NRIs 360



Types of ADs
An AD Category-I is a bank specifically authorised by the RBI to deal in forex and foreign securities. For providing greater reach, the RBI grants licenses to certain entities by authorising them as AD Category-II or Category-III or Full Fledged Money Changers to undertake a range of non-trade current account transactions. All transactions undertaken by a Resident that do not alter his assets or liabilities, including contingent liabilities, outside India are current account transactions.

List of activities handled by different categories is available on www.fedai.org.in.

Currency
The definition includes debit cards, ATM cards or any other instrument by whatever name called that can be used to create a financial liability.

Know Your Customer (KYC) Compliance
Investments of all investors related with banks, Depository Participants for shares, units for MFs, life and general cover for insurers, etc., should be compliant with ‘KYC’ and also Anti Money Laundering guidelines. It is also mandatory to possess a PAN in most cases. Each of these entities required separate KYC, causing a lot of inconvenience to the investors. Fortunately a Centralised KYC (CKYC) was established w.e.f. 1.2.17 to allocate a number to new applicants and the current KYC-compliant investors. Unfortunately CKYC has not yet seen daylight. Sec. 139AA requires every person eligible to obtain Aadhaar number shall, on or after 1.7.17, quote it in the return of income furnished by him. In a circular issued by UIDAI, it is clarified that NRIs/PIOs/OCIs are exempt from obtaining Aadhaar. However, those with valid Indian passport can apply for Aadhaar on arrival, without the 182-day waiting period.
Prohibited Transactions
An ROI shall not make investment in India, in any form directly or through any entity, whether incorporated or not, which is engaged or proposed to be engaged in —
a) Chit fund or Nidhi Company.
b) Agriculture or plantation activities. These exclude —
c) Floriculture, Horticulture, Development of seeds, Animal husbandry, Pisciculture, Cultivation of vegetables, mushrooms, etc., under controlled conditions and Services related to agro and allied sectors and Plantations (other than tea plantations).
d) Housing and real estate business or construction of farm houses. ‘Real estate business’ means dealing in land and immovable property with a view to earning profit therefrom and does not include development of townships, construction of residential commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional level infrastructure. Further, earning of rent income on lease of the property and also investment in units of Real Estate Investment Trusts (REITs) shall not be treated as real estate business.
e) Trading in Transferable Development Rights (TDRs). This is a certificate issued in respect of land acquired for public purpose by government for surrender of land by the owner without monetary compensation. These are transferable in part or whole.
f) Lottery, gambling and betting in casinos or otherwise, including government, private or on-line lotteries.
g) Partnership firms and proprietorship concerns having investments as per FEMA are not allowed to be engaged in print media sector.
h) Retail Trading except single brand product retailing
i) Atomic Energy.
j) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
The same restrictions are applicable to a Resident in respect of the amount borrowed, if any.
Prohibited Remittances
Prohibited remittances out of India by any person or entity are ––
1. Income from lottery winnings, racing, riding, or any other hobby.
2. For purchase of lottery tickets, banned or proscribed magazines, football pools, sweepstakes, etc.
3. Payment of commission on exports of equity investment in Joint ventures or wholly owned subsidiaries abroad of Indian companies or on exports under Rupee State Credit Route except commission up to 10% of invoice value of tea and tobacco.
4. Dividend by any company to which the requirement of dividend balancing is applicable.
5. Payment related to ‘Call Back Services’ of telephones.
6. Drawal of exchange for travel to Nepal or Bhutan and also transactions with a person resident therein, unless specifically exempted by the RBI by general or special order.
However, remittance of prize money or sponsorship of sports activity abroad by a person other than international, national or state level sports bodies, if the amount involved exceeds US$ 1 lakh requires permission from Ministry of Human Resources Development, Department of Youth Affairs and Sports.
Prohibited Foreign Contributions
Sec. 4 of Foreign Contribution (Regulation) Act, 1976 (FCRA) prohibits acceptance of foreign contribution by any candidate for election, correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper, judges, government servants or employees of any corporation, members of any legislature, political party or its office bearers. Associations having a definite cultural, economic, educational, religious and social programme should get themselves registered with the Ministry of Home Affairs, before receiving any foreign contributions. These should be received only through a designated bank branch as specified in the application for registration. Those who are not registered with the ministry may obtain prior permission of the Central Government. Indian citizens abroad do not fall in the purview of ‘foreign source’ and therefore do not attract the provisions of FCRA.
Prohibition on Export of Antique Indian Coins
No person shall take or send out of India the Indian coins which are covered by the Antique and Art Treasure Act, 1972.
Transactions with Terrorist Countries
Capital account remittances directly or indirectly to countries identified by the Financial Action Task Force (FATF) as ‘non-cooperative countries and territories’ and remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism, are banned. Further, AP (Dir) Circular 28 dt 25.1.17 prohibits an Indian Party from making direct investment in an overseas entity (set up or acquired abroad directly as JV / WOS or indirectly as step down subsidiary) located in such countries. The list of these is available on www.fatf-gafi.org.
Repatriation v Remittance
Repatriation is sending money abroad which was originally remitted from abroad. Such an amount received from abroad can be credited o NRE account and is repatriable. This amount along with income generated therefrom can be sent outside India without any restrictions. It is mandatory for all the receipts and dispatches to be made through normal banking channels.
       Funds on non-repatriable basis cannot be remitted abroad. The income from such funds or their maturity proceeds should be credited only to the NRO accounts. Depositor transferring funds from NRE to NRO loses repatriability.
Repatriation Subject to Tax Compliance — Forms 15CA/CB
Sec. 195 mandates application of TDS (= withholding tax) from payments made or credit given to NRIs at the rates in force. RBI also requires that except in cases of specifically exempted personal remittances, no remittance shall be allowed to an NRI unless he has obtained a no objection certificate from the Department. Such a certificate is not required if the NRI submits a letter of undertaking (Form 15CA) along with an accountant’s certificate (Form 15CB) stating that tax, if applicable has been paid on the amount contemplated to be repatriated or transferred to his NRE account.
To monitor and track transactions properly, Circular 04/2009 dt 29.6.09 has laid down the following revised procedure: Remitter obtains certificate of Accountant (Form-15CB). Remitter accesses www.tin-nsdl.com.
Takes printout of the undertaking (Form-15CA), fills the remittance details, signs it electronically and uploads it.
Takes printout of filled Form-15CA with system generated acknowledgement number.
Submits both the forms to the AD in duplicate. If the remitter has obtained a certificate from AO for applying tax at lower or nil rate, this certificate is required to be submitted in place of Form-15CB.
AD remits the amount.

In the case of NRIs who do not maintain NRO account and have no taxable income in India, ADs can allow remittances after obtaining a simple declaration from them.
      GSR 978(E) dt 16.12.15 states that Form 15CB is required only if such payment made to an NRI is chargeable to tax and it exceeds ` 5 lakh. Sec. 271J levies penalty on an accountant, merchant banker or registered valuer who furnish the incorrect information in a report or certificate. The amount of penalty shall be ` 10,000 for each such inaccurate report or certificate.
Capital Account Transactions
These are transactions altering assets or liabilities, including contingent liabilities, outside India of Residents or ROIs such as —
For Residents

(a) Investment in Foreign Securities.

(b) Forex loans raised in India and abroad.

(c) Transfer of immovable property outside India.

(d) Guarantee in favour of an ROI.

(e) Export, import and holding of currency or currency notes

(f) Loans and overdrafts from and to an ROI.

(g) Maintenance of forex accounts in or outside India.

(h) Taking an insurance policy from an insurer outside India.

(i) Remittance outside India of capital assets.

(j) Sale and purchase of forex derivatives in India and abroad and commodity derivatives abroad.

For ROIs

a) Investment in securities issued by a body corporate or an entity in India and contribution to the capital of a firm or a proprietorship concern or an AOP in India.

b) Acquisition or transfer of immovable property in India.

c) Guarantee in favour of an ROI.

d) Import, export and holding of currency or currency notes.

e) Forex accounts in India.

f) Remittance outside India of capital assets in India.

Current Account Transactions These include —

a) Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business.

b) Payments due as interest on loans and as net income from investments.

c) Remittances for living expenses of parents, spouse and children residing abroad, and.

d) Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Tax liability in India is directly determined by residential status of an assessee under ITA and it depends on change in such status.

There are 3 such statuses —

1. Resident and Ordinarily Resident (ROR),

2. Resident but Not Ordinarily Resident (RNOR), and

3. Non-Resident Indian (NRI).


ROR

An individual is treated as a Resident (ROR) for the FY (April to March) if he satisfies, during the year, any one of the following 2 conditions — He is in India for at least a period or periods amounting in all to —

a) 182 days in the FY, OR

b) 365 days out of the preceding 4 FYs AND 60 days in the FY

Most of those going for the first time may not be eligible to be an NRI because of the ‘b’ clause above which allows stay in India only for 60 days. This problem is bypassed by the following additional provisions —

i) Where an Indian citizen leaves India in any year for the purpose of employment, or as a member of a crew of an Indian merchant ship, the period of ‘60 days’ is to be replaced by ‘182 days’. Consequently, an Indian citizen going abroad for employment can stay in India up to 181 days for obtaining NRI status for that very year, even if he is in India for 365 days or more during the 4 preceding years.

ii) When an Indian citizen or a person of Indian Origin (PIO) who is abroad comes to visit India, the period of ‘60 days’ is to be replaced by 182 days.

Finally, an NRI is a person who is not a Resident

The condition-i is applicable only to Indian Citizens and not PIOs whereas condition-ii is applicable to both of them. None of them is applicable to rank foreigners. Moreover, the person going abroad may be either employed in India or abroad.

For those who return to India permanently (not on a visit), the period of ‘60 days’ is not replaced by 182 days. Consequently, anyone who has been in India for 365 days or more in the preceding 4 years and returns before February finds that his NRI status is lost right from the year of his return.


RNOR

To mitigate the shock of an NRI suddenly becoming a Resident, after returning to India permanently there is a transitional status of RNOR

An RNOR is an individual who —

a) has been an NRI in 9 out of the 10 previous years preceding that year, or

b) has, during the 7 previous years preceding that year, been in India for a period of, or periods amounting in all to 729 days or less.

If a Resident person is not an RNOR he is an ROR.

Consequently, those returning after being NRIs for 5 continuous years or less, immediately become Residents. Those returning after 6 years may become RNORs for one year whereas others, including those after being NRIs, for say, 25 years may become RNOR for 2 years at the most.

However, in rare cases a person can become an RNOR for 3 years.

Note that ---

1. A person can be treated as a Resident of two or more countries at the same time.

2. India includes the territorial waters. Thus a person in a yacht moored around the shores of India would be staying in India.

3. Indian ships operating beyond the Indian territorial waters are treated as not in India.

Taxability Depends on Status

ROR: The total income of a person who is a Resident includes all income from whatever source derived which —

a) is received or is deemed to be received in India in such year by or on behalf of such person; or

b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

c) accrues or arises to him outside India during such year.

Many NRIs go in for cumulative deposits under the wrong impression that the tax becomes applicable in India only when the interest is actually received. Sec. 5(2) leaves no room for any doubt or ambiguity, that if an effective and final conclusion can be drawn, on the issue of accrual of income to a Non-resident, the actual date of receipt is inconsequential — Smt. Trishla Jain v Income-tax Commissioner [ITR 43 to 48 of 1991].

RNOR:Tax liability of an RNOR is the same as that of an NRI. In other words, his forex income is not taxable in India. There is only one exception. In the case of RNOR, income received and accrued outside India from a business controlled in or a profession set up in India continues to be taxable in India.

NRI: On the other hand, an NRI is not liable to tax on income accruing or arising outside India, even if it is remitted to India. As per Sec. 5, he is liable to pay tax only in respect of income received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India by or on behalf of such person.

Income ‘received or deemed to be received’ in India has a strange and illogical aspect. You may be taken unawares if and when it bites. The receipt of income refers to the very first occasion when the recipient gets the money under his control. Once an amount is received as income abroad, any remittance or transmission of the amount to any other place, including India, does not result in receipt of income at other place. The position will remain the same if income is received outside India by an agent of the assessee who later on remits it to India. The same income cannot be received by the same person twice, once outside India and once within India — Keshav Mills Ltd. v CIT (1953) 23ITR230 (SC).

    Take care!

Residential Status under FEMA
This is very complicated. It varies from Rule to Rule. The complication gets further confounded because the definition as per ITA is different from that of FEMA. Sec. 2(u) of FEMA defines a ‘person’ to include —

a) an individual,

b) an HUF,

c) a company,

d) a firm,

e) an AOP or BOI, whether incorporated or not,

f) every artificial juridical person, not falling within any of the preceding sub-clauses, and

g) any agency, office or branch owned or controlled by such a person.

Sec. 2(v) defines a person Resident to mean —

1. A person residing in India for more than 182 days during the course of the preceding FY but does not include:

(A) A person who has gone out of India or who stays outside India, in either case, for the following 3 purposes —

      (a) for or on taking up employment outside India, or

      (a) for carrying on outside India a business or vocation ,or

      (b) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

(B) A person who has come to or stay in India, in either case, otherwise than the following 3 purposes:

      (a) for or on taking up employment in India, or

      (b) for carrying on in India a business or vocation in India, or

      (c) for any purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

2. Any person or body corporate registered or incorporated in India.

3. An office, branch or agency in India owned or controlled by a person Resident outside India.

4. An office, branch or agency outside India owned or controlled by a person Resident.

A person Resident Outside India (ROI) means a person who is not a Resident.

Comments
ITA deals with previous year and FEMA with preceding year. What is the effect?
The definition for ITA begins by stating — “An individual is treated as a Resident for the FY…”. In other words, one cannot be a Resident for part of the year and a Non-resident for the rest of the year. That is not so for FEMA. The person becomes an NRI from day-1 when he leaves Indian shores and becomes a Resident from day-1 when he returns to India permanently.
Since for ITA the status gets crystallised only when the year is over, the status depends upon previous year. This is the reason why FEMA definition depends upon preceding year. This is also the reason why ITA requires stay in India of ‘182 days or more’ whereas FEMA requires ‘more than 182 days’!

      Yes, very complicated indeed.

Person of Indian Origin (PIO)

FEMA defines a PIO to mean —

A citizen of any country other than Bangladesh or Pakistan, if —

a) He at any time held an Indian passport, or

b) He or either of his parents or any of his grand parents was a citizen of India by virtue of the Constitution of India or Citizenship Act, 1955.

c) The person is a spouse of an Indian citizen or of a person referred to in (a) or (b) above.

PIO includes an ‘Overseas Citizen of India’ cardholder within the meaning of Sec. 7(A) of the Citizenship Act, 1955

The definition of PIO differs from Rule to Rule.

These provisions related with ‘Deposits’ and ‘Remittance of Assets’ where the citizens (or an incorporated entity) of Bangladesh or Pakistan are excluded. This exclusion is expanded to citizens of Sri Lanka for the provisions related with ‘Investment in Firm or Proprietary Concern in India’ or ‘Purchase shares or convertible debentures or preference shares of an Indian company’ and further citizens of Afghanistan, China, Iran, Nepal or Bhutan for Rule related with ‘Acquisition and Transfer of Immovable Property in India’.

For ITA, Explanation to Sec. 115C states that a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand parents, was born in undivided India.

What if such a person was born in divided India? Well, any person born in any place which was part of undivided India can be treated as born in undivided India even if the person was born after 15.7.47.

Sec. 2(25A) of ITA proclaims that India includes, for the purpose of Residentship, Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry in respect of any period. Even when these parts were not a part of India, still, by a fiction of law, these territories will be deemed to have been part of India and the question of residence will have to be decided on the basis of this fiction.

FEMA depends upon the Constitution of India or Citizenship Act. This may result in the same person being treated as PIO for ITA and not for FEMA and vice versa.

These small differences result in large confusions.

Indian Students Studying Abroad

Through Circular 45 dt 8.12.03, RBI has declared that for the purpose of FEMA, students will be treated as NRIs as soon as they go abroad for studies.

We strongly feel that the ITA definition of NRI should have been changed simultaneously. A student does not go abroad for the purpose of employment. Therefore during the very first year of his going abroad, the clause ‘365 days out of the preceding 4 FYs AND 60 days in the FY’ will sink its teeth into him and treat him as a Resident for ITA unless he is in India for less than 60 days.

Consequently, those who desired to send some money to their family members in India are forced to take recourse to the illegal hawala route.
Foreign Students in India
Anyone who had come to India for study or training and has completed it, may remit the balance in his accounts, provided such balance represents funds derived out of remittances received from abroad or rupee proceeds of forex brought and sold to an AD or out of stipend/scholarship received from the government or any organisation in India.
Not Permanently Resident
A person with a foreign passport, Resident for employment of specific duration, irrespective of its duration, or for non-specific duration of not longer than 3 years, is defined by FEMA as a ‘Person not Permanently Resident’ (= Expatriate).

Such a person has the following privileges and restrictions:

1. He should own a normal Resident bank account and not NRI-related NRO, NRE or FCNR accounts. While leaving India after employment, he can redesignate his Resident account as NRO to enable him receive his legitimate dues. The debit to the account should be only for the purpose of repatriation abroad subject to the US$ 1 million per FY under the general facility for NRIs.

2. He may possess forex, without any limit, in the form of currency notes, bank notes and travellers cheques, only provided he had acquired, held or owned it when he was an ROI and had brought it into India through legal channels, including baggage. It is absolutely necessary to fill the Currency Declaration Form (CDF) only if the total forex brought through baggage is above US$ 10,000. Nonetheless, it is advisable for him to file CDF even if the amount is less than this limit. Similarly, for each subsequent inward remittance he should obtain an Encashment Certificate Form (ECF). Moreover, he should get Form-BCI from the banks while purchasing DDs, MTs, TTs, etc. This then will he be able to repatriate unspent forex without any hassles.

3. No tax is payable in India if the conditions relating to short stay exemption under the relevant tax treaty are met with. For example, under the Indo-US tax treaty, if the US Resident is deputed to India for less than 183 days in an FY and the salary is paid by the US company, such employee would be taxable only in US even on salary relating to work carried out in India.

4. ADs can allow a citizen of a foreign state other than Pakistan to remit for maintenance of his close relatives abroad, amount up to his net salary after deduction of taxes, contribution to PF, etc. The same facility is extended to a citizen of India, who is on deputation to India of a foreign company. A problem arises when the expatriate comes to India along with his family but still has to meet his personal liabilities abroad.

5. In case the employee is tax equalised (his Indian tax liability is borne by the employer in India), the employer can pay whole of his salary outside India. TDS is applicable on salary even if the employer is not Resident. If any refund becomes due to the employee, after he has already left India and has no bank account in India by the time the assessment orders are passed, the refund can be issued in favour of the Indian employer as the tax has been borne by him — Circular 707, dt 11.7.95.

6. Unfortunately, AAR has held on the application made by Caterpillar, a US Company, that the salaries of the non-resident technicians paid in the US by the parent company for work carried out in India would be taxable in India. However, reimbursement of living expenses paid to non-resident technicians in India, by the Indian subsidiary or joint venture company would be exempt u/s 10(14). Very confusing indeed

Deputies — Hardships and Confusion
Thankfully, students are treated as NRIs. The authorities should have extended similar benefit to deputies (= employees sent on secondments) of Indian companies, placed abroad or created yet another special category like ‘Not Permanently Resident’. The tax provisions on the income of such deputies are riddled with a lot of confusion and resultant hardships and litigations.
Hardship-1: Per Diem Allowance
Living allowance paid in addition to the regular salary to cover expenses incurred wholly, necessarily and exclusively in performance of office duties to the employees of Indian company who are on deputation is exempt from tax u/s 10(14)(i). Department wanted to tax any savings effected out of such allowances.
The ITAT held that it is not open to the revenue to call for the details of expenses actually incurred unless the specific allowances are disproportionately high compared to the salary received by him or unreasonable with reference to the nature of the duties performed by the taxpayer — CIT v Sakakibara Yutaka [2012] 25taxmann.com557 (HC Delhi).
Hardship-2: Salary Received Abroad
A deputy would face tax in India on ‘Residence’ basis and in the overseas country on ‘Source’ basis.
The employee can claim a short stay exemption (less than 183 days during the FY) on salary paid by the Indian employer under the ‘Dependent Personal Services’, if the DTAA or the domestic tax laws of the host country have such a provision. If the employee is fully taxable abroad, he can claim credit for taxes paid abroad against his Indian tax liability for the same income.
Hardship-3: Employer Pays Tax
ITOs often take the stance that salary costs reimbursed by the Indian company under the secondment agreement are in the nature of technical service fees, warranting a withholding tax in India. Bangalore Tribunal has held that due consideration should be placed on the substance of the secondment agreement, which clearly proves that the real and economic employer of the seconded employee is the Indian company, even though he is on the payroll of the foreign company. Consequently, the services are not technical in nature.
Hardship-4: Foreign Taxes
Payment of foreign taxes by the Indian employer also has a problem. Fortunately, it can be solved by giving a loan to the employee. The notional interest may be liable to tax in the hands of the employee. Consequently, as and when the employee receives the tax refund, he would need to repay it to his employer.
Hardship-5: Filing Tax Returns Abroad
The FY is April-March in India and January-December in most of the overseas countries.
Hardship-6: Returns of Spouses
Certain countries require spouses accompanying the employees to file overseas returns based on their stay abroad. Some others require joint filing which attract some tax advantages. Since there is no such provision in India, the deputies are forced to forego the advantage. Yes, in the erstwhile states under the dominion of Portugal, viz., Goa, Daman, Diu, Dadra and Nagar Haveli system of ‘Community of Property’ continues to prevail which is similar but not same.
The Worst Hardship-7: Social Security
India had, w.e.f. 1.11.08 made it mandatory for International Workers (IWs) to contribute to Employee Provident Fund and Employee Pension System, as for local workers. Previously, IWs were eligible to withdraw the accumulated EPF after the end of their employment in India. Now IWs can withdraw only after they have reached 58 years of age. The amount is taxable in India if the contributions are for less than 5 years unless such withdrawals are due to total incapacity to work or suffering from prescribed diseases or on grounds specified in the Social Security Agreement (SSA), which India has signed with 12 countries.
W.e.f. 1.12.11, expatriates coming from SSA countries are allowed to withdraw on completion of the Indian assignment the amount in his bank account
Rates
The tax rates are applicable as per the following Table:

Income Tax Rates — Individuals & HUFs
Net Taxable Income Slab
Rs
Tax at Minimum
Rs
Marginal Rate
Rs
Up to 2,50,000 Nil Nil
2,50,001 – 5,00,000 Nil 5
5,00,001 – 10,00,000 12,500 20
Over 10,00,000 1,12,500 30
The tax amount is increased by cess @4% This cess is applicable on normal tax, surcharge, TDS, advance tax, excise, custom, etc.

 
Tax at Minimum
Rs
Marginal Rate
Rs
Up to 10,00,000 1,12,500
Addtional 2,20,000 66,000
Total 12,20,000 1,78,500
Cess @ 4%   7,140
Net Tax Payable   1,90,955

Example: Mr. Date, (senior citizenship advantages not available to NRIs) has earned a total income, after deductions u/ss 80C, 80D, etc., of ` 12,20,000. His tax liability is as worked out in the alongside table.
Tax on Rich & Super Rich — Surcharge
A surcharge is a tax on tax and is a close cousin of cess. It was first introduced by FA13 @10% of income tax on every individual, HUF, AOP, BOI, whether incorporated or not, and every artificial juridical person whose income exceeds ` 1 crore. This surcharge was increased at 12% by FA15 and further increased at 15% by FA16. FA17 has roped in assessees having income exceeding ` 50 lakh but not exceeding ` 1 crore.
FA19(2) had introduced 2 more slabs ---i) 25% on total income exceeding ` 2 crore but not exceeding ` 5 crore; and ii) 37% on total income exceeding ` 5 crore. All this essentially means that those persons who have income over ` 5 crore have to pay a whopping marginal tax @42.7440%! Fortunately, these provisions have now been rescinded by the FM Ms. Nirmala Sitaraman.
A marginal relief is put in place ensuring that the total income over each threshold does not exceed the tax payable.
For clarity on marginal relief, take the case of a person earning income of ` 51,35,309. At this level of income his tax liability is 13,53,093 on which surcharge @10% is ` 1,35,309. This surcharge is exactly same as the income over ` 50 lakh. Below this level of income, the surcharge will be higher than income. Charging surcharge which is higher than the extra income will be unkind. Therefore, the revenue is satisfied with charging only the extra income as surcharge and not 10%.
Only For Residents

The following provisions are applicable only to Residents —

a) The tax threshold for ‘senior citizen’ (over 60 years in age) is ` 3 lakh and for ‘very senior citizen’ is ` 5 lakh.

b) The tax rebate applicable u/s 87A to the tax zone of ` 2.5 lakh to ` 5 lakh.

c) Tax @10% on dividend income in excess of ` 10 lakh u/s 115BBDA

d) Deduction available to handicapped persons.

Income Exempt from Tax

Following types of income are not treated as taxable income —

Agricultural Income: Sec. 10(1)
This income is tax-free but is aggregated with the other income only for rate, if it exceeds ` 5,000. NRIs are not allowed to purchase any agricultural land or farm house but they can continue to hold on to it if acquired before becoming NRI or inherited after becoming NRI. See the example presented later for meaning of aggregation for rate.
Life Insurance: Sec. 10(10D)

Sums received under a life insurance policy are completely tax-free. Exceptions are i) Keyman Insurance of LIC or like products of other insurance companies and ii) Pension or annuity.

High-premium minimum-risk life policies are similar to deposits or bonds. The premium or other payment made on an insurance policy, other than a contract for a deferred annuity, is limited to 10% of the actual capital sum assured for the exemption. U/s 10(10D), where premium paid in any of the years during the term of the policy, exceeds 10% of the actual capital sum assured, the maturity value received by the policy holder will be fully taxable. However, any sum received under such policy on the death of the policy holder shall continue to be exempt. In calculating the actual capital sum, no account shall be taken of i) the value of any premiums agreed to be returned or ii) bonuses received.
Allowance or Perquisite Paid by Government: Sec. 10(7)
Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for rendering service outside India is exempt.
Co-operative Technical Programme: Sec. 10(8)
The remuneration of an individual serving in India, received directly or indirectly, from a foreign Government in connection with any co-operative technical assistance programme in accordance with an agreement entered into by the Central Government and a foreign Government, is exempt from tax.
Remuneration of Consultant: Sec. 10(8A & 8B)
Any remuneration or fee received by a consultant directly or indirectly out of the funds made available to an international organisation under a technical assistance grant agreement between it and the Government of a foreign State is exempt. — Sec. 10(8A).
Any remuneration or fee received by a consultant directly or indirectly out of the funds made available to an international organisation under a technical assistance grant agreement between it and the Government of a foreign State is exempt. — Sec. 10(8A).
Family Member of Employee: Sec. 10(9)
Foreign income of any family member of an employee referred to in Sec. 10(8) or 10(8A) or 10(8B) referred to above, accompanying him to India is exempt if the family member is required to pay income tax (including social security tax) to the foreign Government.
Allowance Received from UNO
Staff Assessment is an amount appropriated by the UN for its own expenses. This money does not belong to the employee of the UN. U/s 2 of the UN (Privileges and Immunities) Act, 1947 (read with Sec. 18 of the Schedule thereto) the rest of the salary and emolument is exempt from tax in India.
Consequently any pension received by an ex-employee after his retirement is also exempt from tax — Circular 293 dt 10.2.81.
The exemption is limited only to the salary and pension received from UN. The rest of the income will be treated as normal income, on par with other incomes.
The salaries may have been structured by the UN after factoring in this appropriation of monthly staff assessment. Yes, Staff Assessment is tantamount to deduction at source. However, there are no tax concessions on the Indian income earned from the financial assets in India of the employee. The two are unconnected.
Deductions
Some specified deductions are available on income from some specified sources. Contribution made is deductible from gross total income for arriving at the total income on which tax is required to be computed.

Contributions to Specified Schemes: Sec. 80C

Contributions by an individual or HUF to specified schemes u/s 80C qualify for a deduction up to an aggregate ceiling of ` 1.5 lakh from gross total income. There are no ceilings on deductions u/s 80C for individual schemes, unless the Rules of the schemes provide for their own limits. These schemes are —


1. Contributions to i) any life insurance company in India for life cover, ii) LIC deferred annuity, and iii) ULIP and Dhanaraksha in the name of spouse and all children, major or minor, married or otherwise (including married daughters), but not parents dependent or not, are also eligible for the deduction. Same is the case for such instruments taken in the name of any member of HUF by an HUF.
Sums paid or deposited to effect or to keep in force a contract for a deferred annuity is eligible for deduction provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity. If the premium payment exceeds 10% of the actual capital sum assured, only 10% will be eligible for deduction.
Where a taxpayer discontinues an LIC policy before premiums for two years have been paid, the deduction allowed during earlier years shall be withdrawn and shall be deemed to be the income of the year in which the policy is discontinued.
In the case of Life Annuity, the amount of annuity installments will be treated as Income from Other Sources. In the case of Annuity Certain, the interest portion of the annuity installment is treated as income. If Cash Option is exercised, the difference between the amount of cash option received and the total amount of premiums paid is treated as taxable income.

