New tax rules for NRIs starting FY25

The Finance Minister announced several changes in the 2024 Union Budget that are intended to streamline and rationalize certain aspects of taxation, along with improving the ease of doing business in India. Several of these measures apply to capital gains and income for all tax-filing entities and, hence, would apply to the 30 million+ NRIs spread across the globe as well. 

Overall, budget 2024 is a mixed bag for NRIs with capital gains tax liability increasing in several cases but with the silver lining of TDS impact coming down in real estate transactions.

Here’s a quick overview of  the key taxation changes for NRIs:

What has decreased?

• Long Term Capital Gains (LTCG) tax for unlisted equity shares, including startup investments, decreased from 20% with indexation to 12.5% without indexation – this is good news for NRIs investing in Indian startups.
• Similarly, LTCG tax on sale of real estate has also decreased from 20% with indexation to 12.5% without indexation – The post-budget rollback to the earlier indexation-based calculation is not applicable for NRIs. 
• Accordingly, TDS on the sale of property has been reduced from 20% to 12.5% for long-term holding – this should come as a big relief because TDS for NRIs is typically deducted on the sale value and not on the gains.

What has increased?

• Short Term Capital Gains (STCG) tax for equity went up from 15% to 20%
• LTCG tax for equity went up from 10% (with exemption up to Rs.1 Lakh per FY) to 12.5% (with exemption up to Rs. 1.25 Lakh per FY)
• TDS for NRIs on sale of listed equity shares and equity Mutual Funds units went up from 10% for long-term holding & 15% for short-term (<12 months), to 12.5% for long-term holding and 20% for short-term (<12 months)

What hasn’t changed:

• STCG tax for unlisted equity shares, including startup investments, remains at the applicable slab rate
• STCG tax on the sale of property remains at the applicable slab rate
• TDS on the sale of property remained the same at 30% for the short term (<24 months)
• TDS on rental income remains at 30%

Below, we take a deeper dive into these changes.

1. Revised Tax Rate Structure under the New Tax Regime:

The changes announced in the tax slab structure under the new regime could alter financial planning strategies for NRIs, necessitating a closer look at their tax liabilities and potential benefits under the New Tax Regime. It may now be beneficial for certain income groups to switch to the New Tax Regime from the old one.

Tax Slab for FY 2023-24	Tax Rate	Tax Slab for FY 2024-25	Tax Rate	Change
Upto ₹ 3 lakh	Nil	Upto ₹ 3 lakh	Nil	No change
₹ 3 lakh – ₹ 6 lakh	5%	₹ 3 lakh – ₹ 7 lakh	5%	Slab threshold increased by ₹1 lakh
₹ 6 lakh – ₹ 9 lakh	10%	₹ 7 lakh – ₹ 10 lakh	10%	Slab threshold increased by ₹1 lakh
₹ 9 lakh – ₹ 12 lakh	15%	₹ 10 lakh – ₹ 12 lakh	15%	Matched with previous slab
₹ 12 lakh – ₹ 15 lakh	20%	₹ 12 lakh – ₹ 15 lakh	20%	No change
> 15 lakh	30%	> 15 lakh	30%	No change

• Simplification and Rationalization of Capital Gains

Where previously there were different long-term and short-term holding periods for different asset classes, along with different applicable tax rates, Budget 2024 announced a more simplified set of rules.

1. Listed financial assets (e.g. listed equity shares and equity Mutual Fund units) held for more than 1 year will be classified as long term, and if held for less than 1 year would be classified as short term.
2. Unlisted financial assets (e.g. unlisted equity shares) and all non-financial assets (e.g. real estate) will have to be held for at least 2 years to be classified as long-term, and if held for less than 2 years would be classified as short term. 

Understanding these new distinctions will help investors with effective tax planning and maximizing investment returns.

As you can see in the table below, the long-term capital gains tax across most categories of financial and non-financial assets has been standardized to 12.5% (with no indexation benefit). The short term capital gains would be taxed at 20% for most listed assets (eg. listed stocks, equity Mutual Fund units), and at applicable slab rate for unlisted assets (eg. unlisted stocks/bonds, physical real estate, gold) and units of debt-oriented Mutual Funds. TDS deductions for NRIs will also change accordingly from July 23, 2024, onwards, as tabulated below.

As a reprieve to retail investors, the Budget also provides for an increase in the annual exemption of long-term capital gains from listed equity shares and equity Mutual Fund units to Rs. 1.25 Lakhs per financial year. This is intended to offset the increase in tax from 10% to 12.5%.

