Tax Articles & Insights

1. INR Cross-Border Transactions — October 2025 Amendment

RBI amended FEMA guidelines in October 2025 to promote cross-border rupee settlement. Authorised Dealer Banks' overseas branches can now open INR accounts for residents outside India, facilitating settlement of all permissible current and capital account transactions. This is a significant liberalisation for NRI remittances and trade invoicing in INR.

2. 2026 FEMA Amendment — INR Borrowings by Residents from NRIs

The 2026 FEMA amendment has clarified rules around INR borrowings by resident individuals from NRI or OCI card-holding relatives:

• Funds must be received only through NRO/NRE accounts — no cash or foreign account transfers
• Repayment must be from NRO account; amounts cannot be repatriated by the borrower
• Strict documentation requirements for the lending NRI

3. FEMA Compounding — Penalty Cap for Minor Violations

A significant relief: RBI, through April 2025 amendments to Compounding Directions, has capped the compounding amount for miscellaneous non-reporting contraventions at ₹2,00,000 per contravention. Earlier, there was no upper limit — creating uncertainty for inadvertent minor violations. This cap encourages voluntary compounding and faster resolution, especially for NRIs who missed RBI filings.

4. NRI Residential Status — FEMA vs Income Tax: Two Different Tests

Many NRIs confuse residential status under FEMA vs Income Tax — these are legally separate determinations:

• FEMA Residency: Based on intention to stay outside India (not just day-count). An NRI is someone who is not a "person resident in India" under Section 2(v) of FEMA.
• Income Tax Residency: Based on day-count (182 days under 1961 Act; new Tax Year concept under 2025 Act). This governs which income is taxable in India.
• Mismatch Risk: You can be an NRI under FEMA but a Resident under Income Tax in the same year. Get your residency status correctly determined every year to avoid penalties under both laws.

5. NRO to NRE Transfer and Repatriation Rules

Current rules allow transfer of up to USD 1 million per financial year from NRO to NRE account, subject to payment of all applicable taxes and submission of CA Certificate in Form 15CA/15CB. Current account income (rent, interest, business income) can be repatriated freely after tax clearance — there is no separate limit on this type of repatriation.

1. Angel Tax — Permanently Abolished (w.e.f. 1 April 2025)

Through Finance Act 2024, Section 56(2)(viib) — the dreaded "angel tax" provision — has been rendered inapplicable from FY 2025-26 onwards. This means:

• Investments received by any unlisted company above fair market value are no longer taxable under this section
• Applies to all investors — Indian residents, NRIs, and foreign investors alike
• Removes a major barrier to startup fundraising that had plagued founders for over a decade

2. Section 80-IAC — 100% Tax Holiday Extended to April 2030

DPIIT-recognised startups can now claim 100% income tax exemption on profits for any 3 consecutive years out of the first 10 years from incorporation, subject to IMB (Inter-Ministerial Board) certificate.

• Eligibility window extended: Now covers startups incorporated up to 1 April 2030
• DPIIT recognition alone is not enough — you must separately file for the IMB certificate with the Income Tax Department
• 187 startups were approved for tax exemption in the 79th and 80th IMB meetings (May 2025)
• Processing: Recognition takes 2–5 working days; 80-IAC exemption takes 3–9 months

3. Other Startup Tax Benefits Still in Force

• Section 54GB: Capital gains exemption for individual/HUF investors who invest sale proceeds of long-term assets (including property) into eligible startup equity
• Section 54EE: Reinvestment of LTCG into DPIIT-notified startup funds (up to ₹50 lakh, 3-year lock-in)
• Section 79: Carry-forward of losses is protected through funding rounds — even if more than 51% shareholding changes (special exemption for startups)
• Patent fee rebate: 80% reduction in patent filing fees for DPIIT-recognised startups
• Self-certification compliance: Exemption under 9 environmental and labour laws

4. DPIIT Recognition Process — 2025 Update

Applications are processed through the National Single Window System (NSWS) and Startup India portal. Eligibility: Private Limited Company, LLP, or Partnership Firm with turnover below ₹100 crore, incorporated less than 10 years ago, working on an innovative product or service with scalable business model.