2. Equity-Linked Tax-Saving Schemes of MFs.

3. Payment by an individual or HUF towards cost of purchase or construction of a residential house (not necessarily self-occupied) in respect of —

a) Installment or part payment due under i) any self-financing or other schemes of any development authority, housing board or other similar authority engaged in the construction and sale of house property on ownership basis or ii) any company or co-operative society of which the assessee is a shareholder or member towards cost of house property allotted to him.

b) Repayment of housing loans from i) Central or State Government, ii) any bank including a co-operative bank, iii) deposits in HLA of NHB, iv) LIC, v) a housing finance public limited company, vi) any co-operative society engaged in providing long-term finance for construction or purchase of houses in India, vii) employer, if the employer is a public company, viii) PSU, ix) university and its affiliated colleges, ix) a local authority or x) a co-operative society and xi) an employer being an authority, board, corporation, or any other body established under a Central or State Act.

c) Stamp duty, registration fee and other expenses incurred on transfer. This payment need not flow from borrowed funds.

These expenses shall not include:

a) admission fee, cost of share or initial deposit,

b) cost of any addition, alteration, renovation or repairs carried out after the issue of the completion certificate or the house is occupied by the assessee or it has been let out, and

c) any expenditure where a deduction is separately allowed u/s 24.

Such a house is required to be held for a minimum period of 5 years from the end of the FY in which its possession was taken. If the house is sold earlier, aggregate deduction claimed shall be added to the normal income of the assessee for the year during which the house is sold. The same tenet is applicable when the assessee receives the money back whether by way of refund or otherwise.

4. Tuition fees paid, whether at the time of admission or thereafter, to any university, college, school or other educational institution situated within India for the purpose of full-time education of any two children of the individual. However, the eligible amount shall not include any payment towards any development fees or donation or payment of a similar nature.

The concession is available to each of the parents, if eligible, even in respect of the same child, on their respective payments.

5. A 5-year term deposit of a scheduled bank eligible for deduction.

Limit on Deductions u/s 80D — Mediclaim

For obvious reasons, health insurance on self from an Indian insurer is not useful to NRIs. However, they can claim the deduction on such insurance taken for their family members in India.
The amount of deduction is ` 50,000 for senior citizens if they are not covered by health insurance. In view of this, it is advisable not to cover your parents in your family policy if they are senior citizens. The premium for family policy depends on the age of the oldest member of the family besides the sum assured. Getting independent covers for each family member can sometimes be cheaper.
For non-seniors, this deduction covers health insurance premiums paid, along with expenses incurred on preventive health check-up, by an individual for himself and his family up to ` 25,000. A similar deduction is also available to HUF for any of its member.
In the case of single premium health insurance policies having cover of more than one year, the deduction shall be allowed on proportionate basis for the number of years for which health insurance cover is provided, subject to the specified monetary limit.

The premium is required to be paid in any mode other than cash, except for preventive check-ups.

Loan for Higher Education: Sec. 80E

Deduction of interest on loan taken by the student or his parents, the spouse, or his legal guardian for full time studies in all fields of studies (including vocational studies) pursued after Senior Secondary Examination from a bank or an approved financial and charitable institution is available for 8 successive years.

If someone takes a loan from his employer for higher studies, he will not be entitled to the deduction, unless the employer himself falls within the category of an approved source.

Donations: Sec. 80G

An assessee is entitled to a deduction of 50% and in some cases 100% of donations made to approved charitable purposes. Some of these donations attract a ceiling of 10% of the total income of the assessee, as reduced by the amount deductible under any other provision of Chapter VI-A.
Such donations must be in the form of money and not in kind, unless the donor is the manufacturer of the items donated — (178ITR171 Saraswati Industrial Syndicate).
The FA17 amended this Section to provide that no deduction shall be allowed in respect of donation exceeding ` 2,000 unless such sum is paid by any mode other than cash.

Interest on Savings Bank Accounts: Sec. 80TTA

A deduction of up to ` 40,000 is available in respect of any interest on bank accounts (savings as well as FDs) of an individual or HUF.
Advance Tax
All taxpayers are required to pay advance tax in spite of the fact that most of their income is subject to TDS.
If the tax payable for the year is ` 10,000 or more, advance tax is payable without having to submit any estimate or statement of income in 4 installments à On or before 1) 15th June : 15%, 2) 15th September: 45% 3) 15th December: 75% and 4) 15th March 100%.
TDS is treated as advance tax paid. A return which is otherwise valid would not be treated defective merely because self-assessment tax and interest payable in accordance with the provisions of Sec. 140A has not been paid on or before the date of furnishing of the return.
Tax Returns
The FY is April-March in India and January-December in most of the overseas countries. Consequently, the deadline for filing the returns in those countries is earlier than that in India. Since some of the crucial data related with Indian tax is not available before this deadline, the NRIs as well as foreign deputies can experience delay in refund of the tax by the Department. This problem is not yet satisfactorily resolved. Some countries, including the USA grant an extension for filing the return on receiving such a request. There is also a facility to file a revised return within a stipulated time period.
The due date for furnishing the returns in India is 30th September for i) companies and ii) assessees as well as working partners of a firm whose accounts are required to be audited. For other assessees the date is 31st July.
NRIs are not required to disclose their overseas bank accounts in their tax returns, unless they are in the refund zone and they have no bank account in India. This particular portion is only meant to facilitate the Department pay the refund and can be left blank, if the NRI so desires.

Most of the NRIs have to file ITR-2.

person of this category who files income tax return for the first time would not be subjected to any scrutiny in the first year unless there is specific information available with the Department. Good! This will surely attract many otherwise hesitant entities to enter the tax net.


Sec. 139(1) requires a person to furnish his return of income if his total income during the previous year without claiming any deductions under Chapter VI-A (Sec. 80C, 80D, etc.). In other words, the return has to be filed even if these deductions bring down the income chargeable to tax below the tax threshold.
Sec. 288B requires any amount payable and the amount of refund due, to be rounded off to the nearest multiple of ` 10.
Sec. 139(5) provides that the time for furnishing of revised return shall be available up to the end of the relevant AY or before the completion of assessment, whichever is earlier. Moreover, Sec. 234F requires a fee for delay in furnishing of return to be levied if the return is not filed within the specified due dates. The fee applicable shall be ` 5,000 if the return is furnished after the due date but on or before the 31st December of the AY and ` 10,000 in any other case. However, where the total income does not exceed ` 5 lakh, the fee amount shall not exceed ` 1,000.
Belated filing suffers from an embargo on carry forward of loss earned during the current year, from business (speculative or otherwise), capital loss and loss from owning and maintaining race horses. Moreover, belated tax returns cannot be revised. The ITO has no powers to condone such a lapse. Fortunately carried forward losses from the earlier years suffer no damage.
A return which is otherwise valid would not be treated defective merely because self-assessment tax and interest payable in accordance with the provisions of Sec. 140A, has not been paid on or before the date of furnishing of the return.

Filing Returns through Representative Assessee

Sec. 163 defines such a person as any person in India who —

a) is employed by or on behalf of the NRI; or

b) has any business connection with the NRI; or

c) is in receipt of any income whether directly or indirectly; or

d) who is a trustee of the NRI; and

e) any other person who has acquired by means of transfer a capital asset in India.


No person is to be treated as an agent of an NRI unless he has had an opportunity of being heard by the Assessing Officer as to his liability to be treated as such. An NRI may also appoint an authorised representative to act as his agent.
E-verification
U/s 140, NRIs having Indian incorporated banks internet banking facility would be able to e-verify their returns/claims, etc., by logging through their internet banking account. Alternatively they can authorise by registering an Indian resident as their agent through their e-Filing account to perform their tasks.
On-line Payment of Income Tax
e-Tax Payment facilitates payment of direct taxes online by taxpayers. To avail of this facility you are required to have a Net-banking/Debit card of the selected Bank.
All that is required is to log on to www.incometaxindia.gov.in or http://tin.tin.nsdl.com and follow the instructions. After payment, account holders would be able to generate the taxpayers’ counterfoil containing the Challan Identification Number (CIN). Before undertaking e-payment, check whether your bank offers this facility.
Annual Information Returns
U/s 285BA read with Rule 114E, the transactions of all persons, including NRIs undertaking any one of the following 7 specified financial transactions, equal to or over specified financial limits are required to be reported to the Department through Annual Information Return (AIR) —
1. Cash deposits in a year in any bank SB account     Rs. 10 lakh
2. Payments in a year credit card                                             2 lakh
3. Purchase of units of a Mutual Fund                                     2 lakh
4. Acquisition of bonds or debentures                                     5 lakh
5. Purchase of shares                                                                  1 lakh
6. Purchase or sale of immovable property                           30 lakh
7. Purchase of RBI bonds                                                            5 lakh
Take care.
How to Compute Tax
The example of computation of tax elucidates the method of computing tax. Note that if there were no agricultural income the tax on normal income of ` 3,50,000 would be only ` 5,000. The agricultural income takes the tax to ` 20,000. Agricultural income is really not totally tax-free. This is in addition to the agricultural tax charged by the State Governments
Computation of Tax



`

`

`

Business Income

4,17,000

4,17,000


House Property




Self Occupied

NIL



Property Given on Rent

1,60,000



Less: Interest on Loan

1,30,000

30,000


Capital Gains STCG on debt MF


11,000


Other Sources




Interest on SB Deposits

52,000


Less: Deduction u.s 80TTA

10,000

42,000


Total Gross Income


5,00,000


Deductions




Equity Linked Saving Scheme

1,30,000



Housing Loan Repayment

50,000



Total / Limited to

1,80,000

1,50,000


Taxable Income


3,50,000


Agricultural income




Non-agricultural Income

3,50,000



Add: Agricultural Income

3,00,000



TOTAL Income

6,50,000



Tax on ` 6,50,000


42,500


Agricultural Income

3,00,000



Add: Threshold

2,50,000



Total / Tax thereon

5,50,000

22,500

20,000

Long-term Capital Gains




Total Sale Proceeds

1,50,000



Less: Indexed Cost

90,000



LTCG


60,000


Less: Contribution to Sec. 54EC


50,000


Taxable LTCG /Tax thereon @20%


10,000

2,000

Total Tax



22,000

Add Cess @ 4%



880

Tax Accrued



22,880

Less : Advance tax Paid


4,000


TDS


16,070

20,070

Tax Payable



2,810

FA15 has abolished the wealth tax. Gift tax was abolished w.e.f. 1.10.98.
Receipt of Gift has become Income
If an individual or an HUF receives from any person any sum of money and/or some specified assets without any or with some inadequate consideration, the aggregate value of which exceeds ` 50,000, the whole of such amount will be treated as Income from Other Sources of the donee. If it does not exceed ` 50,000, it will not be treated as income.
The specified assets are — 1. Cash 2. Land and building. 3. Shares and securities. 4. Jewellery and bullion. 5. Archaeological collections. 6. Drawings, paintings, sculptures or any work of art.
Movable property and immovable property will be considered at its Fair Market Value (FMV) and stamp duty value respectively. If it is received with inadequate consideration, the difference between the FMV or stamp duty and the inadequate consideration shall be taxed as the income, if it exceeds ` 50,000.
Gifts received from following sources are tax exempt ---

a) any relative; or

c) under a Will or by way of inheritance; or

d) in contemplation of death of the payer;

e) from any local authority;

f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in Sec. 10(23); and

g) from any charitable trust or institution registered u/s 12A or 12AA.

h) from an individual by a trust created or established solely for the benefit of relative of the individual.

For ITA ‘relative’ means (differs from FEMA definition. Strange!) —

i) spouse of the individual;

ii) brother or sister of the individual;

iii) brother or sister of spouse of the individual;

iv) brother or sister of either parents of the individual;

vi) any lineal ascendant or descendant of the spouse of the individual; and

vii) spouse of the persons referred in clauses (ii) to (vi).


Definition of relative is a paradox. Suppose I am your mother’s brother. In that case, I am your relative but you are not my relative since you are my sister’s daughter. Yes, I am your relative but you are not my relative. Strange!
The recent FA19(2) has plugged a loop hole, arising of the fact that gifts made by Residents to NRIs are being claimed to be non-taxable in India as the income does not accrue or arise in India. Now it has provided that income arising from any sum of money paid, or any property situate in India transferred, on or after 5.7.19 by a Resident to an NRI shall be deemed to accrue or arise in India. In a treaty situation, the relevant article of applicable DTAA shall continue to apply for such gifts as well.
Clubbing Provision
Yes, the GTA stands omitted but not the clubbing provisions which require income and wealth from assets transferred directly or indirectly without adequate consideration to minor children, the spouse (otherwise than in connection with an agreement to live apart) or daughter-in-law will continue to be deemed income and wealth of the transferor. Same is the case when assets are held by a person or an AOP for benefit of the assessee, the spouse, daughter-in-law and minor children.
Gifts to a daughter-in-law are clubbed but not gifts to a son-in-law.
The entire income of a minor is to be included in the income of that parent whose total income (excluding the income includible) is higher. Where the marriage of the parents does not subsist, income of the minor will be included in the income of that parent who maintains the minor child. Once the income is included in the hands of one of the parents based on these criteria, it shall continue to be included, even if these change, unless the AO is satisfied that it is necessary to do so. Where the income of an individual includes the income of his minor children, an exemption up to ` 1,500 in respect of each minor child can be claimed by the individual u/s 10(32).
A minor earning income by way of manual work or an activity involving application of his skill, talent or specialised knowledge and experience, is directly assessed in the hands of the child. Unfortunately, the income arising from all his investments suffer clubbing. More unfortunately, the provision related with the income of a physically or mentally handicapped minor child being directly assessed in the hands of the child is not applicable to NRIs.
Income on Income
The main advantage of gifts accrues from the fact that in the case of spouse or daughter-in-law, income on income is not clubbed. If the spouse has no other income, no tax is payable unless the interest on interest crosses the minimum tax threshold of ` 2.50 lakh. In other words, instead of investing in your own name it is better to give a gift, pay tax on the income arising from the original corpus gifted and keep on building a corpus for your spouse or daughter-in-law. Yes, it is cumbersome to keep track of what is clubbable and what is not but it may be worth the effort.
Some Useful Tips

1. NRIs cannot open a PPF account or opt for its post-maturity continuation.

Contributions to PPF standing in the name of spouse or minor children attract clubbing. The interest is tax-free, whether clubbed or otherwise. However, if the spouse or minor child is a Resident, surely the NRI can contribute to their PPF accounts and claim deduction u/s 80C.

2. Income of minors up to ` 1,500 is free from clubbing. More the number of minors better is the benefit.

3. Savings made by the wife out of household expenses given by her husband is a separate property of the wife. Any income arising therefrom is not aggregated with the income of the husband.

4. Give gifts to close Resident relatives to take advantage of higher interest obtainable from schemes not available to NRIs.

5. Before the GTA was abolished, aggregate gift over ` 30,000 per FY was taxable @30% and therefore, it was a wise strategy to give a gift up to ` 30,000 per year and build up a corpus for the children and spouse. Now that you can give need-based gifts without any limit there is no need to build a corpus and take the risk of the child running away (and worse, the spouse eloping) with your money.

Do not Purchase House in Spouse’s Name

Purchasing a house in the name of the spouse by applying your own funds means that you are using a name-lender and this is a ‘benami transaction’. This is illegal. It can be made legal by gifting the money to the spouse direcly to enable the spouse purchase the property. An alternative is to gift your house, but this will attract stamp duty and registration charges. The utility, if any, is lost because of the clubbing provisions.
Moreover, if you take a housing loan in your name, you would not be entitled to claim any tax benefits associated with the loan, because the house belongs to the spouse. Further, once you have gifted any repatriable asset, whether cash or the house, you have lost the right to repatriate it.
In short, do not buy a house property (or any other asset) in the name of the spouse. The tax concessions on housing loan can be availed only by the person who owns the house.

Power of Attorney (PoA

This system is quite prevalent in Delhi and Haryana and is slowly percolating to other parts of India. It has the advantage of avoiding the hefty stamp duty. We do not approve this route because — EMIs paid by a PoA holder are on behalf of the original allottee and therefore, the PoA holder cannot claim deduction of interest u/s 24 and capital repayment u/s 80C. The original allottee cannot claim these benefits because he has not incurred the costs.

Gift Procedure

To safeguard against any hassles, it is advisable to follow proper gift procedure. All that is required is an offer by the donor and acceptance thereof by the donee in black and white. The donee should request the donor for a gift and then the donor should remit the amount to the donee. Alternatively, the donor can offer the gift. In either case, it is necessary for the donee to accept the gift in writing (may be through a thank you note). Only then it would be considered as a gift in India. It is preferable to mention the relationship between the donor and the donee. It is better to prepare a gift deed and get it registered (with related stamp duty) but such a precaution is normally needed in the case of high-value gifts, particularly those of real estate and particularly where objections from some 3rd party looms large.

RBI does not involve itself directly in routine operations and has passed on its own responsibility to monitor and control to the ADs and kept the regulatory authority with itself.

Opening of accounts by individuals, entities of Pakistan nationality or ownership and entities of Bangladesh ownership requires prior RBI approval. All such requests may be referred to the Chief General Manager-in-Charge, Foreign Exchange Department, Foreign Investment Division, Reserve Bank of India, Central Office, Mumbai — 400 001. An Individual of Bangladesh nationality can open an NRO account subject to the individual holding a valid visa and valid residential permit issued by Foreigner Registration Office or Foreigner Regional Registration Office.

Notification FEMA 5(R)(1)/2018-RB dt 9.11.18 allows a citizen of Bangladesh or Pakistan belonging to minority communities namely Hindus, Sikhs, Buddhists, Jains, Parsis and Christians who is Residing in India and has been granted a Long Term Visa (LTV) is permitted to open with only an AD only one NRO Account. This account shall be converted to a resident account once the person becomes a citizen of India.

Common Features
Opening Accounts

Documents required to open any new account are Passport (Copy of Name, Address and Photo pages along with dates of issue and expiry page). If it is an Indian passport, copy of Visa and resident permit is also necessary. In case the place of birth is outside India, OCI card is required, irrespective of the nature of the passport along with as many as the following self-attested documents, either original or its notarised copy —

1. Electricity/Landline telephone bill, not over 3 months old.

2. Latest 3 months transaction of passbook with a cancelled cheque

3. Banker’s verification, only from a scheduled commercial Indian bank required on bank letterhead with bank employee name, signature, employee code and designation.

4. Driving licence with name, address and photo pages along with issue and expiry date pages.

5. In case of Merchant Navy NRI persons, Mariner’s declaration or certified copy of CDC (Continuous Discharge Certificate) is to be submitted.

In rare cases where there is a difficulty in submitting such details, a person can open a Basic Savings Bank Deposit Account (BSBDA) which is available at all the scheduled commercial banks, including foreign banks having branches in India. It does not have a mandatory minimum balance. There is no cap on number of deposits but withdrawals are capped at four a month, including withdrawals through ATMs. A BSBDA holder is not eligible to open any other savings account. Anyone desiring opening such an account will do well to check carefully the rate (large amounts attract higher rates) and its structure which differs from bank to bank.

ADs can convert Indian Rupees into the designated forex at the clean TT selling rate and convert forex at clean TT buying rates ruling on the date.

Interest Rates

Banks are free to determine their interest rates on both savings and term deposits under NRE and NRO accounts but in no case, such rates should be higher than those on comparable domestic rupee deposits. Banks are allowed to offer interest rates without any ceiling on NRE deposits with maturity of 3 years and above. Anyone desiring opening an account will do well to carefully check the rate and structure of interest of different banks.

Interest is paid at quarterly or longer rests. In the case of SB, interest is calculated on daily basis and credited regularly whether the account is operative or not.

On deposits repayable in less than 3 months or where the terminal quarter is incomplete, interest is paid proportionately for the actual number of days reckoning the year at 365 days. Some banks reckon the year at 366 days in a leap year. While banks are free to adopt their methodology, they should intimate this to their prospects.

If an FD matures and the amount is left unclaimed, it attracts savings bank rate of interest.

Conversion of NRE into FCNR(B) and vice versa before maturity would be subject to the penal provisions. In the case of conversion of NRE or FCNR term deposits into RFC account, there is no penalty. If such a deposit has not run for a minimum of 1 year, the bank may, at its discretion, pay interest at their SB rate. A bank should allow premature withdrawal of a term deposit. It can determine its own penal interest. Interest on the deposit for the period that it has remained with the bank will be paid at the rate applicable to that period. No interest is payable where premature withdrawal takes place before completion of the minimum period prescribed. However, the bank, at its discretion, may disallow premature withdrawal of large deposits held by entities other than individuals and HUFs.

You are requested to check the latest position related with interest rates since these get changed very often.

Joint Accounts

Notification FEMA 5(R)/2016-RB dt 1.4.16 allows NRIs to have Resident close relative/s on ‘former or survivor’ basis though nomination facility is available. Such a joint holder shall operate the account as if he is a PoA holder during the life time of the NRI. Such a Resident joint or PoA/LoA holder—

a) Can make all local payments in rupees including payments for eligible investments through NRO accounts.

b) Can effect remittance outside India through normal banking channels, funds out of the balances in NRE and FCNR accounts to the NRI’s account abroad provided specific powers for the purpose have been given to that effect, and

c) Shall not make payment by way of gift to a Resident or transfer funds from one NRE/NRO account to another account of a different person.

An easier structure in terms of a Letter of Authority (LoA) of banks can be used for allowing the LoA holder to withdraw funds for local payments.

Similarly, a Resident can include NRI close relative as joint holder in his resident bank accounts including EEFC/RFC but only on ‘former or survivor’ basis.

At the request of all the joint account holders, the bank may, at its discretion, allow deletion of existing or add the name of another person as a joint holder. In no case the term and the aggregate amount of the deposit should undergo any change. This should not be construed as premature withdrawal of the term deposit.

Change in Residential Status

When an account holder becomes a Resident, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him. However, for all other purposes such deposits shall be treated as resident deposits from the date of return of the accountholder to India. ADs should convert the FCNR(B) deposits on maturity into resident rupee deposit accounts or RFC account (if the depositor is eligible), at the option of the accountholder and interest on the new deposit shall be applicable at the then existing rates.

Deceased Depositor

In the case of current account of a deceased individual depositor or sole proprietorship concern, interest should be paid from the date of death of the depositor, till the date of payment to the claimant at interest rate applicable to SB as on the date of payment.

In the case of NRE, when the claimants are Residents, the deposit on maturity should be treated as a domestic rupee deposit and interest should be paid for the subsequent period at a rate applicable to a domestic deposit of similar maturity.

In the case of a term deposit standing in the name of i) a deceased individual depositor, or ii) two or more joint depositors, where one of the depositors has died, interest should be paid ––

a) At the contracted rate on the maturity of the deposit.

b) If the deposit is claimed before maturity, interest should be paid at the applicable rate for the period elapsed prevailing on the date of placement of the deposit, without charging penalty

c) In the case of death after maturity, interest should be paid at a RFC SB rate operative on the date of maturity from the date of maturity till the date of payment

d) If on request, the bank agrees to split the amount of term deposit and issues two or more receipts, no penalty should be levied provided the period and aggregate amount of the deposit do not undergo any change.

e) If the claimant is a Resident, the maturity proceeds may be converted into Indian rupees on the date of maturity and interest be paid for the subsequent period at the rate applicable to a deposit of similar maturity under the domestic deposit scheme.

f) In the case of NRO, the amount due or payable to an ROI nominee shall be credited to his NRO account. If the nominee is a Resident, it shall be credited to his resident account.

g) A Resident nominee can remit funds outside India for meeting the liabilities abroad of the deceased account holder.

Tax on Interest

The interest on NRE is tax-free u/s 10(4ii) of ITA. Schedule-II (10) of the FEMR states, “When an account holder becomes a person Resident, deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by him. However, such deposits shall be treated as resident deposits from the date of return of the account holder to India.”

Consequently, from the date of returning to India permanently, both NRE and FCNR would be treated as resident accounts, even if they are not redesignated as such. These can run up to their maturity but the interest on NRE becomes taxable from the date of the return whereas the FCNR interest is tax-free as long as the holder remains an RNOR. Alternatively, both NRE and FCNR can be converted into RFC without any penalty. RFC interest is taxable in the hands of RNOR.

NRO and RFC interest suffers TDS @31.2%, without any threshold, even though interest on RFC is tax-free for RNORs and not for Residents and even though interest on Savings Bank account is deductible u/s 80TTA.

Non-Resident External Account (NRE)

The account can be opened only by the NRI himself. The AD should obtain an undertaking from the NRI that he would intimate the AD when he becomes a Resident.

On fixed deposits, the rate of interest should not be higher than the one applicable to resident deposits of comparable maturity. The term of FD should be from one to three years. However, banks are allowed to accept NRE deposits above three years from their asset-liability point of view.

Renewal of Overdue Deposits

All aspects concerning renewal of overdue deposits may be decided by individual banks subject to the customers being notified of the terms and conditions of renewal including interest rates, at the time of acceptance of deposit. The policy should be non-discretionary and non-discriminatory.

Permitted Credits

a) Proceeds of remittances to India in any permitted currency.

b) Proceeds of personal cheques drawn by the account holder on his foreign currency account and of travellers cheques, bank drafts payable in any permitted currency including instruments expressed in Indian rupees for which reimbursement will be received in foreign currency, deposited by the account holder in person during his temporary visit to India.

c) Proceeds of foreign currency/ bank notes tendered by account holder during his temporary visit to India, provided (i) the amount was declared on a Currency Declaration Form (CDF), where applicable, and (ii) the notes are tendered to the authorised dealer in person by the account holder himself and the AD is satisfied that account holder is a person resident outside India.

d) Transfers from other NRE/ FCNR (B) accounts.

e) Interest accruing on the funds held in the account.

f) Current income in India due to the account holder, subject to payment of applicable taxes in India.

g) Maturity or sale proceeds of any permissible investment in India which was originally made by debit to the account holder's NRE/ FCNR (B) account or out of remittances received from outside India through banking channels.

h) Refund of share/ debenture subscriptions to new issues of Indian companies or portion thereof, if the amount of subscription was paid from the account holder’s NRE/ FCNR (B) account or by remittance from outside India through banking channels.

i) Refund of application/ earnest money/ purchase consideration made by any house building agencies/ seller on account of non-allotment of flat/ plot/ cancellation of bookings / deals for purchase of residential/ commercial property, together with interest, if any (net of income tax payable thereon), provided the original payment was made out of NRE/ FCNR(B) account of the account holder or remittance from outside India through banking channels.

j) Any other credit if covered under general or special permission granted by the RBI.

Permitted Debits

a) Local disbursements.

b) Remittances outside India.

c) Transfer to NRE/ FCNR (B) accounts of the account holder or any other person eligible to maintain such account.

d) Investment in shares/ securities/ commercial paper of an Indian company or for purchase of immovable property in India provided such investment/ purchase is covered by the regulations made, or the general/ special permission granted by the RBI.

e) Any other transaction if covered under general or special permission granted by the RBI.

ADs may at their discretion allow for a period of not more than two weeks, overdrawing in NRE SB accounts, up to a limit of ` 50,000 subject to the condition that such overdrawing together with the interest payable thereon are cleared within two weeks by inward remittances through normal banking channels or by transfer of funds from other NRE/FCNR accounts in India.

Foreign Currency Non-Resident Account

AP (DIR) Circular 36 dt 19.10.11 has permitted opening of FCNR(B) deposits in any permitted forex which is freely convertible. This is indeed a good move since earlier, NRIs/PIOs from other countries had to convert their remittances into one of the six permissible currencies while depositing and repatriating. This incurred exchange/swap losses and also bank charges.

The interest rate on FCNR deposits is very volatile and differs from bank to bank and also depends upon fixed or floating rates. You will do well to check this as and when you need the information. The interest on the deposits should be paid on the basis of 360 days to a year and be calculated and paid at intervals of 180 days each and thereafter for the remaining actual number of days. The depositor has the option to receive the interest at maturity with compounding effect and also to get the interest credited to any NRI-related accounts, existing or to be opened afresh.

Overdue FCNR Deposits

Banks have discretion to renew an overdue deposit or a portion thereof provided the overdue period from the date of maturity till the date of renewal (both days inclusive) does not exceed 14 days. The interest rate on renewal should be the appropriate rate for the period of renewal as prevailing on the date of maturity or when the depositor seeks renewal, whichever is lower. If the overdue period exceeds 14 days and if the depositor renews a portion or whole amount as a fresh deposit, banks may fix their own interest rate for the overdue period. However, if the deposit is withdrawn before completion of minimum stipulated period after renewal, banks are free to withdraw the overdue interest paid.

Other Conditions

The terms and conditions as applicable to NRE deposits in respect of joint holdings, opening accounts during temporary visit, operation by PoA/LoA, debits/credits, loans, overdrafts, change of Residential status, repatriation of funds, transfer of EEFC/RFC balances, etc., shall apply mutatis mutandis to FCNR deposits. Moreover, as per AP (DIR) Circular 57 dt 18.5.07, remittance of the maturity proceeds of FCNR deposits to third parties outside India is permitted if the transaction is specifically authorised by the account holder and the AD is satisfied about its bona fides.

AP (DIR) Circular 36 dt 19.10.11 has permitted opening of FCNR(B) deposits in any permitted forex which is freely convertible. This is indeed a good move since earlier, NRIs/PIOs from other countries had to convert their remittances into one of the six permissible currencies while depositing and repatriating. This incurred exchange/swap losses and also bank charges.

The interest rate on FCNR deposits is very volatile and differs from bank to bank and also depends upon fixed or floating rates. You will do well to check this as and when you need the information. The interest on the deposits should be paid on the basis of 360 days to a year and be calculated and paid at intervals of 180 days each and thereafter for the remaining actual number of days. The depositor has the option to receive the interest at maturity with compounding effect and also to get the interest credited to any NRI-related accounts, existing or to be opened afresh.