	Before Union Budget 2024		Changes announced in Budget 2024	After Union Budget 2024
	Short-Term Capital Gain Holding Period and Tax	Long-Term Capital Gain Holding Period and Tax		Short-Term Capital Gain Holding Period and Tax	Long-Term Capital Gain Holding Period and Tax
Listed stocks and equity mutual funds	<12 months 15%	>=12 months 10%, on gains above Rs 1 lakh	No change in the holding period, but change in taxation	<12 months 20%	>=12 months 12.5%, on gains above Rs 1.25 lakhs
Debt-oriented mutual funds	NA Taxed as per slab rate	NA Taxed as per slab rate	No change in holding period, and no change in taxation	NA Taxed as per slab rate	NA Taxed as per slab rate
Listed Bonds	<12 months Taxed as per slab rate	>=12 months 10%	No change in holding period, but change in taxation	<12 months 20%	>=12 months 12.5%
ReITs/ InvITs (with less than 90% exposure in equity ETFs)	<36 months 15%	>=36 months 10%	Change in holding period, and change in taxation	<12 months 20%	>=12 months 12.5%
Equity FOFs/ Gold and Silver ETFs/ Gold Funds/ Overseas FOFs	NA Taxed as per slab rate	NA Taxed as per slab rate	Change in holding period, and change in taxation	<12 months 20%	>=12 months 12.5%
Physical Real Estate	<24 months Taxed as per slab rate	>=24 months 20% with indexation benefit	No change in holding period, but change in taxation	<24 months Taxed as per slab rate	>=24 months 12.5% with no indexation benefit1
Unlisted Bonds	<24 months Taxed as per slab rate	>=24 months Taxed as per slab rate	No change in holding period, and no change in taxation	<24 months Taxed as per slab rate	>= 24 months Taxed as per slab rate
Physical Gold	<36 months Taxed as per slab rate	>=36 months 20% with indexation benefit	Change in holding period, and change in taxation	<24 months Taxed as per slab rate	>= 24 months 12.5% with no indexation benefit
Unlisted stocks/ Foreign Equity/Debt	<24 months Taxed as per slab rate	>=24 months 20% with indexation benefit	No change in holding period, but change in taxation	<24 months Taxed as per slab rate	>= 24 months 12.5% with no indexation benefit

1 Post announcement of the Budget in July, the government passed an amendment that reinstated the earlier long-term capital gains taxation on real estate (20% with indexation benefit) for resident individuals and HUFs (Hindu Undivided Family) for properties acquired before July 23rd, 2024. The rollback, however, is not applicable to NRIs.

Impact:
Taken together, these measures will significantly simplify tax planning for large sections of the taxpaying population, at the cost of increasing the tax burden for some.

The increase in long term capital gains tax to 12.5% coupled with the increase in the exemption limit up to Rs 1.25 Lakhs will help protect the interests of long term retail investors, while increasing the overall tax collections for the government through this channel.

The increase in short-term capital gains tax to 20% is also intended to target increased tax collection from the short-term trading and speculation markets while avoiding hitting the purse of long-term investors.

The change in long term capital gains taxation for real estate is one of the most significant announcements and has led to a heated national debate. The government announced a reduction in the tax rate from 20% to 12.5%, but with the removal of the indexation benefit. This meant that gains would be calculated based on the actual purchase price of the property, rather than the indexed price as was done till now.

After significant public outcry on the issue, the government subsequently reintroduced the option to calculate the long term capital gains on real estate as per the old method of 20% with indexation benefit. Resident individuals and HUFs can now calculate their tax liability under both methods and file the return as per whichever lowers their tax liability. NRIs, however, must compulsorily follow the new taxation formula of 12.5% without indexation.

3. Tax Deducted at Source (TDS)

TDS is a mechanism used by the Indian government to collect tax revenue and ensure tax compliance. This is particularly important in the case of NRIs, who primarily live and work outside India. By collecting TDS, the government ensures that any potential tax dues on Indian income are accounted for before the money leaves India. TDS is deposited with the government on behalf of an NRI by the entity making the payment to the NRI (eg. a tenant in the case of rental income from property, or a Mutual Fund in case of sale of Mutual Fund units). If a refund is applicable, then the individual can submit a claim for refund by filing their annual Income Tax Return (ITR). 

