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.