Overdue FCNR Deposits

Banks have discretion to renew an overdue deposit or a portion thereof provided the overdue period from the date of maturity till the date of renewal (both days inclusive) does not exceed 14 days. The interest rate on renewal should be the appropriate rate for the period of renewal as prevailing on the date of maturity or when the depositor seeks renewal, whichever is lower. If the overdue period exceeds 14 days and if the depositor renews a portion or whole amount as a fresh deposit, banks may fix their own interest rate for the overdue period. However, if the deposit is withdrawn before completion of minimum stipulated period after renewal, banks are free to withdraw the overdue interest paid.

Other Conditions

The terms and conditions as applicable to NRE deposits in respect of joint holdings, opening accounts during temporary visit, operation by PoA/LoA, debits/credits, loans, overdrafts, change of Residential status, repatriation of funds, transfer of EEFC/RFC balances, etc., shall apply mutatis mutandis to FCNR deposits. Moreover, as per AP (DIR) Circular 57 dt 18.5.07, remittance of the maturity proceeds of FCNR deposits to third parties outside India is permitted if the transaction is specifically authorised by the account holder and the AD is satisfied about its bona fides.

Inland Movement of Funds

Any inland movement of funds for opening these accounts as well as for repatriation outside India will be free of inland exchange or commission. RBI has now allowed remittance of the maturity proceeds of FCNR to third parties outside India, provided the transaction is specifically authorised by the account holder and the AD is satisfied about the bonafide of the transaction.

Withdrawal from FCNR

Such withdrawal faces 2 hurdles — 1. It is an FD from which cash payouts are not made as a rule. 2. The branches do not have any forex and will direct you to its HO. You may be able to withdraw cash up to a limited amount from your NRE account with the branch though you may have to collect the forex from their HO. However, traveller’s cheques can be obtained without any limit.

Non-Resident Ordinary Account (NRO)

This is the only so called ‘non-repatriable’ account. In practice, it is repatriable — well, almost. Interest is remittable subject to tax compliance and corpus is also remittable up to US$ 1 million per FY under some conditions.

It is mandatory for a Resident to inform his bank within a reasonable time when he becomes an NRI as per FEMA. What is reasonable is not defined. In practice, the number of persons who fail to inform their banks is so large that the default is mostly overlooked, unless the authorities suspect foul play. On receipt of the information from the NRI, the bank will redesignate his accounts as NRO.

On the other hand, when an NRI becomes a Resident, his NRO account should be redesignated as resident account. Where the account holder is only on a temporary visit to India, the account can continue as NRO.

NRO can also be opened and maintained with ADs or some designated post offices in India as current, savings, RDs or FDs.

The minimum tenure of domestic and NRO term deposits, irrespective of its quantum of the deposit, is 7 days. Since the NRO accounts are designated in Indian rupees, the exchange risk on such deposits is borne by the depositors themselves.

W.e.f. 16.12.11 the interest rates on NRO are deregulated. At present it is between 4% to 6% p.a. Scheduled commercial banks have been advised to calculate interest on savings bank accounts on a daily product basis. Interest should be paid at quarterly or longer rests. Interest on savings bank accounts should be credited on regular basis whether the account is operative or not.

Conversion into $s into `s

As per AP (DIR) Circular 14 dt 17.10.07, requests for payment in cash by ROIs may be acceded to the extent of US$ 3,000 or its equivalent. For higher amounts, the money changers should make payments through account payee cheques or demand drafts.

Permissible Credits

a) Remittances received in any permitted currency from outside India through banking channels or any permitted currency tendered by the account-holder during his temporary visit to India or transfers from rupee accounts of non-resident banks.

b) Legitimate dues in India such as rent, dividend, pension, interest, etc.

c) Transfers from other NRO accounts.

d) Any amount received by the account holder in accordance with the rules or regulations.

e) Freely convertible forex tendered by the account holder during his temporary visit to India or transfers from rupee accounts of non-resident banks. Forex exceeding US$ 5,000 or its equivalent in form of cash should be supported by Currency Declaration Form(CDF). Rupee funds should be supported by Encashment Certificate, if they represent funds brought from outside India.

f) Legitimate dues in India Sale proceeds of assets including immovable property acquired out of rupee/forex funds or by way of legacy / inheritance.

Permissible Debits

a) All local payments in rupees including those for permissible investments.

b) Remittance outside India of current income like rent, dividend, pension, interest, etc., net of taxes.

c) Transfers to other NRO accounts.

d) Settlement of charges on International Credit Cards issued by AD banks in India to NRIs or PIOs, subject to the limits for repatriation of balances.

e) Remittance outside India of current income.

f) Remittance up to US$ 1 million per FY as per LRS.

g) Loans to non-resident account holders and to third parties in Rupees by Authorized Dealer/bank against the security of FDs subject to certain terms and conditions.

Rank Foreigner Tourists

Even a foreign national of non-Indian origin visiting India can open NRO with funds remitted from outside India or by sale of forex brought by him to India when he is in India on holidays or short tour. The account can be freely operated by the account holder or the joint holder for bona fide transactions. At the time of his departure from India, the amount can be converted into forex provided the account has been maintained for a period not exceeding 6 months and the account has not been credited with any local funds, other than interest accrued thereon. For accounts maintained beyond this period, application for repatriation should be made on plain paper to the related RBI Regional Office.

Resident Forex Currency Account (RFC)

Any person who was an NRI returning only from External Group of countries and now has become a Resident is eligible to open a RFC account, mainly for transferring his NRE and FCNR balances and the proceeds of assets held outside India to this
account. The forex received as i) pension, superannuation or other monetary benefits from the employer outside India; ii) received or acquired as gift or inheritance from a person resident outside India iii) sale of his assets abroad or iv) received as the proceeds of life insurance policy, claims, maturity, surrender values settled in forex from an insurance company may also be credited to this account.

The main aspect is that the funds in RFC account are free from all restrictions regarding utilisation of forex balances including any restriction on investment outside India.

RFC accounts can be maintained in the form of current or savings or term deposit accounts, where the account holder is an individual and in the form of current or term deposits in all other cases. No loans or overdrafts will be permitted in these accounts. If and when the account holder again becomes an NRI he can transfer the funds from his RFC to NRE. Such accounts can be held jointly with resident relative as joint holder on ‘former or survivor’ basis. However, such a relative cannot operate the account during the life time of the account holder.

The interest is tax-free as long as you hold RNOR status. However, the interest rate unfortunately is quite low, varies between 2.5% and 3.5% depending upon the term and the bank and moreover, it is subject to TDS even when you are an RNOR.

Forex Rupee Options

In terms of AP (Dir) Circular 108 dt 21.6.03 as a part of developing the derivative market in India and adding to the spectrum of hedge products available to Residents and NRIs for hedging currency exposures, forex rupee options are permitted subject to certain conditions.

Facilities for NRIs on Repatriation Basis — Summary

1. Government dated securities/Treasury bills.

2. Units of domestic mutual funds.

3. Non-convertible Debentures of Indian companies.

4. Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme.

5. Shares and Convertible Debentures of Indian companies under the FDI scheme.

6. Perpetual debt instruments and debt capital instruments issued by banks in India.

7. Bonds issued by Public Sector Undertakings.

8. Shares in Public Sector Enterprises being disinvested by the Government of India.

Facilities for NRIs on Non-Repatriation Basis — Summary

1. The first 4 items listed above.

2. Units of Money Market Mutual Funds.

3. SEBI approved Exchange traded derivative contracts out of INR funds held in India on non-repatriable basis, subject to the limits prescribed by the SEBI.


Note: NRIs are not permitted to invest in small savings or Public Provident Fund (PPF) or RBI Savings Bonds.

Definition: Capital Asset and Transfer

The term capital asset does not include personal effects such as wearing apparel, furniture, air conditioners, refrigerators, etc., held for personal use by the assessee. Even cars, scooters, cycles, motorcycles owned and used by the assessee are personal effects. Therefore, the sale of personal effects does not attract any capital gains tax.

For instance, a car used for personal purpose (depreciation is not charged), is not a capital asset. When it is sold, no capital gains arise. The profit or loss cannot be brought to income tax.

It is obvious that the returning NRIs will do well by bringing their cars with them and sell these in due course.

Agriculture

Sec. 2(14iii) defines capital asset and Sec. 2(1A) defines agricultural income. Accordingly, an agricultural land is one which is not situated within a certain distance from the local limits of any municipality, cantonment board, etc., having a certain amount of population according to the last preceding census. Accordingly, the distance, as measured aerially (as the crow flies) should not exceed:

a) 2 kilometres where population is between 10,000 and 1 lakh.

b) 6 kilometres where population is between 1 and 10 lakh.

c) 8 kilometres where population is more than 10 lakh.

Obviously, the provisions bring the income from the land within the fold of agricultural land if and only if it is located nearer to the less populated area.

Rural agricultural land is not a capital asset. Consequently, its sale would not attract provisions of capital gains tax. Looking at it from another angle, sale of all lands, agricultural or not,
located in urban areas and non-agricultural land located in rural areas would attract the tax.

However, gains arising out of compulsory acquisition of such an agricultural land irrespective of its location are exempt u/s 10(37).

Transactions not Regarded as Transfer

Following are some of the transactions related with NRIs which are not considered as transfer:

1) Sec. 47(iii): Assets transferred under a gift or a Will or an irrevocable trust.

2) Sec. 47(ix): Transfer of any work of art, archaeological, scientific or art collection, etc., to the government or a university or the National Museum, National Art Gallery, etc.

3) CBDT Circular 4/2015 dt 26.3.15 has clarified that declaration of dividend by a foreign company outside India does not have the effect of transfer of any underlying assets located in India and therefore, the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India by virtue of Explanation-5 to Sec. 9(1i).

Judicial Pronunciations Negated

1. The Supreme Court had held in the case of B. C. Srinivasa Shetty, 128ITR294 that no tax is chargeable on transfer of capital assets in respect of which there is no cost of acquisition. This decision has been negated steadily by ordaining that the cost of acquisition should be taken as nil in for computing capital gains the following cases:

a) Route Goodwill of a business (not of a profession).

b) Trademark or brand name associated with the business.

c) Patent, copyright, formula, design, etc.

d) Right to carry on any business. FA16 has added one additional item to this list namely — ‘cost of acquisition’ and ‘cost of improvement’ of ‘right to carry on any profession’.

e) Tenancy rightspermits, Loom hours, etc.


2. Vania Silk Mills (Pvt) Ltd. v CIT (1991) 59Taxman3 (SC) had laid down the principle — Transfer presumes the existence of both the asset and the transferee. When the property is destroyed both these criteria are not satisfied. This was negated by inserting Sec. 45(1A) according to which, tax will be charged on any gains arising from money or other assets received under an insurance arising out of damage to, or destruction of any capital asset, as a result of i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature or ii) riot or civil disturbance or iii) accidental fire or explosion or iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war).

3. FA12 has inserted Sec. 50D to counter CIT v Mandharsinh ji P. Jadeja (2005) 14Taxman110 (Guj) by ordaining that where the actual purchase consideration is not attributable or determinable, the then existing FMV of the asset (as assessed by a licenced valuer) shall be deemed to be the full value of consideration.

Redevelopment of Flats

Fortunately, any compensation paid by a redeveloper to flat owner due to the hardship caused to the taxpayer (cost incurred is nil) continues to be non-taxable as per several court verdicts. The latest one ( 2016 (8) TMI 1087 ITAT Mumbai) involves Jitendra Kumar Soneja who had received a sum of ` 22 lakh as compensation from the redeveloper and ` 8.55 lakh for paying rent as he had to vacate his flat. The ITAT held that ` 22 lakh received as a corpus fund, is a capital receipt and not taxable. Going a step further, ITAT stated that while the compensation was a capital receipt and not taxable, it would be reduced from the cost of acquisition of the flat. This would have a tax impact, in case the redeveloped flat was subsequently sold. However, as Soneja had incurred a rent expenditure of only ` 6.80 lakh as against ` 8.55 lakh, the balance of ` 1.75 lakh was liable to tax.

Purchases in Cash

Sec. 43 to provides that any cash payments in the nature of capital expenditure above ` 10,000 shall not be considered to determine actual cost of asset u/s 43(1). Moreover, no deductions shall be available u/s 35AD, including depreciation for such expenditure. It will be income chargeable to tax.

Capital Gains Tax: Sec. 112

A ‘Short-term capital asset’ (ST) is a financial asset held for 36 months or less immediately preceding the date of transfer. The holding period is only 12 months for shares of a company, units of MFs, zero coupon bonds and listed scrips, bonds, debentures. An asset which is not ST is LT (Long-term).

The holding period is 24 months in the case of --- i) immovable property, being land or building or both and ii) unlisted equity shares.

Sec. 112(1c) as amended by FA12 provided concessional tax rate of 10% on LTCG arising from the transfer of unlisted securities in the case of NRIs. The ambiguity as to its applicability to shares of a private company was clarified by FA16 stating that the share of company in which public are not substantially interested shall also be chargeable to tax @10%.

FA14 has taken away debt-based MF schemes from this concessional lower period of 12 months. The normal period of 36 months will be applicable.

Note the word ‘held’ in this provision. The assessee need not be an owner of the property and can hold it as a lessee, as a mortgagee, under a hire purchase agreement, or on account of part performance of an agreement.

In the case of other financial assets like houses, jewellery, etc., STCG is taxed like any other income at the rates applicable to the assessee. LTCG is taken as a separate block, charged to tax at a flat rate of 20% with indexation benefit. The benefit of gap between the tax threshold and normal income is not available to NRIs.

Cost Inflation Indexation (CII)

Sec. 55 has been amended to allow the cost of acquisition of an asset acquired before 1.4.2001 to be taken as FMV as on 1.4.2001 and the cost of improvement shall include only those capital expenses which are incurred after 1.4.2001. Indexed cost is arrived at by multiplying the cost with the ratio of CIIs for the year of sale and that of acquisition.

LTCG is computed by deducting from the full value of the consideration i) any expenditure (brokerage, stamp duty, etc.) incurred in connection with the transfer, ii) indexed cost of acquisition and iii) indexed cost of improvement. For assets acquired prior to 1.4.2001 the option of substituting the fair market value (FMV) in place of original cost is possible. In other words, if the cost of acquisition is lower than FMV as on 1.4.2001, the assessee may adopt the FMV as his cost. If it is higher, he may adopt it as his cost of acquisition. The CII based on 2001-02 only will be taken into account, whatever is the choice for the cost.

Table-1: Cost Inflation Index

FY

Inflation

Index

FY

Inflation

Index

2001-02

100

2010-11

167

2002-03

105

2011-12

184

2003-04

109

2012-13

200

2004-05

113

2013-14

220

2005-06

117

2014-15

240

2006-07

122

2015-16

254

2007-08

129

2016-17

264

2008-09

137

2017-18

272

2009-10

148

2018-19

280



2019-20

289


An assessee has the right to take the FMV as on 1.4.2001 even for bonus shares allotted to him prior to that date. Same is true for other assets, normally required to be taken at nil value.

Security Transaction Tax (STT)

STT is a minuscule amount of tax (0.1%) collected from the following transactions taking place in a recognised stock exchange in India:

a) Purchase and sale of shares.

b) Sale of equity-based MFs.

c) Sale of Options in securities.

d) Sale of Futures in securities.

STT is also charged on redemption of equity-based units of MFs, (but not on debt-based) directly with the fund house which had issued these units. The LTCG was exempt (note the past tense) and STCG is taxed and continues to be taxed at a concessional rate of 15%, only if the sale transaction has suffered STT.

CTT is close cousin of STT for commodities.

There are two hidden bombs in this provision:

1. If the gains are exempt, the loss is also exempt and cannot be set off against any other ST or LT gain.

2. Tax on STCG @15% is beneficial only to those who are in 20% or 30% zone; not to those in 10%.

The requirement to have the deal in a recognised stock exchange in India applied only to sales and not purchases. Therefore, when bonus shares are sold in the market, the tax concessions apply. These used to attract heavy tax since their cost of acquisition was required to be taken as nil. Same is the case for IPOs and right issues but to a lesser extent. Those who have lost the record of cost and date of acquisition need not now worry.

10%-or-20% Option

In the case of listed shares and securities which are not sold on any recognised stock exchange in India, such as sale of non-dematted shares between two persons, as well as Zero Coupon Bonds (alternatively termed as Deep Discount Bonds) which do not suffer any STT, LT gains is charged to tax @10% without indexation (= sale – cost = profit) or 20% with indexation (= sale – indexed cost), whichever is lower. ST gains are to be added to the normal income of the assessee and charged to tax at the rate applicable to his slab of income.

Sec. 50CA provides that where consideration for transfer of share of a company (other than quoted share) is less than the FMV of such share determined in accordance with the prescribed manner, FMV shall be deemed to be the full value of consideration for the purposes of computing capital gains.

For Debt-based units of MFs houses, jewellery, etc., LTCG is taken as a separate block, charged to tax @20% with indexation and STCG is taxed like any other income at the rates applicable to the assessee.

No deduction under sections 80C to 80U is allowed from long-term capital gains.

Large Scale Amendments by FA18

In the case of capital gains arising out of shares and securities and equity-based units of MFs or a unit of business Trust sold on a Recognised Stock Exchange in India or repurchased directly from MFs, STT is payable and therefore —

a) LTCG was exempt u/s 10(38).

b) STCG was and continues to be taxed @15% flat, u/s 111A.

This exemption u/s 10(38) was misused by certain persons for declaring their unaccounted income as exempt LTCG by entering into sham transactions. To address this abuse, FA18 has implemented large-scale amendments by making Sec. 10(38) non-operative and introducing a new Sec. 112A. Consequenly --

1. The LTCG will be computed without giving effect to the 1st proviso to Sec. 48 dealing with CII and also the 2nd proviso dealing with foreign currency in the case of NRIs.

2. Such LTCG shall be taxed @10% if STT has been paid on both acquisition and transfer. The requirement of STT being paid at the time of acquisition shall not apply to purchases made before 1.4.2004 when STT was introduced and some additional notified transactions as mentioned later.

3. The tax of 10% is applicable only on amount of capital gain exceeding ` 1 lakh.

4. The cost of acquisitions in respect of the long term capital asset acquired by the assessee before 1.2.2018 shall be deemed to be the higher of –

a) the actual cost of acquisition of such asset; and

b) the lower of i) the ‘Fair Market Value’ (FMV) of such asset; and ii) the full value of consideration received or accruing on the transfer of such asset.

5. FMV for this new Section has been defined to mean –

a) In a case where the capital asset is listed on any recognised stock exchange, the highest price of the capital asset quoted on such exchange on 31.1.18. Where there is no trading in such asset on that date, the FMV shall be its highest price on a date immediately preceding date when it was traded.

b) In a case where the capital asset is a unit not listed on recognised stock exchange, its NAV on 31.1.18.

6. The FMV of shares which are unlisted on 31.1.18 but listed on date of transfer (on or after 1.4.18) shall be indexed cost of acquisition. This will also apply for unlisted shares which are substituted in tax neutral transfers (like amalgamation, demerger, gift, succession, etc.) for shares which are listed on date of transfer.

7. The benefit of deduction under chapter VI-A as well as the rebate u/s 87A and also the exemption u/s 54EC is not available on such capital gains.

8. The STCG arising from sale of equities of shares purchased after 1.4.18 can be set-off against other gains or carried forward for 8 years as per the normal terms and conditions.

9. However, gains arising from a transaction on a recognised stock exchange in any International Financial Services Centre and where the consideration is received or receivable in Forex, shall be eligible under this Section without payment of STT.

10. Sec. 115D has been amended to make all these changes applicable to FIIs, consequent to non-application of Sec. 10(38) to equities.

11. Notification S.O. 1789(E) dt 5.6.2017 protects genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company, acquisition by non-residents in accordance with FDI policy, acquisition under ESOP framed under SEBI Guidelines, transfer of shares approved by the Supreme Court, High Court, National Company Law Tribunal, SEBI, RBI in this behalf, any non-resident in accordance with foreign direct investment guidelines, acquisition from the Government, etc. New notification is expected to be released on similar lines.

This is an attempt to bring private deals between parties outside the market, shares of listed companies acquired through, preferential allotments, ESOPs, etc., under the normal capital gains net. Fortunately mergers and acquisitions are tax neutral.

Analysis

Very complicated indeed. For clarity, let us take the following example —

Let's say you had purchased Maruti shares on 13.10.17 @
` 7,900/share. Irrespective of this rate, the FMV will be taken @ ` 9,500 or thereabout, which was the highest price on 31.1.18. However, the date of purchase will remain 13.10.17 only.

The FMV will be ` 9,500 and not the rate as on 1.4.01 with one exception. If anytime after 13.10.18, you sell Maruti at say
` 8,500, you will be incurring a loss of ` 1,000. In this case, your FMV will be deemed to be ` 8,500 thereby bringing your loss at nil level. In other words, you cannot set it off against your other gains. On the other hand, if your sale price is, say ` 10,500, you will earn LTCG of ` 1,000 (without indexation) on which the tax will be @10% with associated surcharge and cess. This works out at ` 116.48. Then again, had you sold Maruti after 1.4.18 but before 13.10.17, you will have earned short-term capital gains which will be taxed @15%.

Listed securities, not sold on a Recognised Stock Exchange in India (or bought on or after 1.4.04), the LTCG are taxed @10% without indexation or 20% with indexation, whichever is lower. In his budget speech FM referred to the 10% rate on listed shares as a ‘concessional’ rate and yet the tax rate on unlisted shares is more concessional. Strange!

Finally, the best thing you can do is to pocket the tax-free LTCG up to ` 1 lakh every FY.

Business of Dealing in Shares

Where dealings in shares is a business of the person, all capital gains (or losses) are charged to tax under the head, ‘Profits and gains of business or profession’. Sec. 36 provides that STT paid on transactions entered into in the course of the business shall be allowable as deduction.

Shares & FIIs

FIIs, other foreign companies as well as NRI individuals pay a concessional 10% tax on LTCG (without indexation) from transfer of unlisted securities which are covered under the SCRA. This reduced rate was not applicable to transfer of shares of private companies, as they are not governed by SCRA. FA16 has extended this benefit by amending Sec. 112(1ciii) to companies in which public are not substantially interested.

Exchange Rate Risk

Protection provided to NRIs by First Proviso to Sec. 48 has been deleted for NRIs, even if it results in a loss, because of the introduction of 10% tax on LTCG arising out of equities and equity-based MFs. However, it still is applicable on STCG arising from shares or debentures of an Indian company (private or public) acquired by utilising forex.

In such cases, capital gains shall be computed by deducting the cost of acquisition from the net value of the consideration received or accruing into the same foreign currency as was initially utilised for the purchase of shares or debentures. The capital gains so computed in such foreign currency shall be reconverted into Indian currency. Thus the NRI is protected against the exchange risk.

Indian corporates, vide RBI’s notification dt 29.9.15, are permitted to issue rupee denominated bonds (popularly known as Masala Bonds) overseas to enable them raise funds. To protect the interest of NRI investors from exchange rate fluctuations FA16 has provided that while computing capital gains u/s 48 at the time of redemption, full value of consideration received shall exclude any gain arising on account of appreciation of rupee.

What if the rupee depreciates? We wonder . . .

FA17 has amended Sec. 48 to provide relief in respect of such gains also to secondary holders. Moreover, Sec. 47 has been amended to provide that any transfer of such bonds by an NRI to another NRI shall not be regarded as transfer.

Sale Value for Stamp Duty — Sec. 50C

Where the consideration declared by the assessee for transfer of land or building or both, is less than the value adopted or assessed for stamp duty, the latter shall be deemed to be the full value of the consideration. If the assessee claims that this deemed value exceeds the fair market value (FMV) the ITO may ask a valuation officer of the Department to assess the FMV. If it turns out to be less than the value adopted for stamp duty, the ITO shall take the FMV to be the full value of consideration. Otherwise, the original duty shall prevail, subject to revision in any appeal.

This results in the buyer paying higher stamp duty and the seller paying higher tax on capital gains. Unfortunately, when the buyer sells the property at a later date, he is forced to adopt the original value declared by him and not the stamp duty valuation.

Where the dates of the agreement registration for the transfer of a capital asset differ, the value adopted by the stamp valuation authority may be taken for the purposes of computing full value of consideration on the date of agreement if and only if the amount of consideration, or a part thereof, has been received through a bank account, on or before the date of the agreement for transfer.

Dates of Transfer & Registration Differ

Where the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, the stamp duty value may be taken as on the date of the agreement. This exception shall, however, apply only in a case where the amount of consideration, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement.

Advance for Transfer of a Capital Asset

Amount confiscated by the seller cannot be treated as his capital gain, since no transfer of any capital asset has actually taken place. — CIT v Sterling Investment Corp Ltd. [1980] 123ITR441 (Bom).

Such forfeited amount was treated as a capital receipt not chargeable to tax during the year of forfeiture. This amount was reduced from the cost of acquisition of the property so that tax would get collected if and when the property gets actually sold. This provision was ingeniously used by some persons to convert their taxable earnings into capital receipts by entering into a sham agreement to sell a property to an accommodating party on the understanding that the earnest money will be forfeited as per the terms of the agreement.

To counter this situation, Sec. 56 provides that any advance money taken against sale of an asset and forfeited because the negotiations did not result in transfer shall be chargeable to tax under the head ‘Income from Other Sources’.

This has resulted in punishing the buyer in genuine cases where there was no such understanding. Even if such forfeiture is a pecuniary loss, he cannot claim it as a capital loss u/s 45 as he neither ever owned nor relinquished the capital asset in question. A CBDT clarification is necessary to avoid litigations.

FA12 has curtailed the practice of receiving a very high premium against the issue of shares.

Treatment of Losses

U/s 74 losses under the head ‘Capital Gains’ cannot be set off against income under any other head. Though short-term loss can be set off against both STCG as well as LTCG, any LTCL shall be set off against LTCG only. If there are no sufficient gains during the year, the balance loss, ST or LT, can be carried forward for 8 successive years for similar set off.

Dividend Distribution Tax (DDT)

U/s 10(34), dividend received from a domestic company and u/s 10(35) income distributed by any MF, is tax-free. However, this dividend suffers DDT @15%, payable by the company before distributing the dividend to its stakeholders. With the surcharge of 15% and educational cess of 4%, the effective rate works out at 17.4720% (= 15 × 1.12 × 1.04).

In other words, if the company desires to pay ` 100 as dividend, it can pay ` 82.5280 to the shareholder and pay ` 17.4720 to the exchequer.

This DDT is in addition to the normal income tax payable by the entity giving dividends on its own profits.

In the case of MFs, the equity-based schemes are exempt from this DDT u/s 115R(2). For individuals & HUFs, on all debt-based funds of MFs, DDT rate is 25%. (= 29.1200%). For all other categories of taxpayers, the rate is 30% (= 34.9400%).

Many investors feel that this is an atrocity. We do not. Well, here are our reasons.

Dividends suffer DDT; growth does not. Yes, growth attracts tax on capital gains. But in the case of MFs, it works out at almost nothing.

Mr. Arun Jaitley deserves kudos for punishing the investors if they opt for dividend option in MF schemes by —

a) deleting the option of 10% which was useless in any case,

b) raising the period from 1 year to 3 years for entitling it to be LT, and

c) raising the DDT rates on dividends paid.

Sec. 54EC Bonds

This offers exemption on LTCG arising from land or building or both if the gains are reinvested within 6 months in Bonds issued by National Highway Authority of India (NHAI), Rural Electrification Corporation (REC) and some other notified companies. The term of the Bonds is 5 years. Unfortunately, the limit on such contributions is ` 50 lakh and it can be made during the FY when the CG occurs and the subsequent FY but within the stipulated period of 6 months.

The Bonds are non-transferable, non-negotiable and cannot be offered as a security for any loan or advance. The present interest rate is 5.25% fully taxable. There is no TDS.

Deposits in the Bonds are riddled with 2 problems. The 1st one is that the date of allotment is the last date of the month during which the subscription is received, irrespective of the date when the company encashes your cheque. The 2nd one is that the face value of one Bond is ` 10,000. Consequently, if you have earned LTCG of ` 83,000 you can either purchase Bonds worth ` 80,000 and pay tax on ` 3,000 or purchase Bonds worth ` 90,000 and pay no tax. What should you do?

For arriving at the answer to this question, let us first find out whether it is worth buying the Bonds even if you have earned a round figure of LTCG worth ` 10,000. Suppose you are in 31.2% tax bracket. If you buy the bonds, you earn a low rate of 5.25% taxable (=3.61% after-tax) rate of interest. The maturity value of this after a term of 5 years works out at ` 11,941.

Now, suppose you decide to pay tax applicable to LTCG @23.92% comprising of the base rate of 20%, the surcharge of 15% and cess of 4%. Your take home happens to be ` 7,608. You will have to earn an after-tax rate of 9.43% after-tax (=13.70% taxable) rate to get a maturity value of ` 11,941.61.

If you are in the 31.2% tax zone, you may decide to pay tax on the capital gains and invest the remaining amount in any other equally safe avenue offering an interest rate of over 13.70%.

This computation requires a little fine tuning taking into consideration that the annual interest received from the Bonds can be invested in the other avenue. The most accurate rates works out at 14.12% for 31.2% zone, 13.08% for 20.4% zone and 12.29% for 10.4% zone.

Now, what if the amount of capital gain is odd, such as 83,000? Follow the above algorithm to arrive at the decision.

It is important to note the following court verdicts —

1. Investment made prior to the date of transfer out of earnest money or advance received is eligible for exemption u/s 54EC — [2012] 28taxmann.com274 Bombay (HC) Mrs. Parveen P. Bharucha v DCIT Circle 2 Pune.

