Budget 2025: Key Tax Changes for NRIs and Foreign Investors
Finance Minister Nirmala Sitharaman's Budget 2025 proposed several important tax reforms that directly affect Non-Resident Indians (NRIs) and foreign investors. These updates aim to simplify taxation, promote NRI investments, and align the tax regime with global standards. Below is a breakdown of the major changes:

Presumptive Taxation Regime for Foreign Entities

• The government introduced a presumptive taxation regime for foreign entities offering services to Indian companies engaged in electronics manufacturing.
• This system is designed to provide more clarity and ease for foreign service providers, especially those in the electronics sector.
• The initiative will ensure that such entities are not burdened with excessive compliance and taxation requirements, encouraging more international collaboration in India’s manufacturing growth.

• A safe harbour provision has been proposed for non-residents who store components intended for supply to specified electronics manufacturing units in India.
• This measure is meant to protect foreign entities from heavy tax liabilities when storing goods within India for supply to domestic companies involved in electronics manufacturing.
• The safe harbour provision is seen as a boost to foreign investment in India's manufacturing sector by minimizing the risk of taxation on non-resident businesses.

• In a bid to create tax parity between residents and non-residents, the government proposed aligning long-term capital gains (LTCG) tax rates for non-residents, including Foreign Institutional Investors (FIIs), with those of resident taxpayers.
• The new proposal ensures that both domestic and foreign investors are taxed similarly when transferring capital assets such as stocks, bonds, and other securities.
• Quote from Finance Minister: "It is proposed to bring parity between the taxation of capital gains on transfer of capital assets between residents and non-residents, including Foreign Institutional Investors, on their income from long-term capital gains on securities transfers."
• This change aims to attract more foreign investors by providing them with a level playing field compared to domestic investors.

• The budget also extends tax exemptions under Section 10(4H) to include capital gains on the transfer of equity shares in ship leasing domestic companies for non-residents and units in International Financial Services Centres (IFSCs).
• Non-resident investors and businesses involved in ship leasing can now benefit from exemptions on capital gains when transferring shares in related companies.
• This extension of exemptions is designed to promote investment in niche sectors such as ship leasing and IFSCs, further enhancing the attractiveness of India as an investment destination.

• Income generated from the transfer of non-deliverable forward contracts by Foreign Portfolio Investors (FPIs) operating within an IFSC will now be exempt from taxation, subject to prescribed conditions.
• This exemption will help FPIs avoid the burden of tax on income generated from specific financial instruments traded within the IFSC, encouraging more international investors to participate in the Indian financial market.

• Rationalizing long-term capital gains tax to make it more competitive and aligned with global norms.
• Easing the tax regime around property transactions to encourage more foreign investments in Indian real estate.
• Simplifying income tax filing norms for NRIs to reduce the administrative burden and make compliance easier.

NRI Investment Measures in Budget 2024

• The government had already introduced a series of measures in Budget 2024 to boost NRI engagement with the Indian economy. Key measures included:
  • Eased Foreign Direct Investment (FDI) norms: These reforms aimed to open up more sectors for NRI and foreign investment.
  • Promotion of the Indian rupee for overseas investments: The government stressed making the rupee more accessible and attractive for NRIs, making it easier for them to invest in India.
  • Reduction in the holding period for long-term capital assets: The holding period for assets like gold, bonds, and debentures was reduced from 36 months to 24 months to qualify for long-term capital gains tax.
  • Capital gains tax revisions: The government made changes to make capital gains tax more favorable for NRI investors while maintaining competitiveness.

• Short-term capital gains tax on listed equity shares and equity-oriented mutual funds was increased from 15% to 20%. This change applies to NRIs as well, though it aims to align the taxation with global standards.
• The government also revised the tax on long-term capital gains for listed equity shares and equity-focused mutual funds without indexation benefits, increasing it from 10% to 12.5%.
• However, there is an increase in the exemption limit for long-term capital gains. It was raised to ₹1.25 lakh from ₹10 lakh, offering relief to investors.
• These changes are expected to balance the tax burden and stimulate further investment in the Indian capital markets.

• The tax reforms proposed in Budget 2025 are seen as a significant step toward enhancing India’s appeal as an investment destination for NRIs and foreign investors.
• By simplifying the tax structure, extending exemptions, and aligning tax rates between residents and non-residents, the government is creating a more favorable environment for foreign investments, which could lead to greater economic growth.