By Neeraj Bhatia-
While announcing that the new Income Tax bill to replace the current Income Tax Act will be introduced within a week, Finance Minister Nirmala Sitharaman surprised everyone by increasing the personal income tax threshold significantly from Rs. 7 lakhs to Rs. 12 lakhs[$14,000] for individual taxpayers. This benefits middle-class taxpayers, who otherwise tend to feel ignored in most budget proposals.
These changes are likely going to benefit many seniors settled overseas as well as Indian students studying abroad. Many of the senior citizens living outside India may see a reduction in tax on income from pensions, interest and dividend income they receive in India. The budget also increases thresholds for TDS on rental income, interest, dividends and other income. Besides, remittances for foreign education funded through loans from financial institutions in India will now be exempt from TCS which will benefit India students pursuing education overseas.
In her speech unveiling the 2025 budget, the finance minister also emphasized the continued effort of the government towards tax reforms, with a commitment of the tax department to “trust first, scrutinize later”.
The Indian government will also soon release the New Finance bill to replace the Indian Income Tax Act of 1961, the draft of which has been under consideration since 2019, but took a backseat due to the Covid outbreak in early 2020 which changed the fiscal and regulatory focus as well.
Income Tax proposals which may impact the Non-residents & Foreign investors
Although the increase of personal threshold of zero tax up to Rs. 12 lakhs ($about $14,000) for individual taxpayers, may not benefit NRIs fully, the increased tax threshold slabs would still reduce the tax of NRIs filing returns in India. Besides, the Indian Finance Minister also proposed the following Tax changes which could impact NRIs:
Presumptive taxation scheme extended for non-residents providing services for electronics manufacturing facility
To support the development of semiconductor manufacturing in India, the budget proposes to provide a presumptive taxation regime for non-residents engaged in the business of providing services or technology, to a resident company which are establishing or operating electronics manufacturing or connected facility in India. To support non-residents who set up such electronics manufacturing facilities it is proposed that 25 % of the gross receipts be deemed as profits and gains of such non-residents from this business. This will result in an effective tax payable of less than 10% on gross receipts, by a non-resident company.
Purchase in India for export not taxable to non-residents
To clear the ambiguity for non-residents in Section 9 of the Income Tax Act, their transactions or activities in India which are confined to the purchase of goods in India for export will not constitute a significant economic presence. As a result, it is clarified that for non-residents, no income shall be taxable in India through or from operations that are limited to the purchase of goods in India for export.
Extension of timeline for tax benefits to start-ups
100% tax deduction of profits derived from an eligible startup for 3 consecutive years out of 10 years, which was going to sunset on March 31, 2025, is proposed to be extended for another 5 years till March 31, 2030.
Rationalization of taxation of capital gains on transfer of capital assets by non-residents
It is also proposed to amend the calculation of income tax on long-term capital gains on the transfer of securities included in the total income to 12.5 % in parity with the taxation of other long-term capital gains.
Rationalization of tax deducted at source (TDS) & tax collection at source (TCS)
The finance minister also proposed to rationalize tax deduction at source (TDS) by reducing the rate and increasing thresholds above which TDS is deducted, or in certain cases, removing the TDS obligation altogether. Importantly, the limit of Rs 2.40 lakh per annum for TDS on rent is being increased to Rs.50,000 per month (Up to Rs.6 lakh annually), thereby benefitting taxpayers, including many NRIs who are receiving small payments.
To benefit students studying overseas, the budget removes TCS on remittances for education purposes, where such remittance is out of a loan taken from a specified financial institution.
The threshold to collect tax at source (TCS) on remittances under RBI’s Liberalized Remittance Scheme (LRS) is proposed to be increased from Rs 7 lakh to Rs 10 lakh.
To prevent compliance difficulties in any transaction relating to sale of goods, the budget proposes to omit the TCS altogether on such transactions and to apply the higher TDS deduction only in non-PAN cases.
The delay for payment of TCS will also be decriminalized, in addition to decriminalization of TDS which was done in July 2024.
Extending the time limit to file the updated return from 2 to 4 years
To further encourage voluntary compliance by taxpayers who had omitted to report correct income, the budget extends the time-limit to file updated returns from the current limit of 2 years to 4 years.
Annual value of 2 self-occupied property exempt
For taxpayers who have multiple properties which are non-rented or self-occupied, the finance minister announced that taxpayers will now be able to claim the annual value of two self-occupied properties as “nil,” without having to fulfill any conditions. This provides significant relief to such homeowners who own two or more residential properties in India. This change, which is set to take effect from April 1, 2025, is also aimed at making it easier for individuals with multiple homes to determine their tax liabilities on house properties.
Transaction in securities as a ‘Capital Asset’
With a view to providing certainty in respect of the characterization of income arising from transactions in securities, it is proposed to amend the Income Tax Act to provide that any security held by investment funds would be treated as capital asset only, so that any income arising from transfer of such security would be in the nature of capital gain.
Withdrawals from NSS exempt from Tax
The budget proposes to exempt withdrawals made from NSS by individuals on or after the 29th of August, 2024 . besides withdrawals from NPS Vatsalya accounts as is available to normal NPS accounts, subject to overall limits. It is also proposed that any income received on partial withdrawal made out of the minor’s NPS Vatsalya Scheme account, shall not be included in the total income of the parent/guardian to the extent it does not exceed 25% of the amount of contributions made.