2. For claim of exemption u/s 54EC, source of investment of fund is immaterial. IAC v Jayantilal C. Patel (HUF) [1988] 26ITD1 (Ahd). Surely, this verdict can be extrapolated to Sec. 54EC.

3. As per the language of Sec. 54EC, there is no requirement that investment should be in name of assessee. The only condition is that the sale proceeds of capital assets must be invested in certain specified bonds — ITO v Smt Saraswati Ramanathan [2009] 116ITD234 (Delhi).

4. Although as per Sec. 50, the profit arising from the transfer of a depreciable asset (industrial building) shall be a gain arising from the transfer of short-term capital asset irrespective of the period of holding, but it nowhere says that the depreciable asset shall be treated as short-term capital asset. Sec. 54EC is an independent provision not controlled by Sec. 50 which is restricted only to the mode of computation of capital gain u/ss 48 and 49 and this fiction cannot be extended beyond that for denying the benefit otherwise available to the assessee u/s 54EC, if the other requisite conditions of the Section are satisfied — Sudha S. Trivedi v ITO [ITA 6040 & 6186/Mum./2007].

5. The time-limit of 6 months for investment in Bonds is to be reckoned from date of receipt of part or full payments and not from date of transfer as defined u/s 53A of the Transfer of Property Act — [2012] 18 taxmann.com 304 Kolkata — Trib. Moreover, this period should be reckoned from the end of the month in which the transfer takes place — [2012] 17 taxmann.com 159 Mum.

6. Where purchase of specified conversion of investment into stocks or bonds just a few days beyond period of six months was under a bona fide mistake, the exemption can be denied but penalty u/s 271(1c) cannot be levied [2014] 45 taxmann.com 180 Punjab & Haryana.

7. Bona fide realignment of interest by way of effecting family arrangements among the family members does not amount to transfer — CIT v A L Ramanathan (2000) 245ITR494 (Mad).

Sec. 54 & 54F

The ITA provides other opportunities for saving tax on long-term capital gains such as by way of Sec. 54 & Sec. 54F. Sec. 54 gives exemption from tax on capital gains arising out of sale (or transfer) of a residential house, self-occupied or not, provided the assessee has purchased within 1 year before or 2 years after the date of sale or has constructed within 3 years after that date, one residential house in India. If only a part of the LTCG is used, the exemption would be pro-rata and the excess will be taxed.

Two points are worthy of careful note —

1. For construction, there is no restriction on commencement date. It could have begun even more than 20 years before the sale.

2. The assessee need not apply the amount from the sale proceeds for purchasing another residential house. He can take a loan for the purchase or construction and use the sale proceeds for investment elsewhere, if it is beneficial for him to do so.

Sec. 54F deals with capital gains arising out of assets other than residential houses. The stipulations are essentially the same but with 3 differences —

1. The assessee should not be an owner of more than one residential property on the date of transfer.

2. Sec. 54F requires reinvestment of the net consideration (sale value less expenses) whereas Sec. 54 is content with reinvestment of only the amount of capital gains.

3. In the case of Sec. 54, the assessee is required not to sell the new house within 3 years. If this condition is not satisfied, the cost of the new asset is to be reduced by the amount of long-term capital gains exempted from tax on the original asset and the difference between its sale price and such reduced cost will be chargeable as short-term capital gain earned during the year in which the new asset is sold.

Sec. 54F also requires the assessee not to sell the new house within 3 years. In addition, he is expected not to purchase within 1 year or construct within 3 years, another residential house. If any of these conditions are not satisfied, the capital gain originally exempted shall be treated as long-term capital gain of the year in which the house is sold or another house is purchased or constructed.

This penalty is different from that of Sec. 54 and creates confusion. We do not comprehend the wisdom of imposing different punishments for the same offence.

In the case of Sec. 54, the recent FA19 has extended the concession to two houses in place of one where the amount of the capital gain does not exceed ` 2 crore. This concession is available once in a life time of the assessee.

Note the following case laws ---

1. DCIT Central Circle-32 v Ranjit Vithaldas [2012]— If two flats are sold even in different years and capital gains from both flats is invested in one residential house, exemption will be available for each flat sold provided the time-limit for construction or purchase of new house is satisfied.

2. ITO v Rasiklal N. Satra (280ITR243 dt 19.9.05) — Ownership of a residential house, means ownership to the exclusion of all others. Therefore, where a house is jointly owned by two or more persons, none of them can be said to be the owner of that house.

Capital Gains Accounts Scheme, 1988 (CGAS)

For ascertaining that the assessee really intends to purchase a new residential house within the stipulated time, all scheduled banks have a special bank account designated as CGAS. The amount deposited in such accounts before the last date of furnishing returns of income or actual date, if earlier, along with the amount already utilised, is deemed to be the amount utilised for the purpose.

This means that the assessee can utilise this amount for any purpose whatsoever during intervening period — ACIT v Smt Uma Budhia (2004) 141Taxman39 (Kol.).

If the amount is not utilised wholly or partly for the stipulated purpose, then, the amount of capital gains related with the unutilised portion of the deposit in CGAS shall be charged as the capital gains of the year in which the period expires.

Circular 743 dt 6.5.96 states that when the account holder expires, the unutilised amount in CGAS account is not taxable in the hands of the legal heirs or nominees as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.

Investment in India, particularly in shares, is known to be more rewarding than elsewhere in the global markets since the returns are significantly high and safe. It has become higher and safer particularly under the aegis of the Modi Government and FM Nirmala Sitaraman. The economic health of the industries at large has improved considerably because of the policy of liberalisation and globalisation. Therefore, NRIs should invest in India (= Make in India) not only for their own benefit but also to boost the economy of their motherland.

FPI and FDI Merged

With an objective of simplifying the procedures, Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI) have been merged in respect of all the applicable terms and conditions along with composite sectoral caps.

Portfolio Investment Scheme (PIS)

Notification FEMA 361/2016-RBI dt 15.2.16 has defined an NRI to mean an individual NRI or a PIO with an OCI card. Under PIS, an NRI may acquire securities or units on a Stock Exchange in India on repatriation or non-repatriation basis, subject to the terms and conditions specified in Schedule-3 or Schedule-4 respectively. In the case of these Schedules, the term ‘share’ also includes convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle, including REITs, InvIts, AIFs, etc.

General Provisions

An NRI should operate only through one AD.

The bank shall ensure that amounts due to sale proceeds of shares acquired by modes other than PIS, such as underlying shares acquired on conversion of ADRs/GDRs, shares purchased outside India from other NRIs, shares acquired under private arrangement, shares purchased while he was a Resident, do not get credited or debited to his PIS accounts.

The system provides the facility to freeze the DP accounts for any debits or credits or both debits and credits.

The NRI shall operate on delivery basis for shares purchased and sold. In other words, short selling (sale without having the scrip in his godown) or day-trading is not permitted.

Schedule-3: Repatriable

An NRI may purchase or sell shares, convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle and warrants of an Indian company or units of an investment vehicle, on repatriation basis, under PIS through a designated AD branch within a limit of 5% of paid-up value on individual basis. Additionally, the limit is 10% on the aggregate paid-up value of these instruments of any company purchased by all NRIs on repatriation basis.

This limit of 10% may be raised to 24% if a special resolution to that effect is passed by the General Body of the Indian company.

The NRI investor should take delivery of the shares / convertible preference shares / convertible debentures / warrants and units purchased and give delivery of the same when sold.

The investment shall be subject to the provisions of the FDI policy and Schedule 1 of these Regulations in respect of sectoral caps wherever applicable.

All this limit business need not bother you. RBI monitors this limit assiduously on a case-by-case basis and puts the scrip on ‘Caution List’ when the trigger limit is very near the cap. Thereafter it grants permission on first-come first-served basis. When the limit is reached, such shares are kept on banned-for-purchase list.

An NRI may open a designated NRE account with an AD, for routing the receipt and payment for transactions relating to sale and purchase of shares under this Schedule. The designated account will be called an NRE-PIS Account (alternatively called as PINS). Any NRI or a PIO can have only one PINS account in India separately and exclusively for PINS purposes. Transactions relating to their personal banking as well as on account of transactions relating to shares acquired other than under PINS including IPOs should be routed in his savings bank account.

PINS account is applicable only for NRIs and not for Residents. It is only for trading in Indian markets and not in any other foreign markets. It is applicable only for equity trades and not for Mutual fund investments.

Following transactions are not allowed or are not covered under PINS:

1. Sale of shares, which were not bought under PINS. Like: Gifts, subscription to IPOs or shares bought as resident Indian, or received in bonus. If an NRI has bought some shares under PINS, and has gifted those shares to another NRI, these shares received as gift cannot be sold under PINS.

2. Fresh subscription for the IPOs as an NRI

3. Investment in Mutual Funds.

The designated branch shall ensure that sale proceeds of securities or units which have been acquired by modes other than PIS such as underlying shares acquired on conversion of ADRs/ GDRs, shares, convertible preference shares, convertible debentures, warrants acquired under FDI Scheme or purchased outside India from other NRIs or acquired under private arrangement from residents/non-residents or purchased while Resident, do not get credited in the PINS Account and vice versa.

Permitted Credits to NRE (PIS) are —

a) Inward remittances in forex through normal banking channels,

b) Transfer from the NRI’s other NRE or FCNR accounts maintained with AD in India,

c) Net sale proceeds (after payment of applicable taxes) of shares sold on stock exchange through registered broker, and

d) Dividend or income earned.

Permitted Debits to NRE (PIS) —

a) Outward remittances of dividend or income earned.

b) Amounts paid for purchase of shares on stock exchanges through registered broker under PIS,

c) Any charges on account of sale / purchase of securities or units under the Scheme, and

d) Remittances outside India or transfer to NRE / FCNR (B) accounts of the NRI or any other person eligible to maintain such account.

Schedule-4: Non-Repatriable

Such transactions should take place only through NRO (PIS) account of the NRI.

Mostly the shares held prior to becoming an NRI or out of Indian assets earned or received thereafter, are non-repatriable. NRIs can invest in SEBI approved Exchange Traded Derivative Contracts on non-repatriable basis, subject to the limits prescribed.

An NRI, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians, may acquire and hold, on non-repatriation basis, equity shares, convertible preference shares, convertible debenture, warrants or units, without any limit, either on the stock exchange or outside it. This will be deemed to be domestic investment at par with the investment made by residents.

An NRI may contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietary firm or a Limited Liability Partnership without any limit.

The consideration for investment under this Schedule shall be paid by way of inward remittance through normal banking channel from abroad or out of funds held in NRE/FCNR/NRO account maintained with a bank in India.

The sale/maturity proceeds (net of applicable taxes) of the securities or units acquired under this Schedule shall be credited only to NRO account irrespective of whether the consideration for acquisition was paid by direct remittances from abroad or the type of account maintained in India.

Trading Account

Trading account is used to place or execute the order over respective stock exchange. NRIs can transact over registered Indian stock exchange National Stock Exchange (NSE) & Bombay Stock Exchange (BSE) through the trading account

Demat account can be held jointly or singly as per the preference of the customer.

Nomination facility is provided on the Demat accounts.

Demat account helps to maintain the transaction details such as the date of purchase; cost of the transaction; selling price of the transaction, etc.

Transfer of Shares

General permission has been granted to non-resident entities and NRIs for acquisition of shares by way of transfer subject to:

a) An ROI (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares to any ROI (including NRIs). Government approval is not required for transfer of shares in the investee company from one non-resident to another non-resident in sectors which are under automatic route. Approvals of Government or RBI will be required for transfer of stake from one non-resident to another non-resident in sectors which are under Government or RBI approval route.

b) NRIs may transfer by way of sale or gift the shares held by them to another NRI.

c) An ROI can transfer any security to a Resident by way of gift.

d) An ROI can sell the shares of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI.

e) A Resident can transfer by way of sale, shares (including transfer of subscriber’s shares), of an Indian company under private arrangement to a person resident outside India.

f) General permission is also available for transfer of shares by way of sale under private arrangement by an ROI to a Resident.

g) Such general permissions also cover transfer of shares by a non-resident to an Indian company under buy back and / or capital reduction scheme of the company.

The sale consideration in respect of equity instruments purchased by an ROI remitted into India through normal banking channels shall be subjected to a Know Your Customer (KYC) check by the remittance receiving AD Category-I bank. If the remittance receiving AD is different from the AD handling the transfer transaction, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the customer to the AD carrying out the transaction.

An ROI including NRI investor who has already acquired and continues to hold the control in accordance with the SEBI (Substantial Acquisition of Shares and Takeover) Regulations can acquire shares of a listed Indian company on the stock exchange through a registered broker under FDI provided that the original and resultant investments are in line with the extant FDI policy and FEMA regulations in respect of sectoral cap, entry route, mode of payment, reporting requirement, documentation, etc.

Summary: Cases where Prior RBI Permission is Required

1. Transfer of capital instruments from resident to non-residents by way of sale where:

a) Transfer is at a price which falls outside the pricing guidelines specified by the RBI from time to time.

b) Transfer of capital instruments by the non-resident acquirer involving deferment of payment of the amount of consideration. Further, in case approval is granted for a transaction, the same should be reported in Form FC-TRS, to an AD Category-I bank for necessary due diligence, within 60 days from the date of receipt of the full and final amount of consideration.


2. Transfer of any capital instrument, by way of gift by a person Resident to a person resident outside India who is a close relative. The gift should not exceed 5% of the paid-up capital of the Indian company and each series of debentures/ MF scheme.


3. The value of capital instruments to be transferred together with any capital instruments already transferred by the transferor, as gift, to an ROI should not exceed the rupee equivalent of US$ 50,000 during the FY.


4. Transfer of shares from NRI to NRI.

Miscellaneous Provisions

Transfer of sale of not listed or thinly traded shares under private arrangement are subject to guidelines related with fixing of price, collection of proceeds, documentation, etc.

A Resident can sell shares (including subscriber’s shares), of an Indian company under private arrangement to an ROI, unless the shares are of an Indian company engaged in financial sector.

Companies incorporated in India can borrow in rupees by way of issue of Non-Convertible Debentures (NCDs) to NRIs on non-repatriation or repatriation basis.

RBI ADMA Circular 27 dt 31.8.99 has granted general permission to Indian Proprietorship Concerns, Firms and Companies for issue of CPs to NRIs on non-repatriable, non-transferable basis.

Dividend and Interest

U/s 9(1v) interest payable by the following entities is taxable in India —

a) The Government, or

b) A Resident, except where the interest is payable in respect of any debt incurred or moneys borrowed and used for business or profession carried on outside India or for earning any income from any source outside India.

c) An NRI, where the interest is payable on any debt incurred or moneys borrowed and used for business or profession in India.

Investment in Partnership Firm/Proprietary Concern

An NRI (other than a citizen of Bangladesh, Pakistan or Sri Lanka) can contribute capital of a firm or a proprietary concern in India or any association of persons in India on non-repatriation basis.

Notification FEMA 344/2015 RB dt 11.6.15 has redefined ESOP to mean the option given to its directors, officers, employees and also those of its holding company, joint venture, wholly owned overseas subsidiary / subsidiaries, etc., the right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. ‘Sweat Equity Shares’ means such equity shares issued at a discount or for consideration other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

AP (DIR) Circular 30 dt 5.4.06 permits AD banks to allow remittances without any monetary limit for acquiring shares under ESOP irrespective of whether it is offered directly by the issuing company or indirectly through a trust, SPV, or a Step Down Subsidiary, etc.

General permission is granted to foreign companies for repurchasing the shares issued to Residents under any ESOP provided:

i) The shares were issued in accordance with the Rules and Regulations framed under FEMA and the shares are being repurchased in terms of the initial offer document, and

ii) The proceeds thereof are repatriated to India not later than 90 days from the date of their sale.


A Resident who has acquired or holds such foreign securities, may transfer them by way of pledge for obtaining fund-based or non-fund-based facilities in India from an AD.

ESOP and Income Tax

Where the share is listed on a recognised stock exchange, its value shall be the average of the opening price and closing price on that date. If it is listed on more than one recognised stock exchange, the value shall be governed by the exchange which records the highest volume of trading in the share. Where the exchange quotes both ‘buy’ and ‘sell’ prices, the ‘sell’ prices of the first and the last settlement would be taken into account. If there is no trading on that date, the ‘sell’ price quoted nearest to immediately preceding such date shall be the value.

In the case of non-listed shares, the value shall be determined by a category-I merchant banker registered with SEBI. To avoid multiple valuations depending upon the vesting dates of different employees, the valuation done earlier, not exceeding 180 days, can be taken for the purpose. Thus, the company may have to ask for valuation from the merchant banker, at the most twice in one year.

Sec. 115ACA is applicable to a Resident employee of an Indian company, including its Indian and foreign subsidiaries, engaged in the specified knowledge based industry such as Information Technology. It taxed @10% the Residents deriving income by way of dividends or LTCG arising from DRs purchased either directly or under its ESOP.

There are only two investment avenues, besides Banks, where retail NRI can invest freely with repatriation benefits. One is the share market. Those who do not have time, energy and inclination to track the markets in India may invest through MFs. As a matter of fact, even those who have time should invest through MFs, because an individual can never compete with the team of researchers the MFs employ.

All the MFs have the twin objectives of mobilising the savings of the masses in order to channelise them into productive corporate investments, and providing facilities to persons of even modest means of owning indirectly, equity shares, company bonds, debentures and government securities. An MF is a financial intermediary between investors and the markets (stock and debt). It protects the investor against capital risk by giving him the benefit of its professional expertise in investment management. MF’s constant supervision on the portfolio, which it holds on behalf of the investor and the diversification of large funds over a large portfolio throughout the spectrum of industries, is of great value to the investor.

Before investing in MFs, you will do well to check whether your host country (particularly USA and Canada) allows you to invest in Indian MF schemes.

Dividend & Bonus Stripping for Shares & Units

The 4 conditions applicable for Sec. 94(7) to be operational are —

1. The purchase of shares or units is within 3 months before the record date for dividends.

2. The sale of shares is within 3 months after the record date for dividends or bonuses. In the case of units this period is 9 months.

3. The dividend is tax-free.

4. The transaction results in a loss.


If all these conditions are simultaneously satisfied, loss arising to the taxpayer on the sale, to the extent it does not exceed the dividend, has to be ignored.

Sec. 94(8) deals with bonus stripping, only of MFs and not equities. The stipulation for its applicability is identical with that of dividend stripping with one difference. The loss, if any will also be ignored for the purposes of computing the income chargeable to tax. However, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of the bonus units.

This is indeed very unkind to the MF industry.

Mark to Market

Strange but true, interest rates and prices of fixed income instruments have an inverse relationship. In other words, when the overall interest rates in the economy rise, the prices of fixed income earning instruments fall and vice versa.

To illustrate, let us assume that the current NAV of the MF is ` 10 and its corpus is ` 1,000 crore. This means that if the fund sells all the assets of the scheme and distributes the money on equitable basis to all the unit holders, they will receive ` 10 per unit. Now suppose, the interest rate falls from 6.0% to 5.4%. Immediately thereafter you wish to invest ` 1 lakh in the scheme. Realise that the entire corpus of the fund stands invested at an average return of 6.0%. If the Fund sells the units to you at its current NAV of ` 10, you will be allotted 10,000 units. This will benefit you immensely. You will be a partner in sharing the benefit of the higher returns of 6.0%, though the fund will be forced to invest your ` 1 lakh at the lower rate of 5.4%.

This is injustice to the existing investors. Therefore, comes the ‘mark to market’ concept. The fund raises its NAV to ` 11.11. You will be allotted only 9,000 units and not 10,000. The returns on 9,000 units @ 6.0% would be identical with the returns on 10,000 units @ 5.4%.

Consequently, NAV rises when the interest falls and vice versa.

Capital Assured Schemes

The retail investor wants some kind of guarantee, any guarantee. In the past, in their effort to garner as many investors in their fold, the MFs chose the simple way out by giving some assurance or the other, instead of launching on educating the investor. The way the MFs tried to take advantage of this weakness for assurance and their analytical ignorance is manifest from the fact that for one of their schemes, UTI assured respectable dividends but not the capital. All such MFs faced bad problems when the market went into a prolonged bear phase. The parents of the MFs had to rescue their children by funding the deficit.

In spite of all this, there are still many investors who have fallen in love with some assurance without realising that the decision-oriented criteria should only be the brand image, the parentage and the ability of fund manager of the MF and not any assurance.

The MFs have discovered a way to guarantee capital and also derive some benefit from the share market. The idea is simple yet effective. Invest the entire capital in fixed income schemes and invest the interest received therefrom in equities. This way the capital remains intact while participating in equity upside, if any.

Numbers being easier to understand, let us assume that you have investible funds of ` 5 lakh. Here is what you do. Out of
` 5 lakh invest around ` 2 lakh in a bank 10-yr cumulative FD which gives 9.5% interest. Invest the rest ` 3 lakh in an equity-based MF. This ` 2 lakh FD would grow to ` 5 lakh in 10 years. Now, no matter what happens to the money invested in the MFs, at the end of 10 years, you will certainly have ` 5 lakh which is what you originally started with. The market value of ` 3 lakh of equity-based MF is an additional icing on the cake.

For ease of understanding and not to compromise simplicity over accuracy, we have left out the tax angle.

Surely, the MFs have a vast field from which they can choose guaranteed returns, and this would be much higher than the market rate. Moreover, there are tax benefits for MFs and not for others.

No wonder they say, a steady job and an MF is still the best defence against social security.

Fixed Maturity Plan (FMP)

We never liked the close-ended schemes (having a fixed tenure) of MFs because —

1. At redemption scrips in large quantity had to be sold, even when the fundamentals scream for a ‘buy’. This would spell disaster for the share market and consequently for the Indian economy.

2. At redemption the investor is forced willy-nilly to pay tax, if any, and reinvest the remaining funds, possibly in similar schemes and possibly in those launched by the same MF. This is a national waste. Longer the term, lesser is this wastage.

Open-ended funds have the longest term.

3. At present, the debt market is experiencing an upward pressure on the interest rates causing concerns about the rate risk.

The MFs have discovered a new product, Fixed Maturity Plan (FMP) with varying terms of maturity. These invest in instruments that mature at the same time their scheme term ends. So a 90-day FMP will invest in debt instruments that mature within 90 days. Holding the underlying instruments up to their maturity effectively eliminates the interest rate risk as the value of the instruments at their redemption is known at the time of investment itself. At this particular juncture, it is possible to pick up papers which give a little higher than 10%!!

The MF declares a dividend which is tax-free a day or two in advance of the date of maturity.

Yes, for the short-term FMP, there is this tax arbitrage. For growth FMP schemes with a term of over one year, there is the concessional tax on long-term capital gains. Moreover, the benefit of double indexation can be pocketed.

Double indexation is a neat trick where you hold an investment for a little more than one year but get the benefit of the index multiple of two years. Let us take an example for clarity.

An FMP of a term of 370 days is launched on 29.3.10, i.e. FY 09-10 and the date of maturity is 3.4.11, i.e., FY 11-12. Let us assume you have invested ` 1,00,000 and it has grown by 8.0% to ` 1,08,000. The CII for FY 09-10 was 632 and it was 785 for FY 11-12. The indexed cost is ` 1,24,209 (= 1,00,000*785/632). The capital gains work out at a loss of ` 16,209 (= 1,08,000 – 1,24,209)! This loss is available for set off.

Sadly the retail investor requires guarantee; not double indexation.

To protect the MFs against any unreasonable run on close-ended schemes as happened during the 3rd quarter of 2008, SEBI has made it compulsory for all close-ended schemes (except ELSS) to be mandatorily listed. Now, the investor has an exit route only through the markets where he will have to pay a price for the distress sale.

Liquid Schemes

MF houses have taken advantage of the advancement of technology in designing this product which is better than Saving Bank Accounts. Alternatively termed as ‘Any Time Money’, it allows instant withdrawals over telephones, SMSs and also ATM cards issued by the fund houses. There is no exit load. The returns, though not assured, are around 8.0%, fully taxable. This is not much useful to NRIs because of the distance, but can serve as emergency fund for family members in India.

Equity-based MF Schemes

Equity-based schemes of MFs have evolved as the best parking place for all investible funds. These have become more attractive than ever before because of the various tax concessions discussed earlier.

The one and the only disadvantage is the risk factor. The fortunes of equity-based schemes are linked closely with the market and its associated volatility. One can get very good rewards but the possibility of losing one’s shirt (and also, in some cases, more intimate garments) cannot be lost sight of.

At this particular juncture, the markets have been sliding down because of several external factors such as Chinese meltdown, Global depression, European misery, Oil prices, etc., etc. The markets all over the globe have crashed but the Indian market has crashed much less than all the others, thanks to the Modi factor. Indian GDP is slated to grow significantly, thanks to the Modi factor.

Perhaps this is the right time to go for equity-based.

Equity-Linked Saving Scheme (ELSS)

ELSS is a variant of equity-based schemes with a lock-in of 3 years, though all of them have one open-ended scheme and a few are with a term of 10 years. At least 80% of its corpus is statutorily required to be invested in equities, cumulative convertible preference shares and fully convertible debentures and bonds of companies. Investment may also be made in partly convertible debentures and bonds including those on rights basis subject to the condition that the non-convertible portion of the debentures shall be disinvested within 12 months. These restrictions enable the scheme to come under the umbrella of Sec. 80C within the overall general ceiling of ` 1,50,000.

ELSS, being equity-based is, in theory, highly risky. In practice, it is highly attractive. A savvy investor never has a short-term view. He looks at the macro levels. Since the fundamentals of most companies have become robust, the ELSS has beaten PPF by miles. Consequently, though past performance is not a guide for its future achievements, in practice, ELSS has become highly rewarding.

Thanks to the mandatory 3-year lock-in 1 year if the investor expires), in funds invested, the fund managers have better freedom to play since he need not keep large funds liquid to meet repurchase demands.

Units can be transferred, assigned or pledged after 3 years.

Other Advantages

MFs schemes have become more flexible than flexibonds.

1. Saving Bank Account: Deposit and withdraw whenever you feel like. Banks permit issue of cheques to third parties whereas withdrawal slips (= self-cheques) are for MF schemes.

2. Systematic Withdrawal Plan (SWP): You can give standing instructions to receive some amount of your choice at a periodicity of your choice — annual, 6-monthly, quarterly or even monthly! That is not all. You can ask for additional withdrawals whenever you need more funds. This becomes a pension plan.

3. Systematic Investment Plan (SIP): You can make investments of an equal amount of money at regular intervals (monthly or quarterly) until you cancel the facility. You may either submit post-dated cheques covering a period of your choice or opt for the auto-debit facility. If you adopt this strategy, you will be averaging out the market movements and this is really a great advantage.

4. One Plan Equals All: Can be converted into Tax-free Savings Bonds, Children’s Gift Growth Plan, Children’s College and Career Fund, Marriage Endowment Plan, etc.

Repatriable DP Account

Normally, investments made by either direct remittance of forex from abroad or by applying NRE funds are repatriable and can be credited to NRE account. This is true in the case of investment in shares, MFs and immovable property in India. The income in India of an NRI from any source can be repatriated abroad after taxes are paid thereon.

However, in the case of shares, the transactions have to be carried out from a Repatriable DP account. In other words, an NRI is required to have, if need be, separate DP accounts, one repatriable and the other non-repatriable.

In the case of MFs, on redemption, MFs issue a certificate indicating that the original amount was invested through an NRE account or direct remittance from abroad.

Tax Neutrality on Merger of MF Schemes

In the USA, very strangely, the number of MF Schemes is much higher than the number of listed shares. India is moving in that direction mainly because of the uncanny attraction of the retail investor to NFOs (= IPOs). In spite of millions of rupees spent on the so-called ‘investor education’ the investor brings money to the Fund only when it floats a new scheme. He refuses to look at the old schemes, even those which have performed very well.

The fund manager is forced to offer brand new schemes with regular ferocity for garnering funds for his house. A natural outcome of this situation is that every fund house has many schemes which are clones. Since long, it had become urgently necessary to merge some of such schemes for better governance. Unfortunately such mergers attracted provisions of capital gains and therefore any attempt in that direction by SEBI received lukewarm response.

Thankfully Sec. 47(viii) has now been inserted to provide tax neutrality when two or more schemes of equity oriented fund or of other than equity oriented fund get merged or consolidated.

For most transactions in immovable property of an ROI, RBI has granted its general permission to ADs for administering and monitoring it. All situations not falling under the general permissions, including requests for acquisition of agricultural land by any ROI may be made to the Chief General Manager, RBI, Exchange Control Department, Central Office (External Payments Division), Amar Building, Fort, Mumbai 400001.

Rank Foreigners

Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau, Hong Konga and Democratic People’s Republic of Korea, irrespective of their residential status, need RBI prior permission to acquire or transfer immovable property in India. For this purpose the term “citizen” shall include natural persons and legal entities. Thus prohibition shall not apply to an OCI. They can get it on lease, not exceeding 5 years. However, approvals, if any, required by other authorities such as the concerned State Government will have to be obtained. The visa should clearly indicate his intention to stay in India for an uncertain period to determine his residential status.

Foreign nationals of non-Indian origin who are ROI can inherit a property in India by way of inheritance (but not a gift) from a Resident. He needs to seek prior approval of RBI for selling or gifting an agricultural land, plantation property and farm houses held by him in India. He cannot even be a joint 2nd holder along with an NRI or a PIO. Such a person who has acquired immovable property in India by way of inheritance or have purchased it with the specific approval of the RBI cannot transfer it without prior permission of RBI.