With the changes in capital gains taxation announced in Budget 2024, the key applicable TDS rates for NRIs will now be as follows:

	Short-Term Capital Gains TDS	Long-Term Capital Gains TDS	Who deducts TDS on what amount and when
TDS: Sale of Listed assets – Stocks, Bonds, ReITs and InvITs	20%	12.5%	TDS deducted by broker on capital gains at the time of settlement
TDS: Sale of Equity Mutual Funds/ Equity FOFs/ Gold and Silver ETFs/ Gold Funds/ Overseas FOFs	20%	12.5%	TDS deducted by Mutual Fund on capital gains at the time of sale of MF units
TDS: Sale of Debt-oriented Mutual Funds	30%	30%	TDS deducted by Mutual Fund on capital gains at the time of sale of MF units
TDS: Sale of Unlisted stocks/ Foreign Equity/Debt	30%	12.5%	TDS deducted by buyer on the total sale consideration at the time of payment
TDS: Sale of Unlisted Bonds	30%	30%	TDS deducted by buyer on the total sale consideration at the time of payment
TDS: Sale of Physical Gold	30%	12.5%	TDS deducted by buyer on the total sale consideration at the time of payment
TDS: Sale of Physical Real Estate	30%	12.5%	TDS deducted by buyer on the total sale consideration at the time of payment
TDS: Rental Income	30%	30%	TDS deducted by the tenant every month when transferring rent
TDS: Consultant/ Professional Income	30%	30%	TDS deducted by the client whenever payment is made against the invoice raised

Impact:

The reduction in TDS on long-term holding of real estate from 20% to 12.5% is a huge relief to NRIs, since, unlike listed assets, the TDS for sale of real estate is deducted on the total sale consideration, and not just on the capital gains (unless the seller provides a capital gains tax certificate from the income tax authorities).

4. Miscellaneous changes relevant for NRIs:

• Abolishment of Angel Tax:
  The abolishing of Angel Tax across all categories of investors has come as very welcome news for the Indian startup community.
  
  Impact:
  With the boom in Indian entrepreneurship over the past decade, NRIs flocked to invest in the exciting Indian startup environment as well. However,  the Angel Tax was a significant burden for startups on their scarcest resource, ie investor capital. The removal of this tax is anticipated to spur the growth of startups as it does not charge any tax on investments above fair market value, and directly frees up significant amounts of capital for startups to invest in growing their business.
  
  

1. Closing ‘business income’ loophole for rental properties:

The Union Budget 2024 has also brought in an important change in the taxation of rental income from residential properties, a key asset class and source of income for NRIs investing in India. Individual taxpayers, including NRIs, must report all rental income as ‘Income from House Property’ from FY 2024-25.

They can no longer report rental income under ‘Profits and Gains of business or profession’. This means that they cannot claim deductions in the form of ‘business expenses’, which earlier allowed a substantial reduction in taxable income in excess of the deductions allowed for a ‘House Property’. This was a widespread practice in the short-term housing rental market (such as homestays and B&Bs). The deductions available for ‘House Property’ (namely, the municipal tax, standard deduction of 30% on the annual rent value of the property, and deduction of interest of any home loan against the property) continue to be available.

What’s next for NRIs?

With the changes to the new tax regime and capital gains taxation, NRIs need to plan their investments and address critical financial tasks to ensure compliance, optimize taxes, and make informed investment decisions for the ongoing year. The beginning of the fiscal year is a great time to consider the following:

1) Goal-planning – Start the new year by reviewing financial goals and investment portfolio, assessing milestones, and checking in with your financial advisor.

2) Stay informed about deductions that are available – If you are still filing returns under the old tax regime, utilize tax-saving opportunities, like Section 80C deductions, to minimize tax liabilities.

3) Monitor TDS regularly – Track how much TDS has been deposited on your behalf to ensure compliance by the buyer/tenant, and to know how much refund is due at the end of the year. These details are available on the Income Tax website.

4) File Tax returns – It’s essential for NRIs to understand their tax obligations and file their ITR correctly in India. This is essential for claiming any applicable TDS refund.

Conclusion: 

Understanding taxes is crucial for making informed financial decisions. Knowing how taxes impact your income, investments, and savings helps you optimize your strategies. Having said that, tax laws can change with new policies. Focus on building a solid, diversified portfolio that aligns with your long-term goals, and treat tax planning as a supporting factor, not the foundation of your investment strategy.

The views and opinions expressed in this blog are those of the author. All content provided is for informational purposes only and should not be taken as professional advice.