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Sun 2 Feb 2020 04:24 PM

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Fresh NRI inflow for stock investments in India likely to fall due to dividend tax rule change

India's budget proposal to tax NRIs who do not pay income tax in another country has sent shock waves among expat Indians working in Middle East countries

Fresh NRI inflow for stock investments in India likely to fall due to dividend tax rule change

The budget has also reduced the number of days NRIs can stay in India to 120 days in a year from the earlier 180 days.

Asset management companies in India predict a fall in NRI (non-resident Indian) investments in the country’s stock market in the wake of a budget proposal to make tax on dividend income from companies and mutual funds (MFs) at the recipient’s hands.

Currently, companies and mutual fund houses are liable to pay dividend distribution tax (DDT) at a rate of 15 percent plus applicable cess, before they distribute it among their shareholders.

According to the new rule, dividend income from shares and mutual funds will be taxable in the hands of the recipient at the applicable income tax slab rates to the individual - between 10 and 30 percent - as against the 15 percent rate under DDT.

The proposal to tax NRIs who do not pay income tax in another country has sent shock waves among expat Indians working in Middle East countries.

​“NRIs, especially from the Gulf region, deploy a significant part of their savings in India in shares and mutual funds on a long-term basis. The flow of NRI investments into shares and MFs can be hit if the tax component on income from dividends is more,” a senior executive working with a Koch-based asset management company, told Arabian Business.

The budget has also reduced the number of days NRIs can stay in India to 120 days in a year from the earlier 180 days.

“The proposed changes in the budget on deciding on NRI status and also taxing global income of NRIs if they do not pay personal tax in another country could impact persons who have moved out of India in the recent years,” Kudip Kumar, head of personal taxations with PwC India, told Arabian Business.

“For Indians who have moved to countries like the UAE in the last 2-3 years, they may be impacted under the proposed rule (on tax on NRIs), despite India’s double taxation avoidance treaty with the UAE.

“As per the amended rule, persons who have moved out in the last 2-3 years will qualify as ‘deemed resident’ of India for filing returns and tax in 2020-21, as they are not liable to pay personal tax in the UAE, and also they will satisfy the condition of resident of India for more than three tax years, immediately preceding the relevant FY21 tax year.

“They will be required to file a tax return in India and report their foreign income and assets,” he added.

Tax experts said they expect India’s finance ministry to issue a clarification on this as the changed rules on NRI status and tax liability will impact a large number of expat Indians working in the Gulf countries.

“NRIs have been thinking that there will be some positive proposals in their favour in the budget, but what they got is just the opposite,” Anish Mehta, chairman, Institute of Chartered Accountants of India, has said.

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