Acquisition by a Long-Term Visa (LTV) holder

A citizen of Afghanistan, Bangladesh or Pakistan belonging to minority communities in those countries viz., Hindus, Sikhs, Jains, Buddhists, Parsis and Christians, who is residing in India and has been granted (LTV) may purchase only one residential immovable property in India for self-occupation and only one immovable property for self-employment.

The property should not be located in and around notified or cantonment areas. The person should submit a declaration to the Revenue Authority specifying the source of funds.

The property of such person may be attached/ confiscated in the event of his/ her indulgence in anti-India activities.

A copy of the documents of the purchased property shall be submitted to the Deputy Commissioner of Police, Foreigners Registration Office, Foreigners Regional Registration Office and to the Ministry of Home Affairs Foreigners Division. Sale of the immovable property so acquired is permissible only after such person has acquired Indian citizenship. Prior sale requires approval of all these authorities.

NRI or an OCI but not a PIO can

a) Purchase any immovable property in India.

b) Get gift of immovable property in India from a Resident or from an NRI or an OCI who is a relative.

c) Acquire immovable property in India by way of inheritance. If it is from an ROI who had acquired the property in accordance with the then existing foreign exchange law.

d) Transfer immovable property to an NRI or an OCI. If it is a gift, the transferee should be a relative.

e) Transfer any immovable property in India to a resident.

The last two items may include agricultural land or plantation property or farm house if the individual was in possession of it or has inherited it subsequently.

A rank foreigner who is a spouse of an NRI or an OCI may acquire one immovable property (other than agricultural land/ farm house/ plantation property), jointly with the spouse. The marriage should have been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property.

Mortgaging property to party abroad requires RBI’s prior approval.

The payment of purchase price should be made out of funds received in India through normal banking channels by way of inward remittance from any place outside India or funds held in any non-resident account maintained in India and no other mode such as traveller’s cheque, foreign currency notes, etc. No payment can be made outside India.

Repatriation of Sale Proceeds

Repatriation of sale proceeds of residential property purchased by NRI/PIO is permitted to the extent of the amount paid for acquisition of immovable property in forex. Such repatriation is restricted to not more than 2 such properties. There is no restriction on repatriation of number of commercial properties. The balance amount, if any, can be credited to the NRO account and can be remitted under US$ one million facility.

Where the funds were raised by way of loans from ADs or housing finance institutions, repatriation is allowed to the extent of such a loan was repaid in forex.

Repatriation of amounts representing the refund of application or earnest money, purchase consideration made by the house building agencies, seller on account of non-allotment of the property, cancellation of bookings or deals, together with interest (net of income tax payable) may be allowed by the AD provided the original payment was made in forex.

Note that the right to repatriate is acquired by a person who was an NRI/PIO at the time of acquisition and who is an NRI/PIO at the time of the sale. The residential status between these two periods is immaterial.

If the sale takes place on or before the expiry of 2 years, provisions of STCG and if after 2 years LTCG will be attracted.

The remittance facility in respect of sale proceeds of immovable property is not available to citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan. The facility of remittance of sale proceeds of other financial assets is not available to citizens of Pakistan, Bangladesh, Nepal and Bhutan.

Commission to Agents

AP (DIR) Circular 76 dt 24.2.04 permits ADs to freely allow, without RBI permission, remittance by way of commission to agents abroad for sale of residential flats or commercial plots in India up to US$ 25,000 or 5% of the inward remittance, per transaction, whichever is higher.

Remittance of Rent

The rental income being a current account transaction is repatriable irrespective of whether the property was purchased through forex or otherwise, subject to tax compliance.

Where the house is purchased through housing finance and it is rented out, the entire rental income, even if it is more than the prescribed installment, should be first applied towards repayment of the loan. If it is less than the prescribed installment, the borrower should remit the amount to the extent of the shortfall from abroad or pay it out of his NRE or NRO accounts in India.

Cash Used During Transfer of Real Estate

Sec. 269SS and Sec. 269T have been amended to mandate that no person shall accept or repay from any person any loan or deposit or any sum of money, whether as advance or otherwise, in relation to transfer of an immovable property, otherwise than by an account payee cheque or account payee bank draft or by electronic clearing system, if the amount of such loan, deposit or specified advance is ` 20,000 or more. The specified advance means any sum of money in the nature of an advance, by whatever name called, whether or not the transfer of the immovable property takes place. Related penalties are contained in Secs 271D and 271E.

We were under the impression that almost all the transactions of real estate involve a large portion of black money and this fact is known to the lawmakers. Do they feel that this limit of
` 20,000 in the legislation will curb black money?

Tax Provisions

Self-occupied House

Sec. 23 provides for determination of the annual value of house property, subject to the deductions u/s 24. Annual value of a house or part of a house shall be taken as nil if it —

(a) is in the occupation of the owner for his own residence, or

(b) cannot be occupied by him because of his employment, business or profession at any other place and he has to reside at that place in a building not belonging to him. If the assessee has more than one self-occupied house, the annual value of only one of such houses, at his option, can be taken as nil.

(c) All the others will be deemed to have been let out. The option can change from year to year.

(d) The latest FA19(interim) has modified Sec. 23, 24 and 54

to exempt notional rent on 2nd residential house. Now one can have two separate self-occupied houses Moreover, the tax concession on LTCG if the gains are invested in purchasing or constructing one residential house within certain stipulated time frame has been extended to two residential houses for a tax payer having capital gains up to ` 2 crore. This benefit can be availed once in a life time.

Let-out Property

If the authorities find that the actual rent charged by the owner is quite low, a notional rent value is arrived at by taking into consideration municipal valuation, fair rent and standard rent prevalent in the area. The Gross Annual Value of the property is arrived at by deducting from this rent, the property taxes paid to any local authority during the year only if these are borne and actually paid by the owner. Moreover as per Sec. 25 the amount of such rent received subsequently by an assessee shall be deemed to be the income from house property of the FY in which such rent is received or realised, whether the assessee is the owner of the property or not in that FY. The normal standard deduction of 30% can be claimed on such rent.


Thereafter, Sec. 24 allows the following two further deductions:

1. A standard deduction of 30% of the annual value.

2. The interest payable on capital borrowed (inclusive of processing fee) for acquiring, constructing, repairing, renewing or reconstructing the property with a ceiling of ` 30,000 on self-occupied property. The limit of ` 2,00,000 is applicable on loans taken on or after 1.4.99 but only for acquiring or constructing. The lower limit of ` 30,000 continues to be applicable for loans taken for repairing, renewing or reconstructing. Complicated!


While raising the deductibility of interest up to ` 2 lakh, FA14 imposed two caveats —

1. The house should be completed within 5 years from the end of the year during which the loan is taken, and

2. This higher limit is applicable only for acquisition or construction but not for repairs, renewals or reconstruction.


There was (note the past tense) no limit on the deductibility of interest on loans taken for business, commercial or let-out properties. Sec. 71 relates to set-off of loss from one head against income from another. FA17 has inserted Sec. 71(3A) to provide that after setting off the loss incurred due to interest payable for the FY against the rent (or deemed rent) received from the property during the year, the remaining loss, if any, can be set-off against any other head of income with a cap of ` 2 lakh. The unabsorbed loss, if any, shall be allowed to be carried forward for set-off in subsequent years in accordance with the existing provisions of the Act.

Both the concessions, deduction for repayment of capital u/s 80C and of interest u/s 24 are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value is known. However, if the interest payable is for a period prior to the year in which the property was acquired or constructed, it shall be deducted in 5 equal annual installments commencing from the year of purchase or construction. The ceilings are applicable to the aggregate of interest payable and the annual installments distributed over 5 years taken together. Similar facility is not available for repayment of capital u/s 80C.

If the construction or acquisition is completed any time in a FY, the interest paid during the entire FY is deemed to be the normal interest though a part of the FY is pre-construction period.

There is no restriction on the source of the funds borrowed to claim the exemption of interest. It is only the tax deduction u/s 80C that requires the loan to be taken from specified sources.

Housing loan is cheap and the tax concessions make it cheaper. Therefore take as large a loan as possible for as long a period as possible, even if you have enough funds on hand.

Do not buy a house just because of the tax benefits. There are better methods to save the tax. Similarly, do not buy a house as an investment. You will be putting too many eggs in one basket. Buy it, only if you need it for your personal use. Giving it on rent is fraught with risks.

Housing Finance

The loans can be procured even to i) purchase a piece of land, ii) pay stamp duty and iii) extend or improve an existing house. The security for the loan is always by way of creating equitable mortgage of the property in favour of the lender. Additionally, any existing or a new life insurance policy equal to the loan amount sanctioned should be assigned as collateral security.

The sanction is around 85% of the property cost and starts from a minimum of ` 25,000.

Equated Monthly Instalments (EMI) is the fixed amount, required to be paid by the borrower every month till the end of the loan tenure. It consists of part principal and part interest. At start, the component of interest is understandably high. As time passes, it reduces and the component towards repayment of capital correspondingly increases.

Housing loan in rupees availed of by NRIs from ADs or Housing Financial Institutions in India can be repaid by the close relatives in India of the borrower.

RBI has made it mandatory for banks not to charge any penalty if borrowers pay back home loans taken on floating interest rates before the end of their repayment schedule. If you are in a fixed interest rate regime, you might face a penalty, which, in some cases may run up to 2% of the outstanding balance.

Where a mortgage was created by the previous owner during his/her lifetime and the same is subsisting on the date of his / her death, the successor obtains only the mortgagor’s interest in the property and by discharging the mortgage debt, he / she acquires the mortgagee’s interest in the property and thus, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagee’s interest in the property which is deductible as the cost of acquisition u/s 48 of the Act. But, if the property is mortgaged by the assessee himself / herself, then the amount paid for discharge of the debt is not part of cost of acquisition —V. S. M. R. Jagdishchandran v CIT [1997] 93Taxman389 (SC) and R. M.. Arunachalam v CIT [1997] 227ITR222 (SC).

The expenses incurred towards society charges can be deducted from the rent for determining the taxable income.

Funds Borrowed Abroad for Purchase of Property in India

Sec. 25 specifically prohibits deductibility under the head ‘Income from house property’ of any annual charge or interest chargeable which is payable outside India on which tax has not been paid or deducted in India. What if the assessee treats this as his ‘business income?’ ROIs are prohibited by FEMA from indulging in business of real property. What if the interest is paid out of the repatriable interest earned on NRE, FCNR accounts? Sec. 14A introduced by FA01 states that the total income can be computed without allowing any deduction in respect of expenditure incurred in relation to income which does not form part of the total income.

This is in line with the intent of the tax legislation. The rent has its nexus in India and therefore it is taxable in India. The interest paid outside India is forex, not taxed in India.

As far as the deduction on repayment of the loans is concerned, it is available only if the loan is taken from specific approved sources and these do not include loans taken abroad.

House held Jointly with a Resident

An NRI can be owner of a house jointly with a Resident. But there are some precautions to be taken —

  1. If he has paid his share of acquisition through forex, he should make direct payments to the builder. Sending drafts in the name of a friend or the joint holder may hamper repatriability when the house is eventually sold.

  2. The share of each holder should be well defined and ascertainable for computing the amount of income from housing property, either notional or otherwise. The contribution of the funds should also be preferably in the proportion of the defined share.

  3. Housing loans, if any, should be taken either strictly in individual names or jointly in the same ratio. This helps in arriving at the amount of tax concessions on housing finance.

  4. No loans are easily given on houses in joint names because, in the case of default, a part of a house cannot be confiscated. It is possible that you yourself do not need a loan. In that case, you can stand as a co-obligant or a guarantor to the loan taken by the joint owner.

NRIs enjoy the benefit of ‘Special Provisions’ u/ss 115C to 115-I, dealing with tax on incomes from certain Forex Assets (FEA) which the assessee has acquired, purchased or subscribed to in convertible forex. These are :

  1. Shares in an Indian company but not units of MFs.

  2. Debentures (convertible as well as non-convertible) issued by an Indian company which is not a private company as defined in the Companies Act 1956.

  3. Deposits with an Indian company which is not a private company as defined in the Companies Act 1956.

  4. Securities of the Central Government as defined in Sec. 2(2) of the Public Debt Act 1944.

Any income which is derived from FEA is connoted as investment income. The definition of FEA does not include bank deposits! But mostly, these can be brought under the purview of the provisions through the above mentioned point-3, ‘deposits with an Indian company’. All the banks i) of which shares are listed in the stock market (e.g., SBI, HDFC Bank, ICICI Bank), ii) which continue to be Indian companies (e.g., United Western Bank Ltd.) and iii) nationalised banks which were originally incorporated as Indian companies before nationalisation are eligible for the concessions of special provisions.

None of the foreign banks, or co-operative banks are eligible for this facility, a point which dawns only when it is too late.

Salient Features

The NRI is given the option in respect of investment income to be governed either by the special or the general provisions of the ITA. This option can be exercised by expressing his desire through his return of income. He is free to decide for each FY as to whether he wants to opt for the special provisions or not.

If the individual opts for the special provisions, his total investment income, without taking any cognisance of the income threshold or deductions under Chapter VI-A, is taxed as a separate block at a flat rate of 20% and @10% on LTCG, unless exempt.

In case the assessee has other taxable income in addition to investment income, the other income will be taxed at the rates as per the general provisions, where the income threshold and Chapter-VIA are operative.

U/s 115G it is not necessary to furnish a return of income if the total income consists only of investment income or income by way of LTCG or both and TDS has been correctly applied and there is no additional tax liability. In practice, it is better to file returns to establish continuity.

In order to avoid delays in remitting the sale proceeds of FEA, Sec. 204(iia) authorises an AD to deduct tax if it is not a short-term gain and remit the balance to the NRI or credit it to his NRE account, without requiring any NOC from the Department.

U/s 115F, LTCG arising out of transfer of FEA is not charged to tax if the net consideration is reinvested in FEA within 6 months from the date of transfer. If part of the consideration is invested, proportionate deduction would be allowed. There is a lock-in of 3 years on the new asset acquired. If this new asset is transferred within that period, the exempted capital gains would be brought to tax as LTCG of the year in which the new asset is transferred.

Continuation of Special Provisions

When an NRI becomes a Resident, the Special Provisions continue to apply till the assets get eventually transferred.

To Be or Not to Be

Special provisions have lost almost all their sheen since, in the case of shares, the dividend is tax-free, LTCG is charged @10% with the associated grandfathering by the recent FA18 and short-term gains are taxed @15%. Only in very rare cases, it may be advantageous to opt for this Special Provision where the rate is 20%.

Good News

A. Sinha & Rao Ranvijay Singh (AAR 762 of 2007 dt 3.3.08) held, — NRO deposits shall be treated as FEA and interest thereon shall be treated as investment income u/s 115C(c) which is liable to be taxed @ 20%. The only conditions applicable are that the funds in the account should be made out of convertible forex and further that the account should be in a banking company which is not a private company as per Companies Act.

Some of the very enterprising ADs take advantage of ‘Special Provisions’ to bring down the TDS rate at 20.6%.

General Conditions

Use of credit card in India by an ROI shall not be deemed as borrowing or lending in rupees.

Funds borrowed either by a Resident or an ROI can be used for his personal requirements and/or own business but not for —

  1. Business related with the prohibited transactions such as chit fund, agriculture or plantation, TDRs, etc.

  2. Any investment, whether by way of capital or otherwise, in any company, partnership firm, proprietorship concern, any entity whether incorporated or not, or for relending. Such investment includes purchase of immovable property or shares, debentures, bonds, etc., issued by companies in India, including margin trading or derivatives.

Loans cannot be granted against the security of SB. The term of the loan shall not exceed the balance maturity period of the deposit. The facility of premature withdrawal of NRE/FCNR deposits shall not be available where loans against such deposits are availed of.

Loans to Depositor and 3rd Party against NRE/FCNR

An AD or its overseas branch or correspondent can grant loans against security of the funds to the account holder or a third party in or outside India. Premature withdrawal of such deposits is not permitted.

Rupee loans may be granted by ADs provided —

1. There is no direct or indirect forex consideration paid to the NRI depositor for agreeing to pledge his deposits.

2. There is no transaction between the guarantor and the borrower involving forex until the guarantee is invoked or the loan is settled. If the guarantor is forced to discharge his guarantee, the NRI may enforce his claim against the Resident borrower. If the liability is discharged by payment out of rupee balances, the amount recovered becomes non-repatriable.

3. A Resident, being a principal debtor can make payment to any ROI who has met his liability. The amount remitted or credited shall not exceed the rupee equivalent of the amount paid by the ROI guarantor against the invoked guarantee.

Forex loans in or outside India can be granted by ADs provided

  1. The document is executed by the deposit holder himself and not by his PoA or LoA holder.

  2. If the repayment is made by using the NRO account, the interest has to be charged at the full commercial rate in force.

  3. FEMR (Deposit) permits a branch outside India of an AD to give a forex loan against the security of NRE or FCNR deposit.

Loans to NRIs against Shares/Properties, Non-repatriable

An AD can grant a loan in India in rupees to NRIs on non-repatriable basis against the security of shares or other securities or immovable property in India.

Temporary Overdrawing

ADs may allow overdrawing in NRE SB account, up to ` 50,000. Such overdrawing together with the interest should be cleared within 2 weeks, out of inward remittances through normal banking channels or by transfer of funds from other NRE accounts.

Forex Borrowing by Residents from NRI Relatives

AP (DIR) Circular 24 dt 27.9.03 grants general permission to borrow up to US$ 2,50,000 or its equivalent on a repatriable basis by an individual Resident from his close NRI relative if —

  1. The loan shall be free of interest.

  2. The minimum maturity period of the loan shall be 1 year.

  3. The amount of loan is received by inward remittance in free forex through normal banking channels or by debit to the NRE account of the NRI.

AP (DIR) Circular 95 dt 21.3.12 allows the borrower to repay in installments, interest and other charges directly to NRE account of the lender concerned.

Rupee Loan or Gift to an NRI/PIO Close Relative

A resident individual is permitted to make a rupee loan or gift to a close relative NRI/PIO by way of crossed cheque or electronic transfer subject to:

i) The loan is free of interest and its minimum maturity of the loan is one year.

ii) The loan (or Gift) amount should be within the overall LRS limit of US$ 250,000 per FY.

iii) The loan shall be utilised for meeting the borrower's personal requirements or for his own business in India. It shall not be utilised, either singly or in association with other person, for any of the activities in which investment by ROI is prohibited.

iv) The loan (or Gift) should be on non-repatriable basis.

v) Repayment of loan shall be made by way of inward remittances through normal banking channels or by debit to the NRO or NRE account of the borrower or out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

Borrowing in Rupees by Residents, Non-repatriable

A Resident individual, partnership or proprietorship firm, may borrow in rupees on repatriable or non-repatriable basis from an NRI subject to —

  1. The term of the loan does not exceed 3 years.

  2. The rate of interest does not exceed 2% over the bank rate.

Loans to NRI Employees

Indian companies are allowed to give term loans in rupees to their NRI/PIO staff for personal purposes, including purchase of housing property in India. The loan shall be granted in accordance with the Lender’s Staff Welfare or Housing Loan Scheme. The amount shall be credited to the employee’s NRO account. This facility is also available to employees of branches outside India for forex loans.

SEBI Circular CFD/DIL/3/2013, dt 17.1.13 states that listed entities are prohibited from framing any employee benefit schemes involving acquisition of own securities from the secondary market. This prevents such entities adopting a fraudulent and unfair trade practice of manipulating the price of the securities.

Loans for ESOP

ADs are allowed to grant Rupee term loans to their NRI / PIO employees for acquiring its shares under its ESOP subject to —

  1. The loan should not exceed 90% of the purchase price of the shares or ` 20 lakh whichever is lower. Incidentally, these limits are also applicable to loans to Resident employees.

  2. The amount shall be paid directly by the bank to the company and should not be credited to the borrowers’ accounts in India.

Loans to Foreign National Employees

ADMA Circular 36 dt 11.9.97 has imposed a ceiling of ` 5 lakh on loans granted to foreign nationals, not permanently Resident, for personal purposes such as purchase of household articles, etc. The same ceiling is applicable to liaison offices of the companies. The terms and conditions should be the same as those applicable to its staff Resident.

Housing Finance

An AD or an approved housing finance institution may provide housing loan to an NRI with Indian passport (and not to PIOs) for acquiring a residential house in India. The loan is subject to:

  • Term of the loan should not exceed 15 years.

  • The quantum of loans, margin money and the period of repayment shall be at par with those applicable to Resident borrowers.

  • The loan shall be fully secured by equitable mortgage of the property proposed to be acquired, and if necessary, also by a lien on the borrower’s other assets in India. A Resident close relative may also be taken as a co-obligant or guarantor.

  • Repayment by close relative in respect of loan in rupees availed by NRI was restricted to housing loans only. AP (DIR) Circular 19 dt 16.9.11 has granted general permission to Residents to repay loans availed by their NRI close relatives for any purpose.

  • The amount should not be credited to borrower’s NRE account.

  • Where the property is rented out, the entire rental income, even if it is more than the prescribed instalments, should be adjusted towards repayment of the loan.

  • Rate of interest shall conform with RBI and NHB directives.

  • The flat shall be used by the NRI for self-occupation on return to India and not for any other purpose.

Where the land is owned jointly by an NRI borrower with a Resident close relative, the relative should be taken as a co-obligant or guarantor. In such cases the payment of margin money and repayment of the loan installments should be made by the NRI. The loans can also be given to Residents with NRI as a co-obligant.

An NRI requires prior approval of RBI for mortgaging an immovable property to a party abroad.

AP (DIR) Circular 95 dt 26.4.03 has extended the loan facility for repairs, renovation and improvement of residential accommodation owned in India by NRIs as well as PIOs.

Change in the Residential Status of the Borrower

An AD may (or may not) allow continuance of loan or overdraft of a Resident who subsequently becomes an ROI. In such cases, payment of interest and repayment of loan may be made by inward remittance or out of legitimate resources in India of the borrower.

If a rupee loan was granted by a Resident to another Resident and the lender subsequently becomes an NRI, the repayment of the loan by the Resident borrower should be made by credit to the NRO account of the lender.

Company Deposits

Notification FEMA 5(R)/2016-RB amended up to 16/7/19 covers Acceptance of Deposits from NRIs, PIOs.

Repatriation basis

A company incorporated in India may accept deposits from NRIs or PIOs, on repatriation basis subject to:

i) The deposits should be received under a public deposit scheme.

ii) An NBFC should be registered with the RBI and should have obtained the required credit rating.

iii) The amount should have been received by inward remittance from outside India through banking channels or by debit to the NRE or FCNR (B).

iv) For NBFC the rate of interest payable on deposits shall be in conformity with the RBI directions issued by RBI for such companies. In other cases it shall not exceed the ceiling rate prescribed under the Companies (Acceptance of Deposit) Rules, 2014.

v) The term of deposits shall not exceed 3 years.

vi) The amount of aggregate deposits accepted by the company shall not exceed 35% of its net owned funds.

viii) The payment of interest net of taxes may be made by remittance through an AD or by credit to the depositor's NRE/ FCNR(B)/ NRO/ account as desired by him.

ix) The amount of deposits so collected shall not be utilised by the company for re-lending (not applicable to NBFC) or for undertaking any prohibited activities.

x) The repayment of the deposit may be made by remittance from India through an AD or by credit to the depositor's NRE/ FCNR(B) provided the depositor continues to be a non-resident at the time of repayment. It may also be credited to the depositor's NRO account, at the depositor's option.

Non-repatriable basis

A proprietorship concern or a firm in India and a company incorporated in India, may accept deposits on non-repatriation basis from NRIs or PIOs subject to:

i) In the case of a company, the deposits may be accepted either under a private arrangement or public deposit scheme.

ii) The amount of deposit shall be received by debit to NRO account only, provided that the amount of the deposit shall not represent inward remittances or transfer of funds from NRE/ FCNR (B) accounts into the NRO account.

iii) The amount of deposits accepted shall not be allowed to be repatriated outside India.

iv) All the rest of the conditions are identical with those on repatriable basis.

This happens to be most risky investment especially at the current juncture of unbridled scams.

TDS Rates

Though, for ease of understanding, we have not mentioned the applicability of cess @ 4% on TDS, note that it is always applicable for NRIs but not for Residents.

What is the sanctity of having different rates for different incomes? (See Table-1). It behoves the Department to have a standard uniform rate, convenient for itself as well as the taxpayers. The TDS is not the final tax payable. Advance tax is a close relative of TDS. Moreover, the balance tax, if any, is paid along with filing of his tax returns.

Table-1: TDS Rates

Income Avenue

%

Investment income

20

LTCG from listed as well as unlisted shares

10

Income under Special Provisions

10

Other LTCG, unless exempt

20

STCG from listed shares & Equity-based Units of MFs

15

Interest on forex loans by Government or an Indian concern

20

Royalties & Fees for Technical Services

25

Winnings from lotteries, crossword, puzzle, horse race, etc.

30

On the whole of the other income

30


TDS Thresholds

TDS is not required to be applied if the payments do not exceed prescribed threshold limits — Refer Table-2.

Table-2: TDS Thresholds

Section

Nature of Payment

Threshold `

194B

Winnings from lottery or crossword puzzles

10,000

194BB

Winnings from horse races

10,000

194H

Commission or Brokerage

15,000

194-I

Rent

1,80,000

194J


Fees for professional or technical services

30,000



Since an RNOR is basically a Resident, the base rates and thresholds as applicable to Residents is applicable to him. Particular attention is drawn to interest received from bank deposits where the base rate is 10% and the threshold is ` 10,000 for Residents (` 50,000 for senior citizens) and the rate is 30% without any threshold for NRIs.

Because of technological advancements and availability of KYC of the depositor, it is now possible for a bank to add the interest paid to the depositor by all its branches put together. Therefore, FA15 requires the TDS to be applicable at bank level and not branch level. Moreover, since Recurring Deposits are same as Time Deposits, these also have been brought under the ambit of application of TDS. We are afraid that in the near future this provision will become applicable at the level of all the banks put together.

Purchase/Sale of Housing Property

While purchasing, if the NRI pays the consideration out of forex remitted through normal banking channels or the funds held in NRE, repatriation of the amount equivalent in forex paid for the acquisition is permissible when he sells the property for maximum two such properties. Even the properties purchased out of NRO funds (non-repatriable) can be remitted under the US$ one million facility. Excellent!

U/s 195(1), he has to apply TDS on the capital gains incurred by the seller if the consideration is ` 50 lakh or over. How does he know what is the capital gain of the seller?

One way is --- the seller pays the tax on the capital gains incurred by him even before the due dates for paying the tax. Thereafter, the buyer makes an application to the AO to indicate the amount of TDS by his general or special order and on receiving such order applies the TDS indicated in the order. This is nicely explained in Syed Aslam Hashmi v ITO [2012] 26taxmann.com6.

The NRI faces a bigger difficulty if and when he sells this house in due course. It is he who has to apply TDS. U/s 203A, every person deducting or collecting tax is required to obtain Tax Deduction and Collection Account Number (TAN).

To reduce the compliance burden on such one-time transactions, FA15 allows submission of PAN in place of TAN for reporting of TDS from payment over a specified threshold made for acquisition of immovable property (other than rural agricultural land) from a Resident to a Resident u/s 194-IA This facility has now been extended to NRIs.

What if the NRI does not have a PAN? Fortunately FA16 has taken a corrective action by amending Sec. 206AA enabling the NRI to submit any other document that provides the required information.

The NRI seller has several options to save this tax on capital gains such as buying another house or investing in REC/NHAI Bonds. Can the ITO accept his intentions? The answer is in the negative. He can apply for a refund through filing of his tax returns for the year.

The benefit of i) setting off the basic threshold against the capital gains and ii) filing Form-15G or 15H for non-deduction of TDS are not available to NRIs. The only way of avoiding TDS for an NRI as provided u/s 195(2) is to request the ITO (Form-13) for issuing a certificate to the person who is responsible for applying TDS (Form-15AA) allowing them not to apply TDS or apply it at lesser rate. The moot question is — why should any AO issue any order unless he likes the face of the applicant?

Fortunately, this knotty problem has been addressed by the recent FA19(2) by amending Sec. 195(2) w.e.f.1.11.19. The current process which is manual will be converted into a faceless one by use of modern technology to reduce the time and manner related with the application form and also determination of appropriate TDS.

Non-Resident Entertainer

U/s 194E, TDS rate is 20% for payments made to an NRI:

c) sportsman (including athlete), who is not a citizen of India, or

d) sports association or institution, or

e) entertainers (such as a theatre, radio or television artists and musicians) who are not citizen of India. The term, ‘entertainer’ is not defined anywhere and this might lead to ambiguity and consequent litigations related with its scope and applicability.

Brokerage to Distributors

Explanation-I to Sec. 194H defines ‘commission or brokerage’ to include any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.

CBDT Circular 786 dt 7.2.2000 declares that commission and brokerage payable to an NRI agent for securing export business is not taxable in India.

In the case of MFs, some countries such as USA and Canada do not approve of investment in MFs, FDs and some other investment products in India. However, the taxability of such income depends upon DTAA. For instance, under Article 22 of DTAA between India and UAE, the payment of brokerage being in the nature of other income, it will not be taxable in India.

Salary Paid Outside India

Expatriate employees’ salary for working in India is chargeable to tax in India, whether a part or the whole of the salary and allowances are received in or outside India. This issue was raised in CIT v Eli Lilly & Co. (India) P Ltd., which was decided by the Supreme Court on 25.3.09. It held, “TDS had to be applied on the salary and allowances paid abroad, even if the Indian Company was unaware of the payments made abroad by the foreign employer of the expatriate. It is the duty of the Indian company to apply TDS even on salary and allowances paid abroad by the foreign company, particularly when no work stood performed for the foreign company and the total remuneration stood paid only on account of services rendered in India during the period in question.”

