Tax Regulatory Guidelines for HNIs in India

Several changes have been made to income tax and regulatory provisions for high-net-worth individuals (HNIs) in India in recent years. As an HNI, staying on top of these amendments is crucial to managing your tax liability and making prudent investment decisions. This article outlines taxation guidelines that impact HNIs.  

Change in Residency Rules

Some HNIs conduct business or professional activities in India but earn income abroad. They may be non-resident in India and overseas based on their time spent in India.

The Finance Act 2020 reshaped the residency conditions starting in the financial year 2020-21. Indian citizens whose total income, excluding foreign sources, exceeds ₹15 lakhs in a financial year are considered Indian residents for tax purposes that year. This holds even if they have no tax liability in other countries.

Previously, the residency threshold for Indian citizens and persons of Indian origin was 182 days of physical presence. This has been lowered to 120 to 182 days for anyone whose income, excluding foreign sources, tops ₹15 lakhs. Unfortunately, the term "visits" is not clearly defined here.

Dividend Income No Longer Tax-Free

Earlier, companies paid Dividend Distribution Tax (DDT) on dividends paid to shareholders. However, the Finance Act 2020 scrapped DDT, making dividends fully taxable for shareholders from April 1, 2020.

Now, resident shareholders must pay 10% tax on dividends received from an Indian company. For non-residents, this rate is 20% plus applicable surcharge and cess. At least the surcharge is capped at 15% for dividends, offering some respite. 

Capital Gains Tax on Listed Equity

Before April 1, 2018, long-term capital gains from listed equity shares were tax-exempt in India. But gains exceeding ₹1 lakh now attract 10% taxation without indexation benefits. Again, the surcharge on such LTCG is capped at 15%—a minor relief.  

Employer's Retirement Contributions 

Previously, employer contributions to employee PF, NPS and approved superannuation funds enjoyed unlimited tax exemption.

The Finance Act 2020 restricted this exemption to ₹7.5 lakhs per annum. Any employer contribution above this threshold is now taxable income for the employee.  

Tax on ULIP Proceeds

Maturity profits for ULIPs acquired after February 1, 2021, having an annual premium beyond ₹2.5 lakhs, are no longer tax-exempt under Section 10(10D). Such ULIPs are taxed similarly to equity mutual funds. Capital gains tax is also levied on sales or redemptions depending on the holding term.  

Tax Collected at Source on Overseas Remittances

Many HNIs invest internationally using the Liberalized Remittance Scheme (LRS). From October 1, 2020, authorised dealers must collect 5% TCS on LRS remittances above ₹7 lakhs in a financial year.

The rate is 0.5% for education loan remittances. Additionally, a 5% TCS applies to overseas tour package purchases regardless of amount.

The TCS credit is available when filing income tax returns. However, this could constrain cash flows during overseas remittances.  

Conclusion 

The Indian tax landscape has significantly changed in recent years, posing new challenges for high-net-worth individuals (HNIs). However, with robust financial planning, proper documentation, and expert guidance, HNIs can successfully navigate the evolving regulations.

Staying abreast of the latest tax provisions and managing investments judiciously will enable HNIs to minimise their tax liability and achieve their financial goals amidst the new regulatory paradigm. As the famous saying goes - "Forewarned is forearmed". Proactive planning is key to a prosperous financial future, even for HNIs in these transformative times.