Carry forward of losses in case of amalgamation
In the case of amalgamation of entities, it is proposed that any carry forward of accumulated loss of the predecessor entity, which is deemed to be the loss of the successor entity, shall be eligible to be carried forward for not more than eight assessment years immediately succeeding the assessment year for which such loss was first computed for original predecessor entity. This amendment is aimed at preventing the evergreening of the losses of the predecessor entity resulting from successive amalgamations and to ensure that no carry forward and set off of accumulated loss is allowed after eight assessment years from the year when such loss was first computed for the original predecessor entity.
Incentives to International Financial Services Centre (IFSC)
In order to attract and promote additional activities in the International Financial Services Centre (IFSC), the finance minister has proposed specific benefits to ship-leasing units, insurance offices and treasury centers of global companies that are set up in IFSC. In addition, to claim benefits, the cut-off date for commencement in IFSC has also been extended by five years to March 31, 2030.
To incentivize operations from the IFSC, it is proposed that the income of a non-resident on account of transfer of non-deliverable forward contracts or offshore derivative instruments or over the-counter derivatives, or distribution of income on offshore derivative instruments, entered into with Foreign Portfolio Investors being an IFSC unit shall also not be included in the total income of the non-resident taxpayer.
Ease of Doing Business
Transfer pricing provisions for carrying out multi-year determination
To streamline the process of transfer pricing and to provide an alternative to yearly examination, the finance minister has proposed to introduce a scheme for determining the arm’s length price of international transactions for a block period of three years. To facilitate ease of doing business, she proposed that the arm’s length price (ALP) determined in relation to an international transaction or a specified domestic transaction for any previous year shall apply to a similar transaction for the next 2 consecutive years as well.
The finance minister also announced that requirements and procedures for speedy approval of company mergers will be rationalized and the scope for fast-track mergers will also be widened and the process made simpler.
Emphasizing the Government’s steadfast commitment to ‘Ease of Doing Business’, she stated that the government is determined to ensure that the regulations keep up with technological innovations and global policy developments. According to her, a light-touch regulatory framework based on principles and trust will unleash productivity and employment. Through this framework, she promised to update regulations that were made under old laws. To develop this modern, flexible, people-friendly, and trust-based regulatory framework appropriate for the twenty-first century, she proposed four specific measures – 1. Set up of a High-Level Committee for Regulatory Reforms. 2. An Investment Friendliness Index of States to be launched in 2025 to further the spirit of competitive cooperative federalism. 3. Under the Financial Stability and Development Council (FSDC), a mechanism to be set up to evaluate the impact of the current financial regulations. 4. Jan Vishwas Bill 2.0 to decriminalize another 100 provisions in various laws, besides 180 provisions that were decriminalized earlier.
Simplification of tax provisions for charitable trusts/institutions
To reduce the compliance burden for the smaller trusts or institutions, it is proposed to increase the period of validity of registration of trust or institution from 5 years to 10 years. Moreover, in situations where the application for registration of trust or institution is not complete, it shall not be treated as a violation leading to cancellation of registration of trust or institution.
To obviate some difficulties in furnishing certain details of persons other than author, founder, trustees or manager, etc. who have made a ‘substantial contribution to the trust or institution’, the reporting thresholds are being increased.
Focus of the 2025 Budget and Budget Theme
The finance minister said that the Government sees the next five years as a unique opportunity to realize ‘Sabka Vikas’, stimulating balanced growth of all regions. Viksit Bharat, encompasses: zero-poverty, a hundred percent good quality school education, access to high-quality, affordable, and comprehensive healthcare, a hundred percent skilled labor with meaningful employment, seventy percent women in economic activities, and farmers making India the ‘food basket of the world’.
The finance minister further said that in this Budget, the proposed development measures span ten broad areas focusing on Garib, Youth, Annadata and Nari. Spurring Agricultural Growth and Productivity; Building Rural Prosperity and Resilience; Taking Everyone Together on an Inclusive Growth path; Boosting Manufacturing and Furthering Make in India; Supporting MSMEs; Enabling Employment-led Development; Investing in people, economy and innovation; Securing Energy Supplies; Promoting Exports; and Nurturing Innovation. For this journey of development, she emphasized that the four powerful engines are: Agriculture, MSME, Investment, and Exports. These are fueled by India’s reforms, India’s guiding spirit of Inclusivity leading to a Viksit Bharat.
The finance minister also announced a slew of specific proposals to achieve the above objectives with a focus on Agriculture as the 1st Engine, MSMEs as the 2nd engine, Investment in people and economy as the 3rd engine, and Exports as the 4th engine.
[Neeraj Bhatia, is an accomplished attorney & accounting professional with 35+ years of expertise in international and domestic tax planning and compliance for startups and multinational entities. Neeraj is a licensed attorney in California & CPA in California, New York and Colorado and a CA in India. He also has a LL.M. in International Taxation from the US, Costs and Works (Management) Accountancy, and a Bachelor (Honors) degree in Commerce from India. During his academic years, he has received several awards and scholarships for being the top ranker nationally.]