Jewellery

Sec. 206(c) requires the seller of bullion and jewellery shall, at the time of receipt of such amount in cash, collect tax @1% of sale consideration from every buyer of bullion and jewellery, if it exceeds ` 2,00,000. Payment by any other means does not attract this provision.

Procedure for Refund of Tax

In the case of NRIs there are many circumstances where income does not either accrue or it accrues but the excess amount has been paid as TDS. This may happen where the contract is cancelled in part or full or change of law or because of a mistake. This warrants refund to the resident responsible for applying TDS but he could not do so because the refund is payable to the person who has earned the income and not to the deductor.

Circular 7/2007 dt 23.10.07 has solved this difficulty by allowing this amount to be refunded directly to the deductor.

The amount paid into the Government account in such cases to that extent, is no longer ‘tax’. In view of this, no interest u/s 244A is admissible on such refunds. Similarly, no expenses related with amount representing TDS refunded is allowable.

Such a refund should be granted only after obtaining an undertaking that no certificate u/s 203 has been issued to the NRI. If it has been issued, the person claiming the refund should either retrieve it from the NRI or should indemnify the Department from any possible loss on account of a separate claim of refund for the same amount by the NRI. The refund should be granted only if the deductee has not filed return of income and the time for filing it has expired.

The limitation for making a claim of refund shall be 2 years from the end of the FY in which TDS is applied. However, all pending cases may also be considered.

Sec. 197A read with Rule 29C provides for furnishing declarations by only a Resident individual in Form-15G Form-15H (for senior citizen) in order to enable the payer to make the payment without TDS if the tax payable on the estimated total income is nil.

Can TDS be Avoided?

Yes, all individuals, including NRIs can apply to his ITO for deduction of income tax at a lower or nil rate. The ITO, after examining the veracity of the claim, may (or may not) issue an appropriate certificate on a plain paper to that effect within one month from the date of application (Instruction No. 1/2014, dt 15.1.14).

Almost always, this turns out to be a fruitless exercise. Firstly, for obvious reasons, it is difficult to convince the ITO and secondly, if the sanction is granted, it is applicable for only the current FY. Moreover such a certificate is interim or tentative or provisional in nature and would not bar the AO from initiating proceedings by changing of his opinion --- Areva T&D the Division Bench of the Delhi High Court, held on 25.4.11.

This leaves only the avenue of filing returns and this is a smooth process. All that you have to do is to appoint an accountant in India specialising in the field of filing returns practicing in the area of your home town in India to do the job. All he requires is your NRO pass book entries and his fees are very nominal, possibly below Rs. 1,000.

We have two suggestions.

  1. A large amount of your money in NRO account is repatriable and can be shifted over to your NRE account. The interest rates in NRO and NRE are mostly identical. NRE is tax-free without any limit and NRO is taxable.

  2. Shift over from Bank FDs to MF schemes. The MFs are excellently tax efficient.

Forex Income: Conversion into Rupees

As per Rule 115, the rate of exchange for the calculation of the value in rupees of any forex income shall be the telegraphic transfer buying rate of such currency as on the specified date.

Telegraphic Transfer Buying Rate (TTBR) and Telegraphic Transfer Selling Rate (TTSR) are the SBI rates for buying and selling forex made available through a telegraphic transfer.

For following incomes, specified date means the last day of the month immediately preceding the month in which:

a) Salary is due, or is paid in advance or in arrears.

b) Interest on securities is due.

c) Profits and gains from the business of operation of ships which is deemed to accrue or arise in India.

d) Dividend is declared, distributed or paid by the company.

e) Capital gains where the capital asset is transferred.


For following incomes, specified date means the last day of the previous year unless such income is received in, or brought into India by the assessee or on his behalf before the specified date in accordance with the provisions of FEMA.

a) Income from house property.

b) Profits and gains of business or profession (other than from operation of ships).

c) Income from other sources (other than dividends and interest on securities).


For capital gains arising from the transfer of shares or debentures of an Indian company, the rate of exchange shall be —

a) For converting the cost of acquisition: Average of TTBR and TTSR of the forex initially utilised for purchase of the asset.

b) For converting expenditure incurred in connection with its transfer: Average of the TTBR and TTSR.

c) For converting full value of consideration received or accruing on its transfer: Average of the TTBR and TTSR.

d) For reconverting capital gains computed in the forex initially utilised for its purchase into rupees: TTBR of such currency as on its date of its transfer.

However, where TDS is required to be applied on such incomes, the specified date would be the date on which the tax was required to be deducted and the exchange rate would be the TTBR of such currency on this date.

Uniform Rate of Exchange

In the case of capital assets acquired in forex, where the amount received in forex has to be converted into INR for determining the value of the acquisition and the consideration received for transfer of such a capital asset, it is the uniform rate of exchange which should be adopted for the purpose. It has been held by the Karnataka High Court, in the case of Jaya Kumari and Dilhar Kumari v CIT [1991] 189ITR99, that the exchange value prescribed in Rule 115 must necessarily be followed in computing the capital gains or loss, as the case may be. If the revenue takes the value of pound sterling as on 1-1-1954 (now 1-4-1981) as per Sec. 48 for the purpose of determining the acquisition value of the capital asset and the exchange rate of pound sterling as on the date of sale, it would be acting outside the scope of the Rules.

No TDS on Software

Notification 21/2012 SO 1323 (e) dt 13.6.12 declares that w.e.f. 1.7.12 no TDS shall be made u/s 194J on payment by a resident transferor for acquisition of software where —

  1. the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification, and

  2. tax has been deducted —

  3. u/s 194J on payment for any previous transfer of such software; or

  4. u/s 195 on payment for any previous transfer of such software from a non-resident, and the transferee obtains a declaration from the transferor that the tax has been deducted either under clause ( iia or b) along with the PAN of the transferor.

No TDS on Interest from Offshore Banking Units

U/s 197(A) interest paid by an offshore banking unit on interest paid on deposits made on or after 1.4.05 by an NRI or RNOR is not chargeable to tax u/s 10(15)(viii) and consequently, no TDS need be applied. CBDT Circular 26/2016 dt 4.7.16 has observed that any branch of a bank, Indian or foreign, located in Special Economic Zone is treated as an offshore bank.

Sec. 194LC & 194LD Rupee Denominated Bonds

As per Sec. 194LC, interest payable to an NRI on forex borrowings under a loan agreement entered into between 1.7.12 and 1.7.17 or by way of forex long-term bonds, including long-term infrastructure bonds issued between 1.10.14 and 1.7.17, suffer TDS at the concessional rate of 5%. Moreover, u/s 194LD, the benefit of this concessional rate was also available to FIIs and QFIs on their investments in Government securities and rupee denominated corporate bonds issued outside India.

The time limit for this concessional tax rate benefit has been extended up to 1.7.20, retrospectively from 1.4.16 in both the cases.


Any person, after becoming an NRI is required to inform the following institutions about change in his residential status:

a) banks where he has savings or term deposits,

b) companies where he has shareholding in physical form,

c) DPs where he has demat accounts, and

d) MFs whose units he holds.

The banks will redesignate the person’s running accounts as NRO. Some banks close all such accounts and open new ones, causing the account holder untold inconveniences such as requirement to change his KYCs, ECSs, etc. The companies and DPs will inform RBI to enable it monitor the limit on shareholding of all NRIs put together and the MFs will monitor the TDS and repatriability of the funds.

In practice, most of the NRIs do not inform. Fortunately, many of them do not face any problems because the regulatory mechanism of the regulators is not yet in place. Obviously, a few are apprehended and we hope you are not one of them. Realise that nothing is gained by breaking this rule.

It is also necessary to file the tax returns with status as an NRI. If the Indian income is below the taxable threshold, there is no need to file the returns, and if these are to be filed, an NRI need not have a PAN (though it is good to possess one). It is prudent to file the returns to maintain continuity and possess the card which you may need sometime.

Even after becoming an NRI, one is free to deal with all the investments and assets held prior to becoming an NRI any which way he desires. The only restriction is that, in theory, the original corpus is non-repatriable whereas in practice, it can be remitted under the one-million per FY facility. Income arising out of these assets is repatriable subject to tax compliance.

It is advisable to give a Power of Attorney (PoA) to a trustworthy Resident for ease of operations of bank accounts, investments and other financial transactions. All AD banks have their own Letter of Authority (LoA) for the limited purpose of effecting local disbursements and withdrawals for household expenses. Note that all the Post Office Schemes, including PPF are not available for NRIs.

Returning NRI

A person who returns to India permanently, becomes a Resident from day-1 of his arrival and is required to take within a reasonable period, the following actions —

  1. Inform the banks, MFs, DPs, etc. about the change in his status. Then these entities will redesignate these as Resident accounts.

  2. The NRE and FCNR accounts can be closed either immediately or allowed to run up to their maturity. Such deposits are treated as Resident deposits from the date of return. The originally contracted rates of interest will continue to be applicable until the maturity of the accounts. The FCNR remains tax-free if and only if the returning NRI becomes an RNOR but the NRE becomes taxable from the day of his return, irrespective of the status. Premature withdrawals attract penal provisions.

  3. There is also an option of transferring part or full balance to the credit of NRE and FCNR accounts to RFC account within a reasonable period from the date of the arrival in India. There is no penalty for such transfers.

If an NRI is on a short visit to India, the account may continue to be treated as non-resident account even during his stay in
India.

If the required actions are not taken in a reasonable time, one would be violating FEMA. He would also lose the benefit of Special Provisions as discussed in a previous chapter. What is reasonable time is not indicated in the Act and there are many who do not inform for years on the grounds that they might decide to go abroad once again. Acceptance of such an intention by the AO would depend upon the rent received by him.

Keeping Assets Abroad

FEMA Sec. 6(4) permits an NRI returning to India permanently to continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such assets were acquired, held or owned by him when he was an ROI or inherited these from an ROI. The income and sale proceeds of assets held abroad need not be repatriated.

Similarly, Sec. 6(5) permits an ROI to hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he himself was a Resident or inherited these from a Resident.

This general permission will not apply in respect of any asset received after becoming a Resident by way of gift or inheritance from abroad. Similarly, the benefit is not available on earnings from employment secured subsequent to the return. If the ex-NRI wishes to retain such assets abroad or liquidate them and deposit the money in an RFC account, he has to apply for permission to RBI.

Indian rupee has virtually become fully convertible. NRIs need no more hesitate to grab good investment opportunities in their motherland without any fear of not being able to repatriate the funds abroad, if and when needed. As a matter of fact, the convertibility has reached such a level that they can remit even their non-repatriable funds without much of a difficulty. These are the funds they owned before leaving India or inherited assets thereafter or invested their forex earnings in India on non-repatriable basis.

The procedure for tax compliance as discussed in Chapter General Provisions has to be followed for all the types of remittances.

Remittance of Current Income

Sec. 2(j) defines ‘current account transaction’ to mean a transaction other than a capital account transaction and without prejudice to the generality of the foregoing it includes —

a) Payments due in connection with foreign trade, other current business services and short-term banking and credit facilities in the ordinary course of business.

b) Payments due as interest on loans and as net income from investments.

c) Remittances for living expenses of parents, spouse and children residing abroad. and

d) Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Remittance of current income of an NRI like rent, dividend, pension, interest, etc., is freely allowed. It can also be credited to NRO if he has such an account. It can also be credited to NRE provided the AD bank is satisfied that the credit represents current income and the procedure for tax compliance has been followed correctly.

Remittance up to US$ 1 million

ADs allow remittance of assets up to US$ 1 million per FY to —

1. A foreign national not being a PIO or a citizen of Nepal or Bhutan), if he or she —

a) has retired from employment in India;

b) has inherited the assets from a person [referred to in Sec. 65) of FEMA] resident outside India who, when he was Resident held, owned, transferred or invested in Indian currency, security or any immovable property situated in India or inherited it from a person who was a Resident; and

c) is a non-resident widow or widower and has inherited assets from the person’s deceased spouse who was an Indian citizen Resident.

2. An NRI or a PIO,

a) out of balances held in NRO which may include sale proceeds of immovable property acquired by the NRI out of the resources in India, or by way of inheritance or gift;

b) out of assets acquired under a deed of settlement made by either of his/her parents or a relative. The settlement should take effect on the death of the settler. Any settlement without the settler retaining life interest may be reckoned as transfer by way of gift.

ADs also allow remittance of balance amount, held by a foreign student in a bank in India, after completion of studies or training in India. In case the remittance is made in more than one installment, all these should be made through the same AD.

Where the remittance is to be made from his NRO, the AD should obtain an undertaking from the account holder stating that the remittance is sought to be made out of the remitter’s balances held in the account arising from legitimate receivables in India and not by borrowing from any other person or a transfer from any other NRO account. If such is found to be the case, the account holder will be liable for penal action.

ADs also allow Indian entities to remit their contribution towards PF, superannuation or pension fund in respect of their expatriate staff resident but ‘not permanently resident’ in India.

Remittance of assets on hardship ground in excess of US$ 1 million in an FY would require RBI’s prior approval.

It is necessary to produce documentary evidence in support of the acquisition, inheritance or legacy of assets by the remitter. Additionally, proof of tax compliance is also necessary.

This US$ 1 million facility is over and above the repatriation of the sale proceeds of immovable property purchased through forex (Refer Chapter Immovable Property).

AP (DIR) Circular 117 dt 7.5.12 has now permitted the transfer of such funds from his NRO account to NRE account within the overall ceiling of US$ one million per FY. The tax, if any, must be paid out of the sale proceeds. The rest of the amount can be remitted abroad or credited to NRE.

The remittance facility in respect of sale proceeds of immovable property is not available to citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan. The facility of remittance of sale proceeds of other financial assets is not available to citizens of Pakistan, Bangladesh, Nepal and Bhutan.

For arriving at annual ceiling of remittance, sale proceeds of shares and immovable property owned or held by the citizen of foreign state on repatriation basis in accordance with the FEMR — Acquisition and Transfer of Immovable Property in India and also Transfer of Indian Security by an ROI shall not be included.

Surrendering Forex

An individual who is not a Resident should surrender forex due or accrued as remuneration for services rendered, whether in or outside India, or in settlement of any lawful obligation, or an income on assets held outside India, or as inheritance, settlement or gift within 7 days from the date of its receipt of and within 90 days in all other cases.

If such a person has acquired or purchased forex for any purpose mentioned in the declaration made by him to an AD and does not use it for such purpose or for any other permissible purpose shall surrender the unused portion thereof to an AD within 60 days from the date of its acquisition or purchase by him.

Where the forex acquired or purchased is for foreign travel, then, the unspent balance shall be surrendered within 90 days from the date of return of the traveller to India when the unspent forex is in the form of currency notes and coins and within 180 days when it is in the form of travellers cheques.

To Be or Not to Be

India is a great parking place for investible funds of NRIs. The money multiplies faster here. This opportunity should not be lost just because it has now become possible to convert rupees in forex and remit it abroad. The limit of US$ 1 million can be used every FY. Therefore, we feel that NRIs should indulge only in need-based remittances.

Other Issues

1. A foreigner who has come to India for study or training and has completed it may remit the balance in his account, representing funds derived out of remittances received from abroad or forex proceeds of FE sold to an AD or stipend or scholarship received.

2. Foreign nationals on temporary visit are allowed to take back the unspent amount of forex against Encashment Certificate or Bank Certificate in Form-ECF or Form-BCI respectively. Both the ECF and BCI are valid only for 3 months for reconversion of rupees into forex in all the cases, temporary visits or otherwise. Take care.

3. Rupee loans can be availed by foreign nationals or liaison offices of foreign companies only for personal purposes such as purchase of household articles up to a maximum of ` 5 lakh on the total borrowings of the depositor and his dependents from all the banks.

4. The RBI has, in a press release dt 2.5.03 clarified that foreign nationals, including PIOs, while in India, are free to pay charges towards booking airline and train tickets, hotels, hospitals, etc. either in Indian rupees or in equivalent forex.

5. Notification FEMA 5/2000-RB dt 3.5.2000 allows diplomatic missions, diplomatic personnel and non-diplomatic staff, who are the nationals of the concerned foreign countries and hold official passport of foreign embassies to hold deposits maintained in foreign currency accounts, subject to the conditions stipulated therein.

6. Notification GSR 90E) dt 18.9.07 permits ADs in India to effect remittance of assets of Indian companies under liquidation subject to compliance with the order issued by a court, Official Liquidator or the liquidator in the case of voluntary winding up.

Payment in Rupees

The following transactions are permitted by the RBI —

1. Requests for cash by foreign visitors or NRIs may be acceded up to US$ 3,000 or its equivalent.

2. Any person, to receive any payment in rupees —

    a) By order or on behalf of a ROI during his stay in India out of rupee funds provided to him by sale of forex to an AD or a money changer in India.

    b) Against a foreign bank cheque, draft, travellers cheque or foreign currency notes. The forex so received shall be sold to an AD or a money changer within 7 days of its receipt.

    c) By a postal or money order issued by a post office outside India.

3. A Resident, to make any payment in rupees ––

    a) Towards meeting expenses of a ROI who is on a visit to India on account of boarding, lodging and related services or travel to and from and within India.

    b) To an ROI, by means of a crossed cheque or a draft for purchase of gold or silver in any form imported by such person in accordance with the Foreign Trade (Development and Regulations) Act, 1992 or under any other law, rules or regulations for the time being in force.

    c) To bear the medical expenses of a visiting NRI / PIO who is a close relative.

RBI permits more than sufficient forex for specific needs of all Residents, inclusive of those who have permanently returned to India. Therefore, it is advisable not to have any RFC, RFCD and EEFC accounts or leave forex abroad only for availing forex or maintaining its repatriability.

General Conditions

All forex transactions have been classified either as capital or current account transactions. Those which do not alter the assets or liabilities of a person, including contingent liabilities, outside India are current account transactions.

Remittances of forex to Nepal, Bhutan, Mauritius, Pakistan or Bangladesh, Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Philippines and Ukraine are prohibited. There are no restrictions towards remittances to Mauritius and Pakistan for permissible current account transactions.

As per Sec. 5 of FEMA, Residents are free to buy or sell forex for any current account transaction except for specifically prohibited transactions.

Foreign visitors are allowed to convert up to US$ 5,000 in rupees.

It is not mandatory for ADs to endorse the amount of forex sold for travel abroad on the passport of the traveller, unless the traveller himself desires to have the details recorded. For a private visit, it should invariably be endorsed. In the case of a child travelling on a parent’s passport, the endorsement is made on the joint passport.

Residents may take or send up to two commemorative coins outside India, other than those covered by the Antique and Art Treasure Act, 1972. FEMR (Possession and Retention of Forex) allows a Resident to possess foreign coins without any limit.

Traveller’s cheques should be signed by the traveller in the presence of an authorised official.

Surrendering Unused Forex

Permissible forex can be drawn 180 days in advance. In case it is not possible to use it within this period it should be surrendered to the AD. Again, on return from a foreign trip, travellers are required to surrender unspent forex held in the form of currency notes and travellers cheques within 180 days of return. Following are the limits for possession or retention of forex —

a) Possession without limit of foreign coins by any person.

b) Retention by a Resident of foreign currency notes, bank notes and foreign currency travellers’ cheques not exceeding US$ 2,000 or its equivalent in aggregate provided it —

  • was acquired while on a visit to any place outside India by way of payment for services not arising from any business in or anything done in India.

  • was acquired as honorarium, gift, services rendered or in settlement of any lawful obligation from any person not Resident and who was on a visit to India.

  • was acquired by way of honorarium or gift while on a visit to any place outside India.

  • represents unspent amount of forex acquired by him from an authorised person for travel abroad.

Current Account Transactions Liberalised

RBI Circular 76 dt 24.2.04 has removed or diluted the requirement of RBI’s prior approval relating to current account transactions on remittances by Residents in following cases —

  1. Payment for securing health insurance from a company abroad.

  2. Earnings of artistes e.g., wrestler, dancer, entertainer, etc.

  3. Commission to agents abroad for sale of residential or commercial plots in India, exceeding 5% of the inward remittances. ADs now may freely allow such remittances up to US$ 25,000 or 5% of the inward remittance, per transaction, whichever is higher.

  4. Short-term credit to overseas offices of Indian companies.

  5. Where export earnings of the advertiser were less than ` 10 lakh during each of the preceding 2 years.

  6. Where the agreement for technical collaboration had not been registered with RBI. Henceforth, ADs may allow remittances for royalty and payment of lump sum fee, provided the royalty does not exceed 5% on local sales and 8% on exports and lump sum payment does not exceed US$ 2 million.

  7. Use of trademark or franchise in India. However, RBI’s prior approval will continue to be required for remittance towards purchase of trademark or franchise.

  8. Henceforth, the proposal for hiring of transponders by TV Channels and internet service providers will require prior approval of the Ministry of Information & Broadcasting.

Foreign Assets of a Resident

U/s. 6(4) of FEMA, a Resident may hold, own, transfer or invest in forex, foreign security or immovable property situated outside India if such assets were acquired, held or owned by him when he was an ROI or inherited these from an ROI. Circular AP (DIR) 90 dt 9.1.14 has clarified that such assets cover —

  1. Forex accounts opened and maintained by such a person.

  2. Income earned through i) employment or business or vocation outside India taken up or commenced or ii) from investments made or iii) from gift or inheritance received.

  3. Forex including any income arising therefrom, and conversion or replacement or accrual to the same, held outside India by a Resident acquired by way of inheritance from an ROI.

Such a Resident may freely utilise all his eligible assets abroad as well as income therefrom or sale proceeds thereof received after his return to India for making any payments or any fresh investments abroad, provided the cost of such investments and/or any subsequent payments received therefrom are met exclusively out of funds forming part of eligible assets.

Liberalised Remittance Scheme (LRS)

Resident individuals including minors can remit up to US$ 2,50,000 for any permitted capital or current account transactions or a combination of both. If the remitter is a minor, the LRS declaration form must be countersigned by the minor’s natural guardian.

There are no restrictions on the frequency of remittances under LRS. However, the total amount of forex purchased from or remitted through, all sources in India during the FY should be within the cumulative limit of US$ 2,50,000.

Remittance is on a gross basis and not on net of repatriation from abroad. This means that once a remittance has reached the LRS limit, no further remittance is possible during the FY even if some of the proceeds of the investments have been brought back into India during the same year.

Resident (but not permanently Resident) individuals who have remitted their entire earnings and salary and wish to further remit ‘other income’ may approach RBI through their AD bank for consideration.

The individual will have to designate a branch of an AD through which all the remittances under the Scheme will be made. The applicants should have maintained the bank account with the bank for a minimum period of one year prior to the remittance only for capital account transactions (not for current account transactions). He has to furnish Form A-2 regarding the purpose of the remittance along with all other documentation as required by the AD. The remitter needs to possess a PAN card.

However, if the amount does not exceed US$ 25,000 or its equivalent and the payment is made by a cheque or demand draft drawn on the applicant's bank account, a simple letter from the applicant (containing the basic information, viz., names and the addresses of the applicant and the beneficiary, amount to be remitted and the purpose of remittance) will suffice as long as the forex being purchased is for a permissible current account transaction. ADs shall prepare dummy A-2 for statistical inputs for Balance of Payment.

Note that there are no restrictions towards remittances for current account transactions even to Mauritius and Pakistan.

The permissible capital account transactions by an individual under LRS are —

  1. Opening forex account with a bank abroad.

  2. Purchase of immovable property abroad.

  3. In case members of a family pool their remittances to purchase a property, then the said property should be in the name of all the members who make the remittances. It can also be purchased with balances held by the Resident in his RFC bank account.

  4. Making investments abroad (for acquisition of shares, ESOPs, ESOPs linked to ADR/GDR qualification shares, investment in units of Mutual Funds, Venture Funds, unrated debt securities, promissory notes, etc.).

  5. Setting up Wholly Owned Subsidiaries and JVs abroad.

  6. Extending loans in INR to NRI relatives.

For remittances pertaining to permissible current account transactions, if the applicant is a new customer of the bank, ADs should carry out due diligence on the opening, operation and maintenance of the account. Further, the AD should obtain bank statement for the previous year from the applicant to satisfy themselves regarding the source of funds. If such a bank statement is not available, copies of the latest Income Tax Assessment Order or Return filed by the applicant may be obtained. He has to furnish the ‘application-cum-declaration’ for purchase of forex in the specified format along with Form A-2 regarding the purpose of the remittance and declare that the funds belong to him and will not be used for purposes prohibited or regulated under the Scheme.

Fund or non-fund based facilities (= loans) can be entertained by the ADs to their resident individual customers to facilitate remittances only for current (not for capital) account transactions under LRS.

Remittance can be consolidated in respect of close family members subject to the individual members being compliant. However, clubbing is not permitted of other family members for capital account transactions such as opening a bank account, making investment, purchasing property, etc., if they are not the co-owners or co-partners of the transaction. Further, a Resident cannot gift forex to another Resident, for the credit of the latter’s forex account held abroad under LRS.

An offshore banking unit in India cannot open forex accounts in India for Residents under the Scheme.

Expenses incurred by individuals for the following purposes are subsumed under LRS w.e.f. 26.5.2015:

  1. (a) Private visits to any country (except Nepal and Bhutan).

  2. (b) Gift or donation.

  3. (c) Going abroad for employment.

  4. (d) Emigration.

  5. (e) Maintenance of close relatives abroad.

  6. (f) Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up.

  7. (g) Expenses in connection with medical treatment abroad.

  8. (h) Studies abroad.

  9. (i) Any other current account transaction.

In respect of such activities, note the following:

  1. Any Resident individual or entity such as a trust, company, partnership firms, etc., may remit up to US$ 2,50,000 in one FY as gift to a person or as a donation to an organization outside India. A Resident cannot gift to another Resident for the credit of the latter’s forex account held abroad under LRS.

  2. A Resident is free to send outside India (export) any gift article, which may be free to be exported as per the extant Foreign Trade Policy, of value not exceeding ` 5 lakh. Such gifts may be sent outside India without furnishing the declaration in Form EDF / SOFTEX, as the case may be.

  1. Receiving grant / donation from abroad is under the Foreign Contribution Regulation Act, 1976 which is administered and monitored by the Ministry of Home Affairs whose address is — Foreigners Division, Jaisalmer House, 26, Mansingh Road, New Delhi-11001. No specific approval from RBI is required.

  1. For medical expenses, or check-up abroad, AD banks may allow amount exceeding the LRS limit provided the request is supported by an estimate from a hospital or doctor in India or abroad. Otherwise, a self-declaration in Form A2 and ‘Application cum declaration for purchase of forex’ is sufficient. Additionally, an amount up to the LRS limit is available to an attendant accompanying the patient.

  2. The Scheme also covers expenses incurred in going abroad for employment, emigration, maintenance of close relatives abroad, studies abroad and any other current account transaction. However, for expenses in connection with emigration, medical treatment or studies abroad, individuals may be permitted to exceed LRS limit, if it is so required by the country of emigration, medical institute offering treatment or the university.

  3. A Resident individual may give a loan (or a gift) to a close NRI relative under the LRS by way of crossed cheque or electronic transfer, subject to —

    1. a) It is free of interest and the minimum maturity is 1 year.

    2. b) It should be credited to the NRO account of the NRI.

    3. c) It shall not be remitted outside India. It should be utilised for the borrower’s personal requirements or his own business in India.

  1. Where an AD in India has granted loan to an NRI, a Resident close relative is permitted to repay the loan taken by NRI.

  2. General permission is available to persons other than individuals to remit towards donations up to 1% of their forex earnings during the previous 3 FYs or US$ 5 million, whichever is less, for a) creation of Chairs in reputed educational institutes, b) contribution to funds (not being an investment fund) promoted by educational institutes and c) contribution to a technical institution or body or association in the field of activity of the donor company.

Other Investments Outside India

Resident individuals can use LRS for making investments in —

a) MFs, Venture Funds, unrated debt securities, promissory notes, immovable property, shares of both listed and unlisted overseas company, debt instruments and any other asset outside
India such as objects of art subject to the Foreign Trade Policy.

b) ESOPs and ESOP-linked ADRs / GDRs offered by a foreign company to a Resident employee or a Director of an Indian office, etc. (Refer Chapter Employees’ Stock Option). Purchase of foreign securities under ADR/GDR linked stock option schemes by Resident employees of Indian companies in the knowledge based sectors, including working directors provided purchase consideration does not exceed US$ 50,000 or its equivalent in a block of 5 calendar years.

c) Qualification shares for becoming a director of a company outside India to the extent prescribed as per the law of the host country where the company is located provided it does not exceed the limit prescribed under the LRS.

d) Shares of a foreign entity in part / full consideration of professional services rendered to the foreign company and also in lieu of Director’s remuneration.

Remittance facility under the Scheme is not available for —

a) Margins or margin calls to overseas exchange counterparty.

b) Purchase of FCCBs issued by Indian companies in the overseas secondary market.

c) Trading in forex abroad.

d) Remittances directly or indirectly to Nepal, Bhutan, Mauritius, Pakistan and to countries identified as non co-operative countries and territories.

e) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by RBI to the banks.

International Credit & Debit Cards

ADs are permitted to issue International Debit Cards (IDCs) which can be used by a Resident individual for drawing cash or making payment to a merchant establishment overseas during his visit abroad. IDCs can be used only for permissible current account transactions and the usage of IDCs shall be within the LRS limit.

AD banks can also issue Store Value Card, Charge Card, or Smart Card to Residents travelling on private or business visit abroad which can, besides the above facilities, be also used for drawing cash from ATM terminals. the use of such cards is limited to permissible current account transactions and subject to the LRS limit.

