• Parizad Sirwalla, Partner |

In the recent past, several amendments have been introduced impacting High Net-worth Individuals’ (HNIs) on the Income-tax and regulatory front which should be taken cognizance of. Some of the key implications are as under:

Change in residency provisions

It has been seen in the past that few HNIs earn income outside India from carrying out business/ professional activities in India but depending on their period of stay, they may remain a non-resident in India as well as abroad. The Finance Act 2020 amended certain residency conditions with effect from Financial Year (FY) 2020-21.
As per the same, an Indian citizen (having a total income, other than income from foreign sources, exceeding INR 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 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, for triggering residency during visits to India, has been truncated for cases (having a total income, other than income from foreign sources, exceeding INR 15 lakh during the FY), thereby qualifying them as NOR if stay is between 120 to 182 days. However, what constitutes as visits is not well defined.
Through these amendments, income which arises outside India from a business controlled or a profession set up in India would be now be subject to tax in the hands of these individuals as they qualify as NORs.

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. However, preferential tax rates are available for non-resident taxpayers under the double taxation avoidance agreements that India has with other countries provided that the recipient of such dividends fulfils the eligibility criteria.

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 INR 100,000 on the sale of equity shares will attract tax of 10% and the benefit of indexation will not be available, as per prescribed rules. The surcharge has favorably 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 Scheme (‘NPS’) and approved Superannuation Fund were exempt from taxation in the hands of employee up to specified salary threshold. The Finance Act 2020 capped the exemption to employer contributions to aforesaid funds within INR 7.5 lakh per annum. Any employer contribution over and above this threshold to such retiral schemes (including any accretion thereto) has been brought into the ambit of taxation.

Taxability of Unit Linked Insurance Policies (‘ULIP’) proceeds

The Finance Act 2021 amendment provided that for a ULIP taken on or after 1 Feb 2021, the maturity proceeds of policy, with an annual premium of more than INR 2.5 lakh ,will not be eligible for an exemption under section 10(10D) of the Act and would be taxable at par with other equity oriented mutual fund. Accordingly, the capital gains provisions, as applicable currently to a listed equity oriented mutual fund, would also apply on sale/ redemption of such ULIP.

Applicability of Tax Collection 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 a purpose of purchase of overseas tour program package) under the LRS route if exceeding INR 700,000 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 program 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 Income-tax return, hence it may result in a cash-flow constraint at the time of remittance.

Disclosure of foreign assets and exchange of information

In the recent past, several disclosures are required in the statutory tax return forms (ITR) so that there is no under/non-reporting of income and assets. This requirement must be borne in mind especially by HNI taxpayers who possess assets or accounts in overseas countries either directly or through special purpose vehicles. Some of the amendments in the recent past in this regard include enactment of the black money law in India, mandatory disclosure of foreign income and assets in the ITR, execution of Foreign Account Tax Compliance Act (FATCA) agreement with the US government and other agreements to ensure seamless exchange of information across nations.

Disclosure of Indian Assets and Liabilities

A resident taxpayer whose total income in a particular FY exceeds INR 50 lakh, is required to disclose his/her assets and liabilities in India as on 31 March of the concerned FY. As HNIs may possess significant portfolio of assets in India, they will need to collate such information and disclose adequately as per prescribed rules.
To conclude, it is pertinent that the HNIs are adequately aware of aforesaid aspects and ensure compliance to avoid exposure to any adverse implications under Indian tax law.

A version of this article was carried by LiveMint.com on 18 August 2021