1. Short-Term Capital Gains on Equity — Now 20% (w.e.f. July 2024)

Under amended Section 111A, the tax rate on short-term capital gains (STCG) for STT-paid equity shares, equity mutual funds, and units of business trusts was increased from 15% to 20% effective Budget 2024 (FY 2024-25 onwards). Applies to shares held for less than 12 months. This is a significant increase that affects active traders and investors.

2. Long-Term Capital Gains — Complete Rate Table FY 2025-26

3. Capital Gains Exemptions When Selling Property

• Section 54: Reinvest LTCG from residential house into another residential house within 1 year before or 2 years after sale, or construct within 3 years. Exemption capped at ₹10 crore.
• Section 54EC: Invest LTCG up to ₹50 lakh in specified bonds (NHAI, REC) within 6 months of sale. Lock-in period: 5 years.
• Section 54F: For non-residential property sellers — if you invest the entire net sale consideration (not just the gain) in one residential house within 2 years, full exemption is available.

What Is IMS and Why Was It Introduced?

IMS is a new facility on the GST portal where every invoice uploaded by your supplier in their GSTR-1 appears for your review. Earlier, ITC was automatically populated into your GSTR-3B from GSTR-2B. Under IMS, this auto-population has been withdrawn. You must now actively manage each invoice — or lose the credit.

How IMS Works — Step by Step

• Step 1: Supplier files GSTR-1. Invoice immediately appears in your IMS dashboard.
• Step 2: You review and take action: Accept (confirm you received the supply and want ITC), Reject (return to supplier), or Keep Pending (for limited scenarios only).
• Step 3: Only accepted invoices flow into your GSTR-2B and are eligible for ITC in GSTR-3B.
• Step 4: GSTR-3B ITC fields are auto-populated from accepted invoices only. No manual override is allowed on tax liability.

What Can Be "Kept Pending"?

GSTN has clarified that only specific documents can be kept pending in IMS for one tax period:

• Credit notes received from suppliers
• Upward amendment of credit note
• Downward amendment of credit note where original CN was rejected
• Downward amendment of Invoice/Debit Note only where original was already accepted and GSTR-3B filed

ITC Reversal and Credit Notes — New Legal Rule (Amended Section 34(2))

Effective 1 Oct 2025: A supplier can only reduce their tax liability through a credit note if the recipient has already reversed the corresponding ITC. This is a legal condition, not just a portal requirement. If your supplier issues a credit note, you must reverse your ITC first — or the supplier's return will be blocked, affecting your business relationship.

IMS Best Practices for Your Business

• ✅ Review IMS dashboard every week — not just before filing deadline
• ✅ Reconcile your purchase register with IMS before accepting invoices
• ✅ Audit your vendor list — only work with GST-compliant vendors who file GSTR-1 on time
• ✅ Keep bank details on GST portal updated (name-match verified); suspended GSTIN cannot generate e-way bills
• ✅ Train your accounts team on IMS workflow — this is now a core compliance skill

1. Determining Your Residential Status — Two Different Tests

Under Income Tax Act 1961 (applicable for FY 2025-26):

• Resident: In India for 182+ days in the FY, OR 60+ days in FY and 365+ days in preceding 4 FYs
• NRI: Does not satisfy either condition above
• RNOR (Resident but Not Ordinarily Resident): Was NRI in 9 of last 10 years, OR in India for 729 days or less in last 7 years

2. What Income Is Taxable for an NRI in India?

3. DTAA — Avoid Double Taxation Legally

India has Double Tax Avoidance Agreements (DTAA) with over 90 countries including USA, UK, UAE, Canada, Australia, and Singapore. Under DTAA, you may be able to:

• Claim credit for taxes paid in India against your foreign country's tax liability (Tax Credit method)
• Claim beneficial tax rates — e.g., lower TDS on interest or dividends under specific DTAA articles
• Claim exemption where income is exclusively taxable in one country under the treaty

4. Which ITR Form for NRIs?

Most NRIs file ITR-2 (capital gains, rental income, salary, interest). If an NRI has business income in India, ITR-3 or ITR-4 may apply. NRIs can now file ITR completely online — no need to visit India or sign physical documents.