Resident individuals maintaining a forex account with an AD in India or a bank abroad, are free to obtain International Credit Cards (ICCs) issued by overseas banks and other reputed agencies. The charges incurred against the card either in India or abroad can be met out of funds held in such accounts or through remittances from India only through a bank where the card holder has a current or savings account. Such remittances should be made directly to the card-issuing agency abroad, and not to a third party. The applicable credit limit will be the limit fixed by the card issuing banks. The LRS limit shall not apply to the use of ICC for making payment by a person towards meeting expenses while such person is on a visit outside India. Use of ICCs/ IDCs can be made for travel abroad in connection with various purposes and for making personal payments like subscription to foreign journals, internet subscription, etc.

Incidentally, if an individual holds two or more ICCs, his limit on usage gets forex increased.

Use of these instruments for payment in forex in Nepal and Bhutan is not permitted.

Foreign Securities & Residents

General permission has been granted to a Resident for purchase or acquisition of securities —

  1. (a) Out of funds held in RFC account.

  2. (b) Bonus or Rights shares on existing holding of forex shares.

  3. (c) Gift from a person Resident Outside India.

  4. (d) Under Cashless ESOP of a company incorporated outside India, provided it does not involve any remittance from India.

  5. (e) Inheritance from a person whether resident in or outside India.

  6. (f) When not permanently Resident, out of his forex resources outside India.

  7. (g) Purchase of shares of a JV / WOS abroad of the Indian promoter company by the employees or directors of Indian promoter company which is engaged in the field of software where the consideration for purchase does not exceed US$ 10,000 or its equivalent per employee in a block of 5 calendar years.

A Resident individual holding qualification or rights shares may sell these provided the sale proceeds are repatriated to India through normal banking channels and documentary evidence thereof is submitted to the AD.

The investor can retain and reinvest the income earned on investments made under the LRS. He is not required to repatriate the funds or income generated out of investments made.

Dividends as well as STCG received from abroad are chargeable to tax in India in the hands of the investor at the normal rates of tax, based on their slab rate. LTCG in the case of foreign companies is charged to tax @ 20% after claiming the benefits of indexation. The investor has the right to claim the benefit of DTAA.

Gifts of Securities

As per AP (DIR) Circular 14 dt 15.9.11, a Resident who proposes to gift to an ROI any security including shares or convertible debentures requires RBI’s prior approval. The limit on value of security to be gifted together with any security already gifted by the transferor, has been raised from US$ 25,000 during a calendar year to US$ 50,000 per FY.

Pledge / Sale of Foreign Securities

The shares acquired by Residents in accordance with the provisions of FEMA are allowed to be pledged for obtaining credit facilities in India from an AD Category-I bank or a Public Financial Institution. He may also sell such shares provided the proceeds are repatriated not later than 90 days from the date of sale.

Miscellaneous Provisions

In addition to all this, exchange to the extent needed may be released by the ADs for the following purposes:

  • Remittance by tour operators or travel agents to overseas agents, principals, hotels, etc.

  • Fee for participation in global conferences and specialised training.

  • Remittance for participation in international events and competitions (towards training, sponsorship and prize money).

  • Film shooting.

  • Disbursement of crew wages.

  • Remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL, etc.

  • Skills / credential assessment fees for intending migrants.

  • Visa fees.

  • Processing fees for registration of documents as required by the Portuguese (or other) Governments.

  • Registration, subscription and / or membership fees to International Organisations.

  • Other permissible current account transactions without any limits subject to the AD verifying the bona fides.

  • Securing health insurance from an insurer abroad.

Small Value Remittances

ADs may release forex not exceeding US$ 25,000 for all miscellaneous non-trade current account transactions on the basis of a simplified application-cum-declaration version of Form-A2 in place of the normal Form-A2. The payment should be made by a cheque drawn on the applicant’s bank account or by a DD.

Post Office

GSR 405(E) 3.5.2000, of RBI permits anyone to buy forex from any post office, in the form of postal orders or money orders.

Tax Clearance Certificate No More Required

Ministry of Finance & Company Affairs declared that from 9.1.03 onwards, any person who is not domiciled in India or who is domiciled in India at the time of his departure but intends to leave India as an emigrant or intends to proceed to another country on a work permit will not be required to obtain a tax clearance certificate. However, in some cases, the authorities will notify the emigration authorities that some specified persons should not be allowed to leave India without obtaining a tax clearance certificate. Excellent! This has nullified the rampant corruption that existed while issuing such clearance.

Expenses of an ROI

A Resident can pay in Indian Rupees towards meeting expenses on account of boarding, lodging and services related thereto of an ROI who is on a visit to India, including tickets for his visits within India or even to any third country. For instance, Residents can book ticket for his travel from London to New York, through domestic or foreign airlines in India. This would be a part of the traveller’s overall entitlement under LRS.

Where the medical expenses in respect of NRI close relative are paid by a Resident individual, such a payment being in the nature of a Resident to Resident transaction may be covered under the term “services related thereto”

General Provisions

  • No import license or Customs Clearance Permit (CCP) is required for the clearance of goods as bona fide baggage.

  • There is no provision in the baggage rules to endorse the value of the baggage in passports. Passenger desiring a proof can request for endorsement at the back of the return ticket.

  • The allowances are per individual and cannot be pooled with that of another, even between husband and wife.

  • A passenger may request the customs for issue of an import/export certificate for articles of high value such as video cameras, cassette recorders, jewellery, etc., at the time of his arrival or departure to facilitate its re-import or re-export subsequently, without affecting the free allowance available. Normally, such goods are packed and therefore, it is inconvenient to take these out for inspection of the officer. In such cases, the certificates can be issued in advance, valid for 1 year in custom houses, international airports and sea ports.

  • Carrying narcotic drugs is strictly prohibited and the punishment can be very serious.

  • Import of consumer goods in commercial quantity is not treated as part of bona fide baggage.

  • Goods brought through a carrier or courier are not ‘gifts’ or ‘personal baggage’ of the carrier. These will be classified as imported goods requiring a valid import licence. The rates are governed under the Courier Imports (Clearance) Regulations, 1998 (Circular 56/95-Cus. dt 30.5.95).

  • There is a procedure prescribed whereby the passengers leaving India can take the export certificate for the various high value items such as camera, video camera, as well as jewellery from the Customs authorities. Such an export certificate facilitate re-importation of such goods while bringing back the things to India as no duty is charged. The advantage of having the Export Certificate is that the concessions you are entitled to, when you return, are not affected.

  • Passenger may request detention of dutiable or prohibited articles for being returned to him while leaving India. The request can be made either for payment of duty or for re-export or subsequent production of documents. The request for detention cannot be entertained after the goods have been confiscated and/or penalty imposed.

  • If the passenger does not come for clearance of the goods within the specified period as indicated in the receipt, the authorities can dispose of the goods, deduct customs duty and incidentals and refund the balance.

Classes of Articles

Articles specified in Annexure-I are prohibited. Only one unit of the first 14 items specified in Annexure-II can be imported whereas items in Annexure-III can be imported in any quantity, subject to the overall limit applicable to the passenger. Quantities exceeding the limit are subject to a concessional duty (Refer Valuation of Goods & Custom Duty).

Items which attract general allowance for duty-free imports are given in Table-1. Items for personal use are available in Table-2 whereas household items are available in Table-3.

Annexure-I (Applicable to Rule 3, 4 or 6)

1. Fire arms.

2. Cartridges of fire arms exceeding 50.

3. Cigarettes exceeding 100 or cigars exceeding 25 or tobacco exceeding 125 grams.

4. Alcoholic liquor or wines in excess of two litres.

5. Gold or silver, in any form, other than ornaments.

6. Flat Panel (LCD/LED/Plasma) Television.

Annexure-II (Applicable to Rule 6)

1. Colour Television or Monochrome Television.

2. Video Home Theatre System.

3. Dish Washer.

4. Domestic Refrigerators of capacity above 300 litres.

5. Deep Freezer.

6. Video Camera with or without combination of one or more of a) Television Receiver; b) Sound recording or reproducing apparatus; c) Video reproducing apparatus.

7. Cinematographic films of 35 mm and above.

8. Gold or Silver, in any form, other than ornaments.

Annexure-III(Applicable to Rule 6)

1. Video Cassette Recorder or Video Cassette Player or Video Television Receiver or Video Cassette Disk Player.

2. Digital Vedio Disc Player.

3. Music System.

4. Air Conditioner,

5. Micro Oven.

6. Wordf Processing Machine.

7. Fax Machine.

8. Portable Photocopying Machine

9. Washing Machine.

10. Electrical or Liquefied Petroleum Gas Cooking Range.

11. Personal Computer (Desktop Computer).

12. Laptop Computer (Notebook Computer).

13. Domestic Refrigerator of capacity up to 300 litres.

Table-1 : General Duty Free Allowance Items

Airconditioner

Exposure meter

Processed food

Bedding

Films

Radio

Bicycle

Fishing rod

Rain coat

Binocular

Flash units

Razor & blades

Blanket

Food processor

Record player

Blender

Frying pan

Refrigerator

Calculator

Games

Room heater

Car coat

Garments

Rotisserie

Car stereo

Glassware

Service trolley

Carpet sweeper

Gloves

Sewing machine

Cassette player

Golf set

Shoes & socks

Cassette recorder

Hair clipper

Slide projector

Cassette tape

Hair dryer

Smoking pipe

Cheese tins

Hand bag

Sports equipment

Chewing gum

Handkerchief

Stationery

Chocolates

Wall pictures

Still camera

Cigarette

Head-gear

Tape recorder

Cigarette lighter

Headphone

Telephone set

Clock

Health equipment

Textiles

Coffee maker

Heating tray

Time piece

Confectionery

Iron

Toaster

Cooking stove

Iron board

Toiletries

Cosmetics

Juice extractor

Toys

Costume jewellery

Kitchen utensils

Tuner

Crockery

Knitting machine

TV Set

Curios

Lacquer-ware

Two-in-one

Cutlery

Meat grinder

Umbrella

Decoration pieces

Medicines

Under garments

Deep freezer

Mixer

Vacuum cleaner

Deck amplifier

Mosquito destroyer

Vase

Dictaphone

Movie camera

Video camera

Digital audio disc

Movie projector

Video player

Digital clock

Music system

Video tape

Dinner set

Musical Instrument

Voltage regulator

Dish washer

Nail cutters

Wall paper

Door bell

Ordinary typewriter

Washing machine

Dry fruits

PC

Water cooler

Electric fan

Perfume

Water heater

Electric iron

Phonograph records

Water/air purifier

Electric toaster

Photographic outfits

Weighing scale

Electric micro oven

Playing cards

Wig

Electronic typewriter

Polish

Wrist watch

Embroidery

Pressure cooker


Table-2: Personal Effects

Bedding

Handkerchiefs

Pants

Sarees

Blankets

Hair dryer

Petticoats

Salwars

Bedsheets

Hair curler/styler

Perfumes

Shoe polish

Sleeping bag

Hearing aids

Toilet articles

Shoe brush

Boiler suits

Headgear

Cosmetics

Spectacles

Blouses

Chair for Invalid

Suits

Tops

Dresses

Jeans

Shirts

Towels

Dentures

Lungis

Shoes

Underwear

Frocks

Neckties

Socks

Umbrella

Gloves

Nighties

Shaving kit

Walking stick

Table-3 : Household Effects

Blender

Kitchenware

Toaster

TV

Crockery

Linens

Utensils

Music System

Cutlery

Liquidizer

Air Conditioner

Camera

Iron

Oven

PC

Typewriter

Egg beater

Pressure cooker

Refrigerator

Tapes

Glassware

Rotisserie

Deep Freezer

Films

Juicer

Tablewares

VCR/VCP

Vehicles


As per Circular 72/98-Cus. dt 24.9.98 personal effects would also include the following:

a) Personal jewellery.

b) One camera with film rolls not exceeding twenty.

c) One video camera / camcorder with accessories and with video cassettes not exceeding twelve.

d) One pair of binoculars.

e) One portable colour television (not exceeding 15 cm in size).

f) One music system including compact disc player.

g) One portable typewriter.

h) One perambulator.

i) One tent and other camping equipment.

j) One computer (laptop/note book).

k) One electronic diary.

l) One portable wireless receiving set (transistor radio)

m) Professional equipments, instruments and apparatus of appliances including professional audio/video equipments.

n) Sports equipments — one fishing outfit, one sporting firearm with 50 cartridges, one non-powdered bicycle, one canoe less than 51 metres long, one pair of skids, two tennis rackets, one golf set consisting of 14 pieces with a dozen golf balls.

o) One cell phone. Satellite phone is not permitted to be imported except against a licence to be issued by the WPC wing of Ministry of Communication and Information Technology.

p) Cinematographic films, exposed but not developed.

Duty-Free Items

All over the world, no duty is levied on used personal effects, (excluding jewellery), required for satisfying daily necessities. Though there is no limit, the number of items should be reasonable. One wrist watch, irrespective of its value, is personal effects. The Indian Customs Baggage Rules, 2016 have done away with different allowances for persons under or over 10 years of age. Infants can have freedom only for used personal items and not any duty-free allowance.

Residing in India (Rule-3)

A Resident tourist is a person with an Indian passport or a foreigner normally residing in India, who has gone abroad on a short trip. The duty-free allowance for such a tourist returning after a trip abroad is ` 50,000 and ` 15,000 for the foreigner. This is in addition to the items mentioned in Annexure-I.

Nepal, Bhutan or Myanmar (Rule-4)

For passengers coming from Nepal, Bhutan or Myanmar (Burma) other than by land route, and also for those coming from Pakistan by land route, the allowance is ` 15,000.

Professionals (Rule-5)

A person who is engaged in a profession abroad or is transferring his residence to India shall be allowed, in addition to the allowances mentioned in Rule-3 and Rule-4 above, the following additional concessions—

  1. 3 to 6 months: ` 60,000.

  2. 6 months to 1 year: ` 1,00,000.

  3. 1 year to 2 years: ` 2,00,000, provided the passenger should not have used this concession in preceding 3 years.

  4. Over 2 years: ` 5,00,000, provided ---

  1. a) the minimum stay abroad is 2 years immediately preceding the date of arrival in India. Shortfall up to 2 months in stay abroad can be condoned by Deputy or Assistant Commissioner of Customs if early return is on account of i) terminal leave or vacation ii) any other special circumstances for reasons to be recorded in writing.

  2. b) Total stay in India during the two preceding years should not exceed 6 months. This condition can be waivered by Principal Commissioner or Commissioner of Customs for reasons to be recorded in writing.

  3. c) Passenger should not have availed this concession in the preceding 3 years. No condonation of this condition is possible.

This concession is not available to those who were merely on training abroad, unless the passenger is a government official deputed on training abroad.

This concession cannot be availed in conjunction with TR concessions specified by Rule-8. These allowances are in addition to those offered by Annexures I, II and III.

‘Professional equipment’ consists of portable equipment, instrument, apparatus and appliance as are required in the profession by a carpenter, plumber, welder, mason, and the like and shall not include items of common use such as cameras, cassette recorder, dictaphone, personal computer, typewriter, and other similar articles.

Jewellery (Rule-6)

The limit to import, free of duty, on jewellery is up to weight of 20 gms with a value of ` 50,000 for males and up to weight of 40 gms with ` 2,00,000 for females. This rule is also applicable to a person transferring residence.

Even an infant can enjoy this full concession provided the jewellery is for bona fide use of the infant. The value of jewellery is determined at the prevailing international rates. Import of old jewellery for conversion into new one and subsequent re-export is not permitted.

There is no value limit on the export of gold jewellery through baggage, if it constitutes the bona fide baggage of the passenger (F. 495/19/93-Cus VI, dt 6.10.94). Note that incentives for export of jewellery through legal commercial channels are more attractive.

Commercial export of gold jewellery through the courier mode is permitted subject to observance of prescribed procedures.

Foreign Tourists (Rule-7)

Foreign Tourist is a person not normally Resident who enters India for a stay of not more than 6 months, in the course of any 12 months, for legitimate non-immigrant purposes, such as touring, recreation, sports, health, family reasons, study, pilgrimage or business. Such a tourist, either of Indian origin or otherwise is allowed used personal effects and travel souvenirs if these are for his personal consumption. Balance should be re-exported when he leaves India.

Tourists of Indian origin can avail the general allowances available to passengers who are Indian Resident or a foreigner residing in India as per Rule-3 or Rule-4. Tourists of foreign origin can bring articles up to ` 8,000 and travel souvenirs (other than those mentioned in Annexure-I) for personal use or gifts.

There is no free allowance for tourists of Nepalese or Bhutanese origin coming from their respective countries.


Under Public Notice 34-ITC(PN)/78 dt 16.5.78, an NRI or a PIO, major or minor, who is normally Resident abroad is entitled to import articles of personal and household effects up to ` 5,000, subject to certain conditions. Baggage of family members may be pooled or treated separately. This allowance should be allowed irrespective of educational qualification or profession of the tourist. For example, goldsmith can bring with him his plumbing tools.

Transfer of Residence (Rule-8)

A person on Transfer of Residence (TR) to India is a person whose minimum stay abroad is of 2 years immediately preceding the date of his arrival on TR. He can bring with him any used personal and household articles, other than those listed at Annexure I or II, but including all the items in Annexure III. The total stay in India on short visits during these 2 preceding years should not exceed 6 months and he should not have availed this concession in the preceding 3 years. The concessions can be availed only once in 3 years. This condition cannot be relaxed.

In case there is a shortfall of up to 2 months in the stay abroad and if his early return is on account of terminal leave or vacation or any other special circumstances, it can be condoned by Assistant or Deputy Commissioner of Customs. Only the Commissioner can extend the period of stay in India of 6 months in deserving cases.

Persons who had availed TR were required to stay in India for minimum one year after their return; not any more.

Indian diplomats, if called back to India in public interest before the stay of 2 years, are also eligible for the concessions provided a certificate to that effect from the ministry of external affairs is produced and the items have been in use and possession of the diplomat for more than 6 months.

Articles allowed free of duty are — used personal and household articles, other than those listed in Annexure I or Annexure II but not Annexure III. This is in addition to the allowances offered by Rule-3 and Rule-4 and Rule-6.

TR is not available to each member of the family if they are having a common establishment and staying together. Not more than one unit of each item can be imported by a family.

The passengers, including foreign nationals, will have to pay duty on brand new items for personal use or gifts. Any article will be presumed to be in use if it has been in possession of the passenger for one year. Physical appearance that an article looks new is no ground for denying TR benefit. Purchase bill is to be taken as sufficient evidence. TR benefit must be allowed unless the revenue has sufficient evidence to prove otherwise —Jiwa Singh v. Union of India and Another 1990 (45) ELT 229 (Del.).

Even if the goods are liable to confiscation, exemption of TR cannot be denied — Naresh Lokumal Serai v Commissioner of Customs (Export) Raigad 2006 (203) ELT 0580 Tri-Bom.

TR for Foreigner Specialist

A foreigner with special technical knowledge or experience, finding that he cannot take the benefit of TR for one reason or another, (e.g., his resident permit of visa is for less than one year) may be allowed with prior approval of RBI, to get his goods released on giving a suitable bond. Other conditions of TR would prevail. The bond can be cancelled if and when he gets the visa extended.

Unaccompanied Baggage (Rule-9)

Passengers are allowed to send their baggage through cargo as unaccompanied baggage provided it has been in possession abroad of the passenger and has been dispatched 1 month after his arrival in India or such further period as Deputy or Assistant Commissioner of Customs may allow. The baggage may land in India 2 months in advance before the arrival of the passenger or within such period not exceeding 1 year as the Commissioner or Deputy Commissioner may allow, for reasons to be recorded in writing.

These Rules shall apply to such baggage, unless specifically excluded. re is no free allowance for such baggage which is chargeable to Customs duty @ 35% ad valorem + 3% Education Cess .

Avoid sending used personal effects through unaccompanied baggage. The provisions of Rule-8 are extended to unaccompanied baggage, except where they have been specifically excluded. Consequently, in our opinion,, the concessions to the extent of shortfall availed on the accompanied baggage can be claimed on unaccompanied baggage.

The unaccompanied baggage should be in the possession abroad of the passenger and shall be dispatched within one month of his arrival in India and land in India up to two months before the arrival of the passenger. The Deputy / Assistant Commissioner of Customs may allow an extension of this period not exceeding one year, for reasons to be recorded, if he is satisfied that the passenger was prevented from arriving in India within the stipulated period due to circumstances beyond his control.

Such baggage can also be received by a friend or relatives of the passenger.

NRIs passing through India in transit may also pay the freight in rupees only if it was obtained by sale of forex by the traveller.

The freight rates are normally half the usual cargo rates with a minimum charge for 10 kgs. Freight on accompanied baggage can be accepted in rupees if the fare of the traveller to India was collected in rupees either in India or abroad.

Public Notice 29/86 states that no demurrage is chargeable for storage of baggage since it is baggage and not cargo. This also applies to cases where the goods were detained at the instance of the customs —R. K. Pariyar v. International Airport Authority of India, 1993 (63) ELT 411 (Del).

Prohibited or Restricted Items

Certain goods are prohibited (banned) or restricted (subject to certain conditions) for import and/or export. These are goods of social, health, environment, wild life and security concerns. While it is not possible to list all the goods, more common of these are :

1. Export of most species of wild life and articles made from wild flora and fauna, such as ivory, musk, reptile skins, furs, shahtoosh, etc.

2. Trafficking of narcotic drugs and psychotropic substances.

3. Export of goods purchased against forex brought in by foreign passengers are allowed except for prohibited goods.

4. Carrying of Indian currency notes in the denomination of
` 500 and ` 2,000 to Nepal is prohibited.

5. Export of Indian Currency is strictly prohibited. However Indian residents when they go abroad are allowed to take with them Indian currency not exceeding ` 25,000.

6. Tourists while leaving India are allowed to take with them foreign currency not exceeding an amount brought in by them at the time of their arrival in India. As no declaration is required to be made for bringing in forex / currency not exceeding equivalent of U.S. $ 10,000, generally tourists can take out of India with them at the time of their departure forex/ currency not exceeding the above amount.

7. Indian residents going abroad are permitted to take with them foreign currency without any limit so long as the same has been purchased from an authorised forex dealer.

8. Pornographic material and pirated goods and good infringing any of the legally enforceable.

9. Intellectual property rights.

10. Antiquities.

11. Live birds and animals including pets.

12. Plants and their produce, e.g. fruits, seeds.

13. Endangered species of plants and animals, whether live or dead.

14. Any goods for commercial purpose: for profit, gain or commercial usage.

15. Radio transmitters not approved for normal usage.

Following items are prohibited from being carried either in checked-in or hand baggage —

  • Briefcase with built-in alarms or lithium batteries and/or pyrotechnic materials.

  • Compressed gases, toxic, refrigerated liquids, like camping gas devices.

  • Corrosive products, acids, mercury, alkali and wet batteries.

  • Flammable liquids, coal gas, paints and thinners.

  • Asbestos materials.

  • Oxidising agents such as chloride of lime and peroxide.

  • Flammable solids, matches and material which ignite easily substances capable of spontaneous combustion or which on contact with water emit flammable gases.

  • Poisonous and infectious substances.

  • Radioactive substances.

Hand bag cannot carry — Gels, Alcohol, Liquids, Creams, Lotions, Sharp articles, etc.

Satellite phone is not permitted to be imported except against a licence issued by the WPC wing of Ministry of Communication and Information Technology

One Laptop Computer Imported as Baggage Exempt

Notification 11/2004 dt 8.1.04 has exempted from the duty one laptop computer (notebook) when imported into India by a passenger of the age of 18 years or above (other than a member of the crew).

Import of Baggage of Deceased Person

Used, bona fide personal and household effects belonging to a deceased person are allowed to be imported free of duty subject to the condition that a Certificate from the concerned Indian Embassy or High Commission is produced regarding the ownership of the goods by the deceased person — MoF Notification 103 (F. 56/7/Cus VI) dt 19.7.69. In such a case, the value should be ignored, especially when the person is the widow of the deceased person — Padma K. Fokul Fandhi v Collector of Customs, Mumbai 1995 (78) ELT 265 (Tribunal).

Pets, Wild Animals

Export of most species of wild life, exotic birds, wild orchids and articles made from flora and fauna such as ivory, musk, reptile skins, furs, tiger skins, shahtoosh, etc., is prohibited.

Import of pets up to two numbers per passenger are allowed as baggage only to persons transferring their residence to India after two years of continuous stay abroad in terms of Baggage Rules, 1998 subject to production of required health certificate from country of origin and examination of the said pets by the animal quarantine officer without an import licence issued by DGFT.

Import & Export of Currency

Travellers going out of India are allowed to purchase forex currency notes and coins up to US$ 3,000 per visit. Balance amount can be carried in the form of store value cards, travellers cheque or banker’s draft. This facility is per individual, including children, major or minor.

However, travellers proceeding to Iraq and Libya can draw up to US$ 5,000 or its equivalent per visit and those proceeding to the Islamic Republic of Iran, Russian Federation and other Republics of Commonwealth of Independent States can draw entire forex (up to US$ 250,000) in the form of notes or coins. For travellers proceeding for Haj / Umrah pilgrimage, full amount of entitlement (US$ 250,000) in cash or up to the cash limit as specified by the Haj Committee of India, may be released by the ADs and FFMCs.

Normally, tourists, while leaving India, are allowed to take with them forex not exceeding an amount brought in by them at the time of their arrival in India. As no declaration is required to be made for bringing in currency notes up to equivalent of US$ 5,000, generally they can take with them at the time of their departure currency notes not exceeding this limit.

A resident of India, who has gone out of India on a temporary visit may bring into India at the time of his return from any place outside India (other than Nepal and Bhutan), Indian currency notes up to ` 25,000.

Any person resident outside India, not being a citizen of Pakistan and Bangladesh and also not a traveller coming from and going to Pakistan and Bangladesh, and visiting India may bring Indian currency notes up to ` 25,000 while entering only through an airport. Any person Resident who had gone to Pakistan and / or Bangladesh on a temporary visit, may bring into India at the time of his return, Indian currency notes up to ` 10,000 per person.

A person coming into India from abroad can bring with him forex without any limit. However, if the aggregate value in the form of currency notes, bank notes or travellers cheques brought in exceeds US$ 10,000 and/or the value of foreign currency alone exceeds US$ 5,000 or its equivalent, it should be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF), on arrival in India. ADs and their exchange bureaux are required to issue Encashment Certificates (EC) in Form-ECF in all cases of purchase of forex from the public, irrespective of whether the Currency Declaration Form (CDF) has been submitted or not by the tenderer of the forex and whether the tenderer requests for the certificate or not. In the absence of encashment certificate, unspent local currency held by non-resident visitors will not be allowed to be converted into forex.

Since Indian notes and coins (other than ` 500 or ` 2,000 notes) are acceptable currency in Nepal and Bhutan, travellers can carry Indian currency without any limit but in denomination not above ` 100. There is no necessity of carrying forex.

Permissible forex can be drawn 180 days in advance by an individual, Resident. Forex for travel abroad can be purchased from an authorized person against rupee payment in cash below ` 50,000. However, if the sale of foreign exchange is for the amount equivalent to ` 50,000 and above, the entire payment should be made by way of a crossed cheque, banker’s cheque, pay order, demand draft, debit card, credit card or prepaid card only.

Registration for Foreign Nationals

Anyone entering India on a student, employment, research, medical, medical attendant or missionary visa, which is valid for over 180 days, is required to register with the Foreigners Registration Officer under whose jurisdiction he proposes to stay, within 14 days of arrival in India.

Foreigners visiting India on any other category of visa that is valid for over 180 days are not required to register themselves if their actual stay does not exceed 180 days on each visit. If such a foreigner happens to find that his stay would go beyond 180 days, he should get himself registered before he crosses the limit.

Foreign nationals who are exempt from registration are —

a) those having visa for 180 days or less;

b) children under 16 years of age, irrespective of the type of visa;

c) those holding OCI card.

Irrespective of the type of Visa, Pakistani nationals are required to register within 24 hours and Afganistan nationals within 14 days of their arrival in India.

If at any time, a foreigner proposes to be absent from the registered address for a continuous period of 8 weeks or more, or is changing the address or is finally departing from India, he shall, before leaving inform in person, or through an authorised representative, or by registered post to his jurisdictional Registration Officer.

For updated information and in case of any difficulty or complaint, you can contact the Customs Officer (PRO).

As per Sec. 139A (5a & b), from 1.1.05 it is mandatory to quote PAN on challans for any payments due to the Department. Moreover, Sec. 139A(5c) read with Rule 114B makes it compulsory to quote PAN in all documents pertaining to some financial transactions, mainly purchase and sale of shares and MF schemes. Because of the distance, NRIs find it very difficult to obtain a PAN mainly due to lack of understanding of the exact requirements. This is an attempt to clarify the position in detail.

Though NRIs are not mandatorily required to possess a PAN, it is advisable to possess a PAN.

How to Obtain PAN

UTI Investor Services Ltd. (UTIITSL) and National Securities Depository Ltd. (NSDL) are authorised to issue PAN cards. The fee for preparation and delivery of a tamper proof card is ` 107 plus courier charges, if any, to be paid at IT PAN Service Centre or the TIN Facilitation Centre. Details of service charges and delivery time are available on their respective websites.

Addresses

UTIITSL —

NSDL —

The Vice President

The Vice President

IT PAN Processing Centre

Income Tax PAN Services Unit, NSDL

UTI Investor Services Ltd.

