Impact of Budget on NRIs

1. INCOME TAX RATES

No change in existing Income Tax Rate and Surcharge otherwise stated below.

An Additional Surcharge @ 2% (on aggregate amount of Income tax and existing surcharge) is proposed as Education Cess.
2. INTEREST ON NRE, FCNR & RFC ACCOUNT

Any interest paid or credited on or after 1st September, 2004 in respect of deposits in NRE, FCNR and RFC account of an individual shall be taxable at normal rates of taxation. The bank shall be required to deduct tax at 33.66% (i.e. Income Tax 30% + Surcharge 10% + Education cess 2%). However, if such deposits are with an Indian company or bank, which is an Indian Company not being a private company as defined in the Companies Act, 1956 (1 to 1956), the rate of TDS shall be 22.44% (i.e. Income Tax 20% + Surcharge 10% + Education cess 2%).

3. SECURITIES TRANSACTION TAX (STT) & CAPITAL GAINS

The following provisions are applicable from a date to be notified by the Central Government

SECURITIES TRANSACTION TAX (STT)
a) Every recognized stock exchange shall collect the STT @ 0.15% from every person at the time of purchases of securities in that stock exchange. This is only purchase side tax and no tax is collectable at the time of sale of securities.

b) Securities would include derivatives like futures & options.

c) All mutual funds, all FIIs operating from different countries including Mauritius would also be liable to pay STT.

d) Thus, the NRIs shall be paying 0.15% cost for every purchase of investments. Effectively, you shall pay Rs 150 STT on every Rs 100,000 purchase.

4. LONG TERM CAPITAL GAIN

The income by way of long-term capital gain in respect of securities (including investments in shares) is exempted from tax, if the transaction of sale is entered into a recognized Stock Exchange in India after a specified date.

5. SHORT TERM CAPITAL GAIN

The tax on short-term capital gains in respect of securities (including investments in shares) if the transaction of sale is entered into a recognised stock exchange in India after a specified date shall be chargeable to tax at the flat rate of 11.22% (i.e. Income Tax 10% + Surcharge 10% + Education cess 2%).

6. DIVIDEND STRIPPING

Currently, to curb tax avoidance through dividend stripping, like shares, if units are purchase within a period of three months prior to the record date for declaration of dividend or distribution of income and are sold within three months after the record date, the loss, if any, arising is ignored to the extent of dividend or income is exempt from tax. It is now proposed that in respect of units the minimum period of holding after the record date is to be increased from 3 months to 9 months to be eligible to claim loss on sale of units.

7. BONUS STRIPPING

The investors of the units of mutual funds were eligible to claim losses on sale of original units on which Bonus units were received irrespective of period of holding. Now, it is provided that the loss on sale of existing units (on which bonus units are issued) will be disallowed if the original units are held for a period of less than 3 months prior to the record date or for a period of less than 9 months after the Record Date.

The loss disallowed shall be treated as cost of acquisition of the bonus units.

However, the loss will not be disallowed if he re-sells entire units (i.e. the bonus units as well as original units) within a period of 9 months from the record date.
8. PERMANENT ACCOUNT NUMBER (PAN) It is now compulsory for the NRIs to obtain the Permanent Account Number (PAN) and submit to the payer of the income.

9. CREDIT OF TAX DEDUCTED AT SOURCE (TDS) For the purpose of assessment, the credit for tax deducted at source shall be given to the Non Resident Indians or Resident Indian (from whose income the tax has been deducted) on the basis of the annual statement of TDS issued by the prescribed authority. The present system of submission of TDS certificate is replaced by Annual Statement of TDS.

10. OTHER MISCELLANEOUS PROPOSALS

Any gift/receipts of more than Rs 25,000 by any individual/HUF from persons other than prescribed relative is deemed to be a income. (The receipts in nature of inheritance, tax exempted income, marriage gift to the extent of Rs 100,000 or amount received in contemplation of death, recognition of services, consideration of goods and services are excluded).

The total exemption from tax on the income up to Rs 100,000/- is applicable to residents only (subject to conditions).
NOTE:

The above proposals are effective only after The Finance Bill, 2004 is passed by the Indian parliament and assented by the President of India.

Once this procedure is completed, the proposals shall be effective w.e.f. 1st April, 2004 (i.e. for Financial Year: 2004-05 and Assessment Year : 2005-06) unless otherwise stated like exemption from Long Term Capital Gain and Securities Transaction Tax (STT) will be effective from the date notified by the Central Government.