Income tax benefits for resident vs non-resident taxpayers explained

Though income tax laws generally do not differentiate between a resident Individual taxpayer and a non-resident taxpayer, certain tax benefits/concessions are available to a resident individual only and not to a non-resident taxpayer. Let us discuss this in detail.

Age-based differentiation

A resident taxpayer below 60 years old enjoys total tax exemption for income up to ₹2.50 lakh annually. Those between 60 and 80 years old enjoy a higher basic exemption limit of ₹3 lakh. Those who have completed 80 years even enjoy a higher limit of 5 lakh. All these varying exemption limits are applicable if you opt for the old tax regime. All the non-resident taxpayers opting for the old tax regime have a uniform basic exemption limit of ₹2.50 lakh, irrespective of age. For all individuals opting for the new tax regime, the basic exemption limit is ₹3 lakh, irrespective of age and whether you are a resident or a non-resident.

Likewise, a resident over 60 years of age is entitled to a deduction of up to ₹50,000 for interest received from banks, post offices and cooperative banks during the year under Section 80TTB under the old tax regime. Suppose the person is a non-resident senior citizen taxpayer. In that case, this higher limit of ₹50,000 is not available. Instead, he/she is entitled to claim a deduction only up to ₹10,000, which also applies to interest on a savings bank account under Section 80TTA under the old tax regime.

Rebate under Section 87A

All the individual taxpayers whose total taxable income after various deductions exceeds the basic exemption limit have to pay tax at the slab rates. However, an individual who is a resident of India for tax purposes and whose taxable income does not exceed five lakhs rupees gets a rebate against his liability up to Rs. 12,500 under Section 87A under the old tax regime. It may be noted that the rebate under Section 87A is not available under the old tax regime against tax liability regarding long-term capital gains arising on the sale/redemption of listed shares/units of equity schemes of mutual funds. Likewise, if you opt for a new tax regime, you get a rebate of up to ₹25,000/- against your tax liability, provided your taxable income does not exceed seven lakhs.

The rebate under Section 87A is not available to a non-resident individual who has to pay tax at slab rates on the income beyond the basic exemption under both the tax regimes.

Set off of capital gains against shortfall in basic exemptions

Long-term capital gains of all nature and short-term capital gains on equity products are taxed at special rates in India. Suppose income other than capital gains taxed at special rates is lower than the basic exemption limit applicable. In that case, the resident taxpayer is entitled to set off such shortfall against capital gains taxable at special rates and must pay tax only on the balance of such capital gains. A non-resident individual does not enjoy this benefit to set off a shortfall in the basic exemption against capital gains taxable at special rates, even if his only source of income is capital gains of the above nature.

Deduction for physical disability

Section 80U of the Income Tax Act allows a deduction for physical disability to a resident individual taxpayer. The deduction available is ₹75,000/- for normal disability, and for severe disability, a higher deduction of ₹1,25,000/- is available under the old tax regime. This deduction is not available to a non-resident taxpayer.

TDS provisions

When a resident sells an immovable property, the buyer must deduct tax at the rate of 1% of the sale consideration where the aggregate value exceeds fifty lakh rupees. However, in case the seller is a non-resident, the buyer has to deduct tax at a higher rate of 12.50% if the property was held by the non-resident for more than two years else at 30% of the taxable income comprised in the sale consideration if the seller provides the details of cost and date of purchase of the property to help buyer compute taxable capital gains. If the non-resident does not provide such details, the buyer must deduct tax on the total amount. In the case of a non-resident seller, there is no threshold limit for tax deduction, and the buyer has to deduct tax from the first rupee.

A resident individual can apply to the company to pay him the dividend without tax deduction at source if his estimated tax liability on his income, including the amount of dividends, is nil. No such option is available to a non-resident taxpayer to receive a dividend without tax deduction at source, as the dividend is taxable at a special flat rate of 20% in the hands of the non-resident taxpayer.

Likewise, a resident senior citizen is entitled to furnish a declaration to payers of various incomes to pay them income without tax deduction at source if his estimated tax liability for the year is nil. No such option is available to a non-resident senior citizen receiving income in India.

Indexation benefits for sale of property

While presenting the budget on 23rd July 2024, the Finance minister proposed the withdrawal of indexation benefits on the sale of long-term capital assets while reducing the long-term tax rate from 20% to 12.50%. However, she has proposed some amendments to the budget proposal under which only resident individuals and HUF taxpayers can opt between a lower rate without indexation and 20% tax with indexation in respect of properties acquired before 23rd July 2024.

From the above discussion, it becomes apparent that certain income tax benefits are not available to resident individuals.

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Balwant Jain is a tax and investment expert who can be reached at jainbalwant@gmail.com and @jainbalwant on X, formerly known as Twitter.

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