4th Floor, Trade World, A Wing

Plot No. 3, Sector - 11

Kamala Mills Compound

CBD, Belapur

S. B. Marg, Lower Parel

Navi Mumbai-400 614

Mumbai-400 013

Tel 022-27561690

Tel 022-2499 4650

Fax 022-27561706

Fax 022-2495 0664


Coupon number or Acknowledgement number, as the case may be, should be mentioned in all communications.

Application Form-49A can be downloaded from the websites of

Department      :                  www.incometaxindia.gov.in, or

UTIISL                :                  www.utiisl.co.in or

NSDL                  :                  tin.nsdl.com

or photocopied (on A4 size 70 GSM paper) or obtained from any other source. The Form is also available at IT PAN Service centers and TIN Facilitation centers.

If an application is submitted through Internet and payment made through a ‘nominated’ credit card, the PAN is allotted on priority (TATKAL) and communicated through e-mail.

It is illegal to obtain or possess more than one PAN.

Filling the Application Form

  • Form must be filled and signed using black ink only.

  • Individual applicants will have to affix 2 recent coloured photographs (Stamp Size: 3.5 cms × 2.5 cms). Three signatures are required --- 1. At the left side of the photograph across the photograph. 2. Box provided below the photograph, and 3. On page two in the box at end of the form.

  • Full Name is required in the order of Surname, First name and middle name. However, provision is available in the form for you to select the style in which your name is to appear in PAN card. For instance, if your name is Sunil Raghav Shah, you can ask for S. R. Shah to be printed on the card. Only father’s name is required to be filled in the Form, even by female applicants, irrespective of their marital status.

  • Assessing Officer (AO) code pertaining to International Taxation Directorate is available on the website of service providers. In the case of doubts the first international taxation AO of Delhi is a default.

  • NRIs not having any Indian residential address may provide a foreign address. Such applicants should indicate the address at which the PAN card should be sent and also invariably mention their email-id.

  • Codes 99 and 999999 should be entered for State and PIN fields respectively by those who do not have any Indian address. However, actual foreign ZIP/PIN code should be mentioned in any of the 5 address fields (preferably last) along with the name of the country.

Proofs of Identity & Address

S.O. 2394(E) dt 17.10.11 has stipulated that copy of any one of the following documents is sufficient for the purpose —

  1. a) Passport or visa.

  2. b) PIO/OCI card.

  3. c) NRE account statement.

  4. d) Other national or citizenship identification number.

  5. e) Bank account statement (not more than 2 months old) in country of residence.

  6. f) Certificate of residence in India or Residential permit issued by the State Police Authority.

  7. g) Registration certificate of the Foreigner’s Registration Office showing Indian address.

  8. h) Appointment letter or contract from Indian company or certificate (in original) of Indian service providers,

  9. i) Taxpayer Identification Number duly attested by ‘Apostille’ (in respect of countries which are signatories to the Hague Apostille Convention of 1961) or by Indian embassy or High Commission or Consulate in the country where the applicant is located and finally,

  10. j) Every applicant has to submit self-attested copies of proof of identity, address and date of birth documents along with original documents for verification.

In case the applicant is a minor, any of above documents of any of the parents or guardian shall serve as proof of Address. In case PAN application is made on behalf of a HUF, any of above documents of the Karta will serve as proof of Address.

Non-individuals having no office in India should submit a copy of registration certificate of their country duly attested by Indian Embassy in the country where applicant is located.

Depository Participant

It is also necessary to have a PAN while opening an account with a DP for share transactions in demat format.

NRIs/PIOs who are not able to obtain PAN for one reason or the other but are holding securities in physical form and desire to sell the same, may be permitted to open a ‘limited purpose account’ without PAN subject to —

  • These accounts will be ‘suspended for credit’ which means, only credits arising out of corporate benefits and demat of physical certificates will be permitted.

  • These accounts cannot be used for getting credit from IPOs, any off-market or secondary market transactions, etc.

  • These accounts can remain operational only for a limited period of 6 months to regularise the account. The DPs shall freeze non-regularised accounts thereafter.

  • The account holders can sell the securities lying in these accounts only through a registered broker on the stock exchange.

  • Where there is difference in the maiden name and current name of the investor (predominantly in the case of married women), DPs can collect the PAN card proof as submitted by the account holder. However, this would be subject to the DPs verifying the veracity of the claim of such investors by collecting sufficient documentary evidence in support of the identity of the investor.

KYC Norms for Mutual Funds

It is compulsory for all the MFs w.e.f. 3.3.08 to comply with KYC norms for all the applications including New Fund Offer applications of ` 50,000 or more. This requirement is applicable even to joint holders. This is grossly unjustified, inconvenient and unfriendly measure involving a national waste and benefits none. AMFI exists to protect the investors in MFs and we are surprised to find that this particular diktat has been issued by AMFI itself.

Application forms are separate for individuals and non-individuals. These can be downloaded from the website of AMFI/MFs or obtained from any distributor.

If you have multiple folios within one Fund, you can instruct the MF to update the KYC against all the folios. A copy of the receipt allotted while submitting the KYC Form is required to be attached along with all new investment applications.

Power of Attorney (PoA)

Though the purchases can be made through direct remittances, it is obvious that an NRI requires to have a person in India to whom he has donated his PoA to dabble in shares on his behalf. Can he arrange for a PoA from abroad? Of course yes. Let us take the case of UK. All that he has to do is to —

  1. a) Print the PoA on a stamp paper of the required denomination as per UK Law and contact the Indian Embassy in UK.

  2. b) The person executing the PoA will sign in the presence of a notary who countersigns every page of the PoA.

  3. c) Arrange to send the PoA to the stamp office in India for getting it stamped for a denomination of ` 100.

  4. d) The person accepting the PoA will sign in the presence of the notary who attests his signature.

The authorities may feel that this is very easy. We do not.

Policies Issued by Insurers Outside India

A Resident may take or continue to hold a life or general insurance policy, including health insurance issued by an insurer outside India provided aggregate remittance including amount of premium does not exceed limit under the Liberalised Remittance Scheme for health insurance and RBI specific or general permission for life insurance.

No person shall take or renew any policy covering any property in India with an insurer whose principal place of business is outside India without IRDA permission.

Where the premium on a general or life insurance policy has been paid by making remittance from India, the policy holder shall repatriate to India through normal banking channels, the maturity proceeds or amount of any claim within 7 days from the receipt thereof.

Medical insurance policies in forex can be issued to Indian citizens who have gone abroad for employment and studies. Even when the premium can be paid in Indian rupees, some foreign insurers insist on payment in forex. Such payments are covered under the maintenance quota released by ADs.

Policies Issued by Indian Insurers

Resident of India may take general/health insurance policy permitted by IRDA from Indian insurer on payment of premium in INR, where claims arising under the policies outside India are to be settled in foreign currency.

Resident outside India may take general/health insurance policy as permitted by IRDAI from Indian Insurers. Claims arising under the policies are to be settled in INR if payment of premium is in INR and in any currency if payment of premium is in foreign currency. However, Insurance cover on risks inside India (including All Risks Insurance) on assets in India owned by Indian branches/offices of foreign companies, banks, etc., may be issued only in INR.

Insurers may issue general as well as life policies denominated in forex through their offices in India or abroad to NRIs provided the premiums are collected in forex or out of NRE accounts of the insured or his family members. For policies denominated in rupees, premium through NRO accounts can be accepted.

Policies may be issued in forex to Residents of Indian nationality or origin who have returned to India after being NRIs, provided the premiums are paid out of forex remittances or from their RFC accounts.

Foreign currency Policies issued by overseas offices of Indian insurers may be transferred to Indian register, together with the related actuarial reserves, when the policy holder returns to India. However, if the policy is in force for at least 3 years prior to policy holder’s return to India and the policy holder wishes to retain and continue the forex policy, ADs can accept premium payments through foreign remittances or the RFC account of the policy holder. If the premiums are continued to be paid in forex, the maturity proceeds or the amount of claim can be credited to his account abroad or the RFC account in India.

Resident beneficiaries of forex life insurance policies are being permitted to retain the proceeds in their RFC/RFCD Accounts.

Proceeds of policies denominated in forex or the rupee policies for which premia are paid in forex or out of NRE accounts can be credited to NRE Account of the NRI.

The restrictions in regard to export of policies stand withdrawn.

Conversion of life policies of Resident in rupees into forex or transfer of records of such policies to a country outside India requires RBI prior approval.

Settlement of Claims – Maturity, Surrender Value, etc.

The basic rule for settlement of claims on rupee life insurance policies in favour of claimants resident outside India is that payments in forex will be permitted only in proportion in which the amount of premiums paid in forex in relation to the total premiums payable. Where such a person is an NRI, the amounts can be credited to his NRE account, if it is so desired. Resident beneficiaries may credit proceeds to their RFC/RFCD accounts, if they so desire.

Claims in respect of rupee life insurance policies issued to NRIs for which premia have been collected in non-repatriable rupees may be paid only by credit to NRO account if the claimant is NRI and ordinary account if he is a Resident.

If a beneficiary residing outside India desires remittance abroad, he should apply to RBI for its approval in Form-A2 together with Form-LIM(1), through his bank for the approval.

Where the policies are assigned to an overseas bank, the credit in rupees of any claim to the overseas assignee’s account with an AD, requires RBI permission.

In case of cashless international health insurance products remittances may be allowed to the hospital which has provided the treatment/Third Party Administrator with which the insurer or the hospital has entered into a contractual arrangement in accordance with applicable IRDAI regulations or to the insured person resident outside India.

Notes:

Where rupee policies are issued on life of a non-resident Indian national under the Married Women’s Property Act, the beneficiaries will be the wife and/or children of the policy holder. He may appoint a bank in India or a relative as special trustee to receive the claims and distribute the same to the beneficiaries.

RBI’s prior approval is required for assignment of rupee life insurance policies held in Indian register by a Resident in favour of an NRI or by an NRI in favour of another NRI in a different country, except where the assignment is without consideration in favour of the policy holder’s non-resident wife or dependent relatives. Applications to RBI should contain full details regarding beneficiaries and exact manner in which their shares will be disposed of by the special trustee.

Foreign Nationals not Permanently Resident

Policies denominated in forex or rupees may be issued to foreign nationals not permanently Resident provided the premiums are paid out of forex or from their income earned in India or repatriable superannuation and pension funds in India. Claims, maturity proceeds or surrender value in respect of rupee policies may be paid in rupees or allowed to be remitted abroad, if the claimant so desires.

In the case of foreign nationals employed in India, the insurer may accept a certificate from an AD to the effect that the foreign national was availing of recurring remittance facility.

Miscellaneous

  • Premiums due on rupee policies issued to Indian nationals Resident in Myanmar may be accepted in rupees in India from friends, relatives of the policy holders subject to the condition that all payments under the policies will be made to the policyholders only in rupees after their arrival in India for permanent settlement. Cases of Chinese and Pakistani policyholders should be referred to RBI.

  • Indians, Nepalese and Bhutanese resident in Nepal and Bhutan as well as offices and branches of Indian, Nepalese and Bhutanese firms, companies or other organizations in these two countries are treated as Resident for purpose of transactions in INR. Payments in foreign currency towards claims under general/health insurance policies will require prior approval of Reserve Bank, except where premium thereon was also collected in foreign currency.

  • Life insurance policies are regarded as securities.

  • Units located in Special Economic Zones (SEZs) to take any general policy issued by an insurer outside India provided the premiums are paid by the units in forex. Similar permission is granted for some marine and aviation insurance.

  • AP (DIR) Circular 76 dt 4.2.04 states that approval from Ministry of Finance (Insurance Division) for securing insurance on health from a company abroad is no more required and ADs may freely allow such remittances.

  • Insurers may pay commission in forex to their agents who are permanently resident outside India regardless of the fact that part of the business booked by them may be on the lives of Residents and related premiums are paid in rupees.

The most important reason for India being a poor country is its richness in gold. It is estimated that Indian households hold over 20,000 tonnes (= US$ 1,400 billion!) of the yellow metal. This is an unproductive asset. Everyone realises that even if a part of it is converted into productive capital, it will be a great help in poverty eradication. As per World Gold Council, Indian demand has averaged 838 tonnes over the last 10 years. Around 90-95 tonnes of gold was smuggled into the country in 2018, down from 115-120 tonnes a year earlier.
Gold Import Scheme

To curb this menace, the government had promulgated Gold Import Scheme, granting general permission to those NRIs and PIOs who have stayed abroad for at least 6 months to bring as a part of their baggage gold up to 10 kilos and silver up to 100 kilos in any form, including ornaments or articles, provided the import duties are paid in forex, either abroad or here in India. Short visits up to 30 days shall be ignored unless the passenger has availed of the exemption under this scheme during this period. The prescribed quantity cannot be brought in installments within the prescribed period of 6 months.

Originally, the scheme was designed to discourage those indulging in hawala and smuggling. There was a yawning gap between the landed cost of gold or silver and its market price in India.

To begin with, the import duty was ` 250/10 gms on gold and
` 500/kg on silver. It was an instant success. This duty was raised almost each and every year under one pretext or another. The recent FA19(2) has raised it by a whopping ad volerum 12.5% (= 13.0% with 4% cess) which translates into duty of ` 4,600/10 gm. Imports over these limits, duty would be charged @ 35% (=36.4% with cess).

To avoid any disputes arising from under invoicing, the government fixes import tariff value which is the base price at which the customs duty is determined through notifications issued from time to time (normally on fortnight basis).

Has the Scheme Remained Attractive? See following Table.

NRI IMPORT SCHEME : PRECIOUS METALS

Computed on :

01.08.2019

Overseas Price


Gold

$ 1,450.15

Per Ounce

Silver

$ 16.3400

Per Ounce

Import Duty - `



Gold - 12.5% ad valorem

` 4,201

per 10gms

Silver - 12.5% ad valorem

` 4,733

per Kilo

1 Ounce =

31.1034768

gms

1 $ =

` 69.31

rupees

GOLD - 10 gms

SILVER - 1kg

Price - Indian

35,750

44,100

  • -Overseas

32,315

36,412

Margin

3,435

7,688

Duty

4,201

4,733

Profit

(766)

2,955

It is obvious that no one would like to import any gold or silver through their baggage. The hike in the customs duty on precious metals will certainly boost smuggling.

Most importantly, the government has reduced the quantity of gold allowed to be brought by such eligible passengers returning from abroad from 10 kgs to 1 kg and of silver from 100 kg to 10 kg.

This is not the end of story. It should be noted that when you purchase gold, you are charged Goods and Service Tax (GST) at 3% on the value of gold plus making charges, if any.

There are some more kinks. When you sell the precious metals in India and earn a profit, it would be considered as either a short-term gain or a long-term gain if you sell it after 3 years of its purchase by you or as business income since your intention while buying it was to sell. In any case, you may be entitled to claim expenses incurred ‘wholly and exclusively’ for the purpose of earning the profit or the capital gains. We claim that the cost of the airline ticket is definitely an expense incurred for this transaction. Whether or not it is incurred wholly and exclusively for buying and selling gold can be a matter of dispute between you and your ITO.

All this has rendered the precious metal import scheme unattractive and we are back at square one where smugglers thrive.

The passenger is allowed to bring the precious metals himself or import it within 15 days of his arrival. To avoid the hazards of carrying the gold personally, he can use customs bonded warehouses of SBI or Metal and Mineral Trading Corporation at Mumbai, Delhi, Thiruvananthapuram and special delivery centres. If he has paid the duty abroad and is found ineligible to import it after his arrival in India, refund would be given to him. He has to file a declaration on a prescribed form before the customs officer at the time of his arrival stating his intention of using the warehouses and pay the duty before clearance.

New Solutions of the Government

FA15 has attacked the problem through a 3-pronged attack by —

1. Gold Monetisation Scheme: This new scheme will replace both the present Gold Deposit and Gold Metal Loan Schemes and handled by some banks and gold dealers. It will enable the depositors to earn interest in their metal accounts and the jewellers to obtain loans in their metal account. We hoped that the interest rate would be much higher than the one offered by SBI at 0.755-1% over tenures ranging from 3 to 5 years for the old schemes.

2. Sovereign Gold Bond: This will be an alternative to purchasing gold directly. The Bonds will carry a fixed rate of interest, and also be redeemable in cash at the face value of the gold, at the time of redemption.

3. Indian Gold Coin: It will carry the Ashok Chakra on its face. Such an Indian Gold Coin would help reduce the demand for coins minted outside India and also help to recycle the gold available in the country.

Yes, these steps are likely to offer an official and easy alternative to invest white money into gold. However, it has to be realised that the battle is against black money, havala and smuggling. The 10% import duty surely renders smuggling a better option, in spite of the various risks involved.

We strongly feel that the one and only way of curbing this menace is to give fillip to recycling of precious metal by providing a window where ornaments can be sold without getting fleeced. At present the buyer faces discount over 20% (!), and strangely, the authorities are oblivious of this menace.

Then again, will someone up there, look at the real estates which are purchased and kept locked up, for one reason or another? Can the government not take custody of all such flats and rent them out with a guarantee to the owner of reclaiming the premises for his own use, if and when he needs it? There is no reason on earth for the government to subsidise the financing cost of the white portion of the real estate cost since it serves as a convenient vehicle to invest his black money.

Smugglers have found ways to outsmart customs officials. All that they do is to declare bentex jewellery as gold, while going abroad. This jewellery is then dumped in the visiting country, and real gold jewellery is brought while returning to India. Some enter India from neighbouring countries like Nepal and Bangladesh.

Smuggling of gold, an illegal activity, is coupled with hawala transaction, another illegal activity. Forex for purchase of gold is picked up from NRIs who desire to send funds regularly to their relatives in India for their subsistence. Indian Rupees are paid to the relative in India at a premium over the forex exchange rate prevalent for normal banking channels. Needless to state that these routs give rise to a parallel black money market.

It is obvious that the increase in the import duty of precious metals is a retrograde step.

Tax Collected at Source

The current Sec. 206(C) (1D) requires TDS @1% to be applied by the seller of bullion if the total sale value exceeds ` 2 lakh for bullion and ` 5 lakh for jewellery. Moreover, there is 1% excise duty on articles of jewellery (excluding silver).

Export of Gold Jewellery

There is no value limit on the export of gold jewellery by a passenger through baggage if it constitutes the bona fide baggage of the passenger. He may request the customs for issue of an export certificate while departing to facilitate its reimport on his return.

Final Nail in the Coffin

From the spurt of imports at various airports in past across the country the government felt that some unscrupulous elements were smuggling gold by hiring eligible passengers to import gold on their behalf.

Seeking to check this route of smuggling, the government, tightened baggage rules, requiring inbound Indian passengers to provide details such as source of funds for importing the metal as well as their air tickets. According to a Revenue Department circular, the baggage receipt issued by the Customs will now include the engraved serial number on gold bars and the item-wise list of ornaments. “Wherever possible, the field officer, may ascertain the antecedents of such passengers, source for funding for gold as well as duty being paid in the foreign currency, person responsible for booking of tickets, and the like,” it said, adding that the decision is aimed at preventing misuse of the gold import facility.

To Sum

We are surely back at square number one. Smuggling coupled with hawala has become once more extremely rewarding.

Good news for all PIOs. FA15 has merged the PIO cards into OCI cards. The Government had introduced on 31.03.1999 PIO Cards for PIOs settled throughout the world. Now OCI cards have come into existence and have some better features.

OCI facility is available to any overseas Indian (other than a person who was a citizen of Pakistan or Bangladesh any time) as long as his home country allows dual citizenship under their local laws. On the other hand, the OCI card is not available to a person who was or is a citizen of Afghanistan, Bangladesh, Bhutan, China, Nepal, Pakistan or Sri Lanka at any time.

Such a foreign national should have been —

  1. a) Eligible to become citizen of India on 26.01.1950. Any person who or either of whose parents or any of whose grandparents was born in India as defined in the Government of India Act, 1935 (as originally enacted), and who was ordinarily residing in any country outside India was eligible to become citizen of India on 26.01.1950, or

  2. b) Was a citizen of India on or after 26.1.50, or

  3. c) Belonged to a territory that became part of India after 15.08.1947. Such territories are — i) Sikkim from 26.04.1975, ii) Pondicherry from 16.08.1962, iii) Dadra & Nagar Haveli from 11.08.1961, and iv) Goa, Daman and Diu from 20.12.1961.

  4. d) His children and grand children, even if minors are also eligible.

A person who is already holding more than one nationality can also be an OCI as long as the local laws of at least one of the countries allow dual citizenship in some form or other.

An OCI card holder does not possess dual citizenship or nationality. He shall not be entitled to the following rights:

  1. a) Equality of opportunity in matters of public employment.

  2. b) Be a i) President, ii) Vice-President, iii) Judge of the Supreme Court or High Court or iv) a member of the House of the People, the Council of States, Legislative Assembly, Legislative Council.

  3. c) Be registered as a voter.

  4. d) For appointment to public services and posts in connection with the affairs of the Union or of any State.

As per Sec. 5(1g) of the Citizenship Act, 1955, a person who is registered as OCI for 5 years and is Residing in India for 1 year out of the above 5 years, is eligible to apply for Indian Citizenship to the Ministry of Home Affairs, Central Government. The same rule applies to minor children (even foreign-born) and spouses of foreign origin, married to Indians.

The benefits of OCI are —

  • Multi-purpose, multiple entry, life-long visa for visiting India.

  • OCI does not require registration with local police authority.

  • An NRI or a PIO is prohibited from acquiring agricultural or plantation properties. The press note dt 2.12.05 by Ministry of Home Affairs states that one of the benefits of OCI is — Parity with NRIs in respect of all facilities to the latter in economic, financial and educational fields except in matters relating to the acquisition of agricultural/plantation properties. This implies that an NRI or a PIO does not have the right to purchase an agricultural land but an OCI card holder has the right. We feel that this is an aberration. How can a person with foreign nationality (PIO) have better rights than an Indian citizen (NRI)?

  • Facilities as available to children of NRIs for obtaining admission to educational institutions in India, including medical colleges, engineering colleges, institutes of technology, institutes of management etc., under the general category.

Procedure

Every registered OCI will be issued a registration certificate which is printed like an Indian passport in different colours and an OCI visa sticker will be pasted in the person’s foreign passport. Both these will have all necessary security features, including photograph.

An eligible person may apply to the Indian Mission or Post of the country of his nationality or of any other country if he is ordinarily residing there, along with the necessary proofs of his eligibility.

Application Form-XIX can be used directly on-line or downloaded from www.mha.nic.in and submitted through post. It can be jointly used by a family consisting of spouses and up to two minor children. Part-A of the Form can be filed on-line. A bar code and a reference number will be generated automatically as an acknowledgement. Part-B can be downloaded and printed on computer or written by hand in Block letters. Printed Part-A and Part-B of the application form have to be submitted in duplicate with all necessary enclosures. The concerned office will issue an acknowledgement number which can be used for enquiries in future.

If the applicant is not in the country of citizenship, the application can be submitted to the Indian Mission or Post of the country where he is ordinarily residing. If the applicant is in India, it can be submitted to the FRRO Delhi, Mumbai, Kolkata or Amritsar or to CHIO, Chennai or to the Under Secretary, OCI Cell, Citizenship Section, Foreigners Division, Ministry of Home Affairs (MHA), Jaisalmer House, 26, Mansingh Road, New Delhi-110011. Central processing of applications will occur in New Delhi. Ministry sends OCI cards to embassy/consulate.

An application where there is no reporting of criminal case against the applicant will be granted OCI within 30 days whereas in other cases it may take 120 days. An OCI certificate acquired on the basis of concealed information or misrepresentation, will be cancelled and such persons will be blacklisted for entry into India.

A registration certificate in the form of a booklet will be issued and a multiple entry, multipurpose OCI ‘U’ visa sticker will be pasted on the foreign passport of the applicant. For this purpose, the applicant has to send the original passport after receipt of the acceptance letter or verification of the application on-line.

In the case of loss of or damage to the certificate, an application has to be made to the same Indian Mission or Post which issued the certificate. A new OCI ‘U’ visa sticker will be issued. However, the applicant can continue to carry the old passport wherein OCI ‘U’ visa sticker was pasted along with new passport for visiting India without seeking a new visa, as the visa is valid for lifelong. Ditto for renewal of the foreign passport.

In the unlikely case of a person desiring to renounce OCI, he can use Form-XXII and send it to the Indian Mission or Post where OCI registration was granted.

Cost of OCI Card

An OCI card cost is US$ 275 for US citizens and US$ 295 for others. If the application is rejected, the amount will be returned after deducting US$ 25 for US citizens and US$ 45 of others as processing fees. Issue of duplicate OCI card costs US$ 25.

Each and every government across the length and breadth of the globe desires to target money flowing out of their country specifically for avoiding taxes. With this aim, India has signed an Inter-Governmental Agreement with the USA under their FATCA effective from 1.9.15.

Many ‘reportable’ persons in both the countries have started receiving inquiries related with their assets and income causing some anxiety. This is an attempt to give such persons the most desired related information.

FATCA requires certain foreign financial institutions such as banks, brokers, insurance companies etc., to report directly to the IRS, information about such assets held by US taxpayers.

The Reporting Financial Institutions must review electronically searchable data maintained on indicia covering —

  1. a) Identification of the account holder as a resident of any country outside India for tax purposes or unambiguous indication of a place of birth in USA.

  2. b) Current mailing or residence address (including a post office box) in any country outside India, or

  3. c) At least one telephone number in a country outside India and no number in India, or

  4. d) Standing instructions (other than with respect to a depository account) to transfer funds to an account maintained in a country outside India, or

  5. e) Currently effective power of attorney or signatory authority granted to a person with an address in a country outside India, or

  6. f) A ‘hold mail’ instruction or care-of address in a country outside India if the reporting financial institution does not have any other address on file for the account holder.

If none of the indicia are discovered in the electronic search, no further action is required, but if there is a match, then a confirmation needs to be obtained from the investors whether it is a Reportable Account.

Reporting thresholds (through Form 8938)

If you are staying in the USA -

Unmarried or filing singly and not jointly with your spouse: $50,000 or more on the last day of the tax year or $75,000 or more at any time during the tax year.

If married and filing a joint return: Double amount of the above thresholds.

If you are staying abroad: $200,000.

You are treated as living abroad if you are a US citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.

For calculating the value of assets in applying this threshold, include one-half the value of any specified foreign financial asset jointly owned with the spouse. However, report the entire value on Form 8938 if you are required to file it.

Reporting by Foreign Financial Institutions

Specified foreign financial assets include assets held for investment such as stock and securities, financial instruments, contracts with non-US persons, and interests in foreign entities.

The fair market value (FMV) of such an asset may be employed based on information publicly available from reliable financial information sources or from other verifiable sources. If there is no such information available, a reasonable estimate of the FMV is sufficient.

For assets denominated in a currency other than US$, use the Treasury’s Bureau of the Fiscal Service’s foreign currency exchange rates on the last day of tax year to arrive at FMV in US$. If this is not available, use another publicly available rate.

High value accounts are those which are over US$ 1 million. For such accounts, apart from the above procedure, a paper search for 5 years and a confirmation is also necessary from customer. There are also different reporting deadlines though the procedures are the same.

Compliance

The statute of limitations is extended to six years after you file your return if you omit from gross income a specified foreign financial asset worth more than $5,000 irrespective of the reporting threshold or any reporting exceptions. The statute of limitations for the tax year is extended by three years following the time you provide the required information.

If you are a non-resident US taxpayer who wishes to come into compliance with your US filing obligations, you may be eligible for special IRS procedures. These new procedures are for non-residents including, but not limited to, dual citizens who have not filed US income tax and information returns.

Common Reporting Standard (CRS)

The CRS is an information standard for the Automatic Exchange Of Information regarding bank accounts on a global level, between tax authorities, developed in 2014.

Its purpose is to combat tax evasion. The idea was based on the FATCA between India and the USA though CRS is not just an extention of FATCA. About 154 countries have signed CRS with India and 59 more are in the pipeline.

Each participating country will annually automatically exchange with the other country the below information in the case of Jurisdiction A with respect to each Jurisdiction B reportable account, and in the case of Jurisdiction B with respect to each Jurisdiction A reportable account:

  1. Name, address, Taxpayer Identification Number (TIN) and date and place of birth of each Reportable Person.

  2. Account number

  3. Name and identifying number of the reporting financial institution;

  4. Account balance or value as of the end of the relevant calendar year (or other appropriate reporting period) or at its closure, if the account was closed.

  5. Capital gains, depending on the type of the account (dividends, interest, gross proceeds/redemptions, other).

Comments

A more immediate consequence of FATCA is that all people who are tax resident of the US/Canada and are FATCA compliant can invest in any MF Schemes. However, at present, some of the MFs allow investments from all NRIs only when they are physically present in India, to ensure that they are really FATCA (or CRS) compliant. Other MFs depend upon their declarations. Understandably, money is fast moving into those havens where FATCA or CRS is not applicable and the fact remains that there are many such countries.

Yes, India has become a tax haven.

You can arrange your affairs in such a fashion that irrespective of the size of your funds, you can earn much higher returns than those available anywhere else across the globe with high degree of safely and little tax.

If you are ready to take market related risks, go for equity-based MFs which are endowed with excellent tax concessions. For those who are risk averse, go for Debt-based FMPs of MFs with a term of over 3 years to earn the benefit of low tax on long-term capital gains.

NRE interest is tax-free without any limit. True, these deposits carry exchange risk. However, under the new government, the economy is surely slated to improve fast and along with it, the rupee is slated to strengthen.

In any case, those who do not want to take the exchange risk, FCNR is a good bet.

To Sum

For sure, India has become a tax haven for an informed NRI.

There are different courses for different horses.


Source: Mr. N. SHANBHAG (Income Tax & Investment advisor)

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