Major Tax Reforms for NRIs in 2025: What You Should Know

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The government of India has made major reforms to the Income Tax Act, effective from 2025. These reforms will have a direct bearing on NRIs, particularly tax residence, worldwide income, and foreign asset reporting. In this blog, we’ll deconstruct the most significant updates, their ramifications, and how you can successfully navigate them.

The New 120-Day Rule: A Game-Changer

Earlier, NRIs were taxed as Indian tax residents only if they stayed in the country for 182 days or more. But from 2025, if you stay in India for just 120 days and earn more than ₹15 lakhs from Indian sources, you will be considered a resident for tax purposes. This reduced time period can trap many NRIs in the tax net inadvertently. It’s essential to start keeping a close track of your time spent in India to avoid surprises.

Taxing Global Income: A New Reality for RNORs

If you are a Resident but Not Ordinarily Resident (RNOR), your international income could now be brought within India’s taxing jurisdiction. That would mean income like dividend on foreign stock investments, foreign bank interest, and even gain from sale of foreign assets. So, for example, if you have Apple stocks in your US brokerage or are getting rent on your Dubai home, this may now become taxable in India.

Reporting Foreign Assets: Transparency or Trouble?

The Indian government is tightening the screws on undeclared foreign assets. NRIs are now required to report all foreign bank accounts, real estate holdings, stocks, ETFs, and even cryptocurrencies. Non-compliance can result in draconian penalties of up to 300% of the tax amount and even criminal prosecution. It’s more crucial than ever to be transparent in your tax returns.

Remittance Scrutiny: Higher TCS for Big Transfers

NRIs under the Liberalized Remittance Scheme (LRS) will come under stricter scrutiny. Exceeding ₹7 lakhs overseas now incurs greater Tax Collected at Source (TCS) charges. Although there remain certain exemptions for medical and education purposes, documentation has tightened.

Business Owners Be Aware: Notable Economic Presence (SEP)

If you have a business abroad but Indian clients, the Significant Economic Presence (SEP) rule may impact you. Even if your business lacks physical presence in India, you may still be subject to Indian taxes if you earn income from Indian consumers. This adjustment will hit anyone from SaaS vendors to consultants and may disrupt the conventional tax haven model.

Foreign Pension and Retirement Accounts: No More Exemptions

NRIs having foreign retirement accounts such as the 401(k) in America or Superannuation in Australia must remain alert. Withdrawal from such accounts can now become taxable in India under some situations. It is important to re-evaluate your retirement planning methodologies and take a financial advisor’s advice to stay away from double taxation.

Coming back NRIs: Two Years of Tax Reprieve

On the positive side, coming back NRIs will have a two-year tax relief. For these two years, any foreign income you earned prior to your return will not be taxed in India. But this relief is only temporary. After two years, your worldwide income could be taxed according to Indian regulations.

Practical Steps for NRIs

• Count Your Days in India: Keep accurate records of your travel so you don’t inadvertently activate tax residency.
• Review Your Foreign Assets: Make a complete list of your foreign investments, as this will ensure proper reporting.
• Consult Experts: In case you have business ownership or complicated investments, seek the advice of international tax professionals to refashion your operations and remain compliant.

Conclusion

The changes in the Income Tax Act coming up are important for NRIs. They will necessitate a more active role in tax planning, reporting, and compliance. It’s important to be aware and begin preparing in advance to steer clear of legal issues in the future.

FAQs

1. What is the new 120-day rule for NRIs?

   Ans- If an NRI resides in India for 120 days or more and receives more than ₹15 lakhs of income from Indian sources, he will be taxed as an Indian tax resident.

2. How does the RNOR status impact worldwide income?

   Ans- RNORs under the new regime will have their worldwide passive income taxed by India, including dividends, interest, and foreign asset capital gains.

3. What foreign assets must I report?

   Ans- You are required to report all foreign assets, such as bank accounts, real estate, stocks, ETFs, and cryptocurrency investments.

4. What happens if I do not report foreign assets?

   Ans- he penalty for not reporting can be as much as 300% of the tax owed, as well as potential criminal prosecution.

5. How will the remittances be taxed in LRS?

   Ans- Remittances exceeding ₹7 lakhs will be charged greater TCS charges, with stronger documentation for educational and medical remittances.

6. What is the Significant Economic Presence (SEP) rule?

   Ans- SEP will apply to companies with no physical presence in India but who deal with Indian customers, for which they would become subject to Indian taxes.

7. Are foreign retirement accounts taxable in India?

   Ans- Yes, withdrawals of foreign retirement accounts such as 401(k)s may now be taxable in India under specific circumstances.

8. Is there any tax relief for NRIs returning to India?

   Ans- Yes, NRIs coming back to India will enjoy a two-year tax relief period, and foreign income earned prior to returning won’t be taxed.

9. How do NRIs monitor their Indian stay to not become resident?

   Ans- Use spreadsheets or apps to keep track of your travel days meticulously and adhere to the new 120-day rule.

10. What do business owners need to do to get ready for the SEP rule?

    Ans- Business owners need to take advice from international tax professionals to make their businesses compliant with India’s new tax regulations on SEP.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.