Finance Minister Nirmala Sitharaman's Budget 2025 introduced significant tax policy changes for non-resident Indians (NRIs) and foreign investors. To offer tax clarity, the government proposed a presumptive taxation regime for foreign entities providing services to Indian electronics manufacturers. A safe harbour provision has also been implemented for non-residents storing components for supply to designated electronics units.
A key reform in this budget aligns long-term capital gains (LTCG) tax rates for non-residents, including Foreign Institutional Investors (FIIs), with those for resident taxpayers. Sitharaman highlighted, "This will bring parity in the taxation of capital gains from the transfer of securities between residents and non-residents, including FIIs."
Further, tax exemptions under Section 10(4H) have been extended to cover capital gains from the transfer of equity shares in ship leasing companies and units in International Financial Services Centres (IFSCs) for non-residents. Additionally, income from the transfer of non-deliverable forward contracts by Foreign Portfolio Investors (FPIs) in IFSCs will now be tax-exempt, subject to conditions.
Stricter Compliance and Reporting for NRIs
Budget 2025 introduces enhanced tax compliance for NRIs, especially affecting students and young professionals abroad. The government's focus on fiscal transparency and alignment with international tax norms means more scrutiny of income earned abroad. Enhanced data-sharing through Double Tax Avoidance Agreements (DTAA) will require Indian students and professionals working overseas to declare their foreign earnings in India, even if they have no domestic income sources. This change aims to curb tax evasion but could complicate tax filings for NRIs.
Additionally, the residency threshold for taxation was reduced from 182 days to 120 days in Budget 2020 for high-income individuals. Budget 2025 proposes tightening these rules, making it harder for individuals with significant financial ties to India to maintain their NRI status. This could lead to higher tax liabilities.
The government also plans to renegotiate DTAA agreements with countries such as the US, UK, Canada, and Australia to close tax avoidance loopholes, potentially raising withholding tax rates on foreign remittances and imposing stricter documentation requirements for tax relief claims. These changes may complicate financial transactions for NRIs, requiring careful tax planning to avoid unforeseen liabilities.
Raghavendra Rau, Professor of Finance at the University of Cambridge, noted, “The stricter NRI tax regulations in the 2025 Budget will complicate life for Indians in the UK. Expanded data-sharing means UK-based Indians must now report their earnings to Indian authorities, even if they have limited connections to India. Tighter residency definitions could unexpectedly classify some as Indian residents for tax purposes, leading to dual tax obligations. Businesses may also face short-term challenges due to these changes.”
Impact on Students and Professionals
Indian students and professionals working abroad may face increased tax obligations and double taxation risks due to the stricter regulations. NRIs will need to be more diligent in managing their financial affairs to avoid penalties and ensure compliance with Indian tax laws.
A major change is the requirement for more detailed financial reporting, including declarations of overseas earnings, investments, and bank accounts. Non-compliance could lead to penalties under anti-tax evasion laws, adding to the financial burden for those balancing responsibilities in multiple countries.
Remittances to India under the Liberalised Remittance Scheme (LRS) could also face more stringent compliance checks, particularly for large transactions, potentially causing delays or administrative hurdles for students or professionals sending money to family members or making investments in India.
Returning NRIs may encounter higher tax liabilities. Those who have worked abroad and plan to return to India must disclose foreign assets such as savings, stocks, or property investments. Failure to declare these assets could result in severe penalties under the Black Money Act.
Dr Vinish Kathuria, Professor (Economics) at IIT Bombay, said, “Students planning to remain in the UK post-graduation or young professionals may face increased tax obligations and potential double taxation risks if their finances aren’t carefully structured. Additionally, returning NRIs who haven't disclosed foreign assets could face taxation and penalties on repatriated funds.”
In light of these changes, NRIs, particularly students and professionals, will need to reassess their financial strategies to ensure compliance while minimising tax liabilities.
