NRI Investing - Common Queries Answered

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NRI Investing - Common Queries Answered

05-Oct-2010

Financial Planning for Non Resident Indians can be much the same as Financial Planning for Resident Indians – there are only afew things which NRIs need to keep in mind when executing the Financial P lan i.e. when investing. In this article we will cover India as an investment destination, how to figure out if you are an NRI, things to keep in mind wheninvesting in India as an NRI, NRI taxation and which are the different bank accounts to invest from.

First, let’s consider how to know whether you cl assify as an NRI or not.

The classification is actually very simple. The Income Tax Act classifies residential status of a person into ‘Resident’ and ‘Non-Resident’ (NR). It further classifies ‘Resident’into ‘Ordinarily Resident’ (ROR) and ‘Not Ordinarily Resident’ (RNOR), which is applicable only to Individuals.

An individual is 'Resident in India' if he/she fulfils any one of the condition (basic conditions) given below with reference tohis/her stay in India during the previous year (i.e. April to March).

If he/she is in India in that year for a period or periods amounting in all to 182 days or more or1.

If he/she is in India in that year for a period or periods amounting in all to 60 days or more and if he/she has within the 4 yearspreceding that year been in India for a period or periods amounting in all to 365 days or more.

2.

There are a couple of exceptions to the above stated conditions. Exceptions:

The period of 60 days in (2) above is to be read as 182 days in case of a Citizen of India:

who leaves India in any previous year as a member of the crew of an Indian ship ori.for the purpose of employment outside India orii.a Citizen of India, or a person of Indian origin, who being outside India, comes on a visit to India in any previous year.iii.

Thus, to be resident in India, a person has to satisfy any one of the above two basic conditions. If a person does not satisfy any of the above conditions he/she is determined as ‘Non Resident’ in India. Once a person is determined to be resident in India, he may further be ‘ordinarily’ or ‘not ordinarily resident’ in India.

To determine whether a person is ‘Ordinarily Resident’ he/she has to satisfy any one of the condition in the relevant previousyear:-

he/she has been ‘resident in India’ in 2 out of 10 years preceding that year, or1.he/she has been in India for a period or periods amounting in all to 730 days or more during 7 years preceding that year.2.

Now that we know how to classify oneself, lets move forward to assess India as an Investment Destination – comparedto the other emerging nations.

The recent down economic down-turn has made a number of Indians working in a foreign country become concerned about their job security and investment options. This has made them think about managing their finances in a better way by takingprofessional advice and by investing more money in India – their home country. The India Shining story is something we have allheard, but is it really true when compared to other developing nations such as Brazil, China and Russia?

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Tax on DividendsDividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of assets in equities) are tax-free in the handsof NRI investor.

Dividends declared by debt-oriented mutual funds (i.e. mutual funds with less than 65% of assets in equities), are tax-free in thehands of the NRI investor. However, a dividend distribution tax (which varies for individual and corporate investors) is to be paidby the mutual fund on the dividends declared by them. Dividends received from foreign companies are taxable in the hands of shareholder as the foreign companies are not liable to

DDT

Taxation of capital gains on mutual fundA unit of a mutual fund is treated as short-term capital asset if it is held for less than 12 months.

Short Term Capital Gain:When the units in Equity Oriented Mutual Fund are sold (redeemed) within one year of being held by the investor, it becomesshort term gains or loss. The Short term gains are taxed at 15% on gain

When the units in Debt Oriented Mutual Fund are sold (redeemed) within one year of being held by the investor, it is taxed underslab rates applicable to Individual.

Long Term Capital Gain:When the units in Equity Oriented Mutual Fund are sold after holding for more than a year, gains on such units redemption is taxfree

When the units in Debt Oriented Mutual Fund are sold after holding for more than a year, gains on such units redemption istaxable as Long term Capital Gains. Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gains afterallowing indexation benefit, or at 10% flat without indexation benefit, whichever is less. Indexation benefit is when the cost of the investment is raised to account for inflation for the period the investment is held. This isdone by using a cost inflation index number released by the tax authorities every year. Let's say that you have invested Rs 1 lakh in a mutual fund on March 30, 2005 and redeemed these units at Rs 1.5 lakh on April1, 2010.

As per indexation benefit, according to the Cost Inflation Index levels announced by the government every year the cost of acquisition would be deemed to be Rs 148,125 lakh. Your long-term capital gain on this transaction with indexation benefit is justRs 1,875. The tax liability thus would be Rs 375. Without indexation benefit, long term capital gain will be Rs. 50,000 and tax liability would be Rs. 5,000.

Types of Bank Acc ountsAn NRI must also consider which account he should be investing from. But before doing so, it is important to take into accountsome points:

Are the funds in the bank account from which you will be investing, obtained from Indian sources or are they repatriated(brought back home) from the country in which you are working? E.g. Are they your salary funds?

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In which currency do you want to hold the bank account?■

Do you plan to repatriate the funds in the account back into the foreign currency, in order to take it back to your country of work?

■

Based on the answers to these questions, you can decide whether you need to invest from your NRE (Non Resident External)account or your NRO (Non Resident Ordinary) account.

NRE Account: In an NRE account, your funds in foreign currency are converted into Indian rupees, at the rate prevailing at thetime of transferring the funds from the account. The principal as well as the interest is freely repatriable or can be transferred tothe foreign country. Funds in the NRE account can be freely repatriated.

NRO Account: If you want an account to transfer Indian earnings, an NRO account is suitable for you. Foreign funds can also bedeposited into this account. The interest income earned on in this account is subject to tax in India. The interest is subject toincome tax deduction at source @ 30% plus applicable surcharge plus education cess. Funds in the NRO account cannot berepatriated abroad.

In summary, there are many points to note when investing as an NRI, we hope this article sheds light on some of thecommon queries NRIs may face when investing .

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NRI Investing - Common Queries Answered

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