The Union Finance Minister, Nirmala Sitharaman proposed Union Budget for 2021-22 on February, 01. The budget covered several key aspects and brought in many innovative proposals to ward off the economic devastation caused by the coronavirus pandemic which brought the world economy to its knees. However, this budget also proposed a few things that would benefit the NRIs. The latest NRI tax budget 2021 brought about more clarity involving better procedures on how NRI income will be taxed in the coming year and regulation changes in the OPC provisions for NRIs.
So, what exactly does the NRI tax budget 2021 propose for Non-Resident Indians coming back to their home country? How will the NRIs get benefitted from this? Read on to know more.
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NRI Tax Budget 2021
1. Relief from the Problem of Double Taxation
NRIs were hoping for some regulatory relaxation from the latest 2021 Union Budget, as they are facing issues with accrued income in foreign retirement accounts, whenever they return to India. Considering these issues, the budget has proposed alteration to double taxation rules to ease matters for NRIs.
What is double taxation?
Double taxation refers to a situation in which an NRI is taxed on the same income twice- in India and in the country of residence. NRIs who earn income in India need to pay tax in India that are generally deducted by the way of TDS. The same income earned in India also needs to be declared by the NRI in their country of residence as per the law prevailing in that country and that country will again tax this income. This is referred to as double taxation. Although the double taxation problem of NRIs can be avoided by seeking relief through The Double Tax Avoidance Agreement (DTAA), this has caused a great deal of frustration among NRIs returning to India.
What does the NRI tax budget 2021 offer to NRIs regarding the problem of double taxation?
The problem of double taxation for NRIs mainly occurs due to a mismatch in taxation periods. Because at present, the withdrawal of money from foreign retirement accounts may be taxed on a receipt basis in those foreign countries, while on an accrual basis in India. She also highlighted the hardships faced by NRIs in getting credit for taxes paid in India in foreign jurisdictions.
The NRI tax budget 2021 proposed to insert a new Section 89A to the Act to provide that the income of the NRI from the foreign retirement will be taxed in the manner and the year as prescribed by the central government. The government will notify rules to eliminate the double tax for NRIs on foreign retirement funds.
Read More: Tax Implications for NRIs Selling Property in India
2. One Person Companies (OPC) Provision
The Union Finance Minister, Nirmala Sitharaman also proposed to incentivize incorporation of One-Person Companies (OPC) including the clause to allow non-resident Indians (NRIs) to incorporate OPCs in India.
What is an OPC?
One Person Company (OPC) is a relatively new concept that was introduced in the Company’s Act 2013. As the name suggests, OPC means a company formed with only one person as a member. There are many benefits for OPCs including tax flexibility and savings. This concept was primarily formed to encourage and support entrepreneurs.
What does the NRI tax Budget 2021 offer for NRIs regarding OPCs?
As the Indian economy is slowly booming, many NRIs are eager to return to India to settle or start a business in India. So, to attract the entrepreneurs and innovators to further strengthen the Indian economy, the Finance Minister announced the following regarding the NRI tax budget 2021.
Currently, the residency limit for an Indian citizen to set up an OPC is 182 days. This budget reduced the residency limit to 120 days to provide further relief for many entrepreneurs. Previously, only the resident Indian citizens were allowed to set up one-person companies in India. But the proposed budget allows Non-Resident Indians to incorporate OPCs in India. This will allow the businesses to register as OPCs instead of private or public companies that have a greater compliance burden.
According to the Companies ACT, 2013, if the paid-up capital limit of the OPC exceeds the prescribed limit which is currently Rs 50 Lakh or turnover exceeds Rs 2 Crore in three consecutive years, then the company will lose its status as an OPC and will be required to convert to either to a private company or public company. This Budget 2021 has changed this requirement as OPCs will be allowed to grow without any restrictions on turnover and paid-up capital. This means companies can maintain their status as OPC regardless of turnover or capital and have the freedom to convert into any other type of company at any time.
The NRI tax budget 2021, presented by Nirmala Sitharaman highlighted two things for NRIs- It allows NRIs to set up One-Person Companies (OPC) and provides relief from the problem of double taxation for NRIs on money accrued in foreign retirement accounts. On top of this, she also said that the tax audit limit will be increased from Rs 5 crore to Rs 10 crore. Thus, this is the key take away in the NRI tax budget 2021.
Read More: Best Investment Plans for NRIs in India