5. Form 15CA/15CB for Remittances — Updated April 2026

Before remitting money abroad from India (repatriation from NRO account, payment to foreign entity), Form 15CA (taxpayer declaration) and Form 15CB (CA certificate) must be filed online. Note: Forms have been renumbered under the new Income Tax Rules, 2026 from April 2026. Verify current form numbers with your CA before filing any remittances.

Tax Treatment — Pvt Ltd vs LLP

For companies with significant profits, the Pvt Ltd structure at ~25.17% effective rate is often competitive. For professional services firms with modest surplus, LLP avoids double taxation on distributions.

Compliance Burden — Annual Requirements

• Private Limited Company: Annual ROC filings (Form AOC-4, MGT-7), statutory audit mandatory regardless of turnover, board meetings, XBRL filing if applicable — approximately ₹40,000–₹1,50,000/year in compliance costs
• LLP: Annual return (Form 11), Statement of Accounts (Form 8), audit mandatory only if turnover exceeds ₹40 lakh or capital exceeds ₹25 lakh — lower compliance burden for small firms

FDI and Investor Eligibility

• Private Limited: Full FDI permitted under automatic route in most sectors. Preferred by institutional investors and VCs. ESOP issuance possible. SEBI-regulated securities.
• LLP: FDI allowed under automatic route only in sectors where 100% FDI is permitted AND there is no performance-linked condition. Not eligible for ESOP. Foreign investors generally prefer Pvt Ltd for ease of exit.

Conversion and Winding Up

Pvt Ltd to LLP conversion is possible under the Companies Act but involves tax implications and stamp duty. LLP to Pvt Ltd conversion is more complex and expensive. Winding up of LLP is simpler under the LLP Act compared to Pvt Ltd under the Companies Act/IBC. Strike-off of dormant Pvt Ltd takes 3–6 months; LLP dissolution is typically faster.

1. Tax Rate on VDA Gains — Section 115BBH

Under Section 115BBH introduced by Finance Act 2022 (effective FY 2022-23 onwards, unchanged for FY 2025-26):

• All gains from transfer of Virtual Digital Assets (Bitcoin, Ethereum, NFTs, any crypto) are taxed at a flat 30% rate plus 4% health and education cess = effective 31.2%
• No deduction is permitted except cost of acquisition (your purchase price only)
• No mining costs, no exchange fees, no transaction charges are deductible
• No set-off: Loss from one VDA cannot be set off against profit from another VDA, nor against any other income (salary, business, share capital gains)
• No carry-forward of VDA losses to future years

2. TDS on VDA Transfers — Section 194S (1% TDS)

Since July 2022, a 1% TDS is deducted on every VDA transfer above ₹10,000 per year (₹50,000 per year for specified individuals). This applies to all exchanges and P2P transfers in India.

• Indian exchanges (CoinDCX, WazirX, Zebpay etc.) deduct 1% TDS automatically and report in Form 26AS
• For offshore exchanges (Binance, Kraken etc.), the buyer is responsible for deducting and depositing TDS — this is a compliance trap many investors miss, leading to penalties
• TDS deducted can be claimed as advance tax credit in your ITR to reduce final tax liability

3. What Counts as a "Transfer" — All Taxable Events

• ✅ Selling crypto for INR or any fiat currency
• ✅ Swapping one cryptocurrency for another (e.g. BTC to ETH — this is a taxable event)
• ✅ Using crypto to purchase goods or services
• ✅ Receiving crypto as a gift (taxable in recipient's hands as income from other sources)
• ✅ Airdrop / hard fork — taxable as income at fair market value on receipt
• ✅ Mining rewards — treated as business income, not capital gains

4. How to Report Crypto in Your ITR — Schedule VDA

VDA gains are reported in Schedule VDA in ITR-2 or ITR-3. For each transaction, you must provide: date of acquisition, cost of acquisition, date of transfer, and sale consideration. Match with Form 26AS for TDS credits. Exchange P&L statements downloadable from Indian exchanges help with this reconciliation.