The Indian government imposed a tax on remittances by individuals residing in India effective October 1.

While this does not directly affect NRIs, it will be important to them if they send money from India or receive funds from other parties.

Those who receive money for investment purposes will have to pay a 5% tax if remittances exceed INR 700,000 ($ 9,529, £ 7,357, € 8,089).

This tax is collected at source by remitting banks and deposited with the State.

Although the scheme was due to go into effect from April 2020, it was postponed to October 2020 due to the pandemic.

Travel abroad package

In February 2020, the government proposed the introduction of a 5% tax on remittances abroad as part of the Liberalized Transfer System (LRS) of the Reserve Bank of India (RBI).

According to RBI regulations, Indian residents can contribute up to $ 250,000 under the LRS each year for various purposes; such as medical treatment, gifts, maintenance of relatives abroad, education abroad, and investment in real estate, stocks and bonds.

Payments for organized trips abroad are also subject to a 5% tax with no exemption threshold; and include business visits, family visits and religious visits, covering all expenses related to travel, accommodation and board.

For foreign education-related remittances financed by loans, the tax will be only 0.5% for any amount above INR 700,000; which takes into account the large number of Indian students who take out loans to continue their studies abroad.

In the case of a person remitting funds overseas under the LRS or purchasing an overseas tour package who does not have a Permanent Account Number (PAN) card or Aadhar card; the tax rate will be 10% instead of 5%.

PAN cards are mandatory for all taxpayers and Aadhar is the single national identity card linked to all banking transactions.

Compensation for tax evaders

“The new law is being introduced to widen the tax net and track these remittances, as authorities have found that individuals are increasingly using the LRS channel to send money overseas by invading the tax. Now, while paying money abroad, lenders are required to charge a 5% tax for filing with the government, ”said R Ramesh, managing director of Veracity Consulting.

The LRS discount program applies only to Indian residents.

NRIs can pay up to $ 1 million outside of India per fiscal year from balances held in an NRO account.

Payments in excess of this amount will require special authorization from the RBI.

“Since NRIs transfer money under the $ 1 million program, they can transfer up to $ 1 million from NRO to NRE or to a foreign account, as long as the money has been initially sent from an NRE account, overseas, or any investment income made in India, on which tax has already been paid to the Indian government, ”said AS Elavarasan, chairman of the firm of India. chartered accountants and auditors ASPA Management Consultancy, Dubai.

Investors strike

Although NRIs are not directly affected by the new tax rules, Indian residents who invest in foreign stocks, bonds or property will see their initial cost and expenses increase as the tax element increases their costs.

For example, anyone paying $ 9,500 or more to buy stocks or property overseas will have to pay the tax, which will be collected by banks.

Individuals can open, maintain, and hold foreign currency accounts with banks outside of India to conduct authorized transactions under the program, but will be required to pay a 5% transfer tax if investments exceed the threshold.

Here too, investors will have to bear the additional cost due to the tax.

Investors who pay less than INR 700,000 per year will not see any impact from these rules.

Investment advisers are of the opinion that the new tax should not be seen as a stumbling block to investing in foreign stocks, as investors can recoup taxes collected at source when filing tax returns.