investors in equity can be availed of only by resident Indians.
Disability
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.
Medical treatment
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.
Royalty income
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.
Property deals
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.
Bank interest
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%
Capital gains
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.
More restrictions:
Concessions
If an NRI opts for the concessional tax treatment, he is taxed at a flat rate. However, in such a case, he cannot avail of any deduction of expenditure or allowance under any provisions or claim benefit of cost indexation for capital gains.
Investments
Apart from the higher taxes, NRIs are not allowed to invest in certain instruments, such as the Public Provident Fund. Certain scrips specified by the RBI are also out of their reach.
NRIs constitute an important segment of the investing population. If the government wants this section to bring in more investment, it should take steps to remove these glaring anamolies in the tax structure. This is especially important in the current situation, when the rupee has seen a drastic fall against the dollar. If NRIs are given the same tax treatment that resident Indians enjoy, it will encourage this large segment of overseas population to start investing in their home country.
As Published in Economic Times on Jul 22, 2013.