What are the amendments with respect to withholding tax (tax deducted at source) for Non Resident Indians that have been announced in the recent India Budget 2014?
— Sangeeta Nagori
The existing provisions of the law provide that certain payments such as interest, royalty and fee for technical services made to an NRI shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the prescribed time limit.
Under section 40(a)(ia) of the Income Tax Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act under section 200(1) of the Act.
The Act contains similar provisions for disallowance of business expenditure in respect of certain payments made to the residents. However, in case of disallowance for non-payment of tax from payments made to non-residents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is not available.
To provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1) of the Act.
What have been the announcements in the Budget with respect to portfolio investments in India?
— Jitendra Tandon
Foreign portfolio investors (foreign institutional investors) have always faced a difficulty in the characterization of their income arising from capital market transactions as to whether it is capital gain or business income. Further, the fund managers managing the funds of such investors remain outside India under the apprehension that their presence in India may have adverse tax consequences.
Therefore, in order to end this uncertainty, it is now proposed that FII income will be in the nature of capital gain and not business income. This is an extremely positive step for the stock market in general. Also, the government stands to gain tax revenue from the increased economic activity and salaries etc. So in effect, it is a win – win for all stakeholders concerned.
What have been the clarifications regarding capital gains taxation in the Budget?
— Gaiurav Bhatkar
There have been two major clarifications with respect to tax on long-term capital gains. The first one is with respect to capital gains exemption in case of investment in a residential house property
Currently, upon the sale of a residential house property, the tax law offers exemption from long-term capital gains tax, if the net amount of capital gains is invested in a fresh residential house property within prescribed time limits. So far there used to be ambiguity and uncertainty due to the use of the article ‘a’ house property — it was not clear whether exemption would be available if more than one fresh house property were to be invested in.
Now it has been clarified that ‘a’ indeed was meant to be ‘one’ house — in other words, the benefit was always intended for investment in one residential house within India.
The second clarification is to do with the investment limit for saving long term capital gain by investment in bonds under Section 54EC.
Once again, this issue had been hanging fire for quite some time. The current ceiling for investment in these bonds is Rs 5 million ($83,000). The investment must be done within six months of having earned the capital gain. However, in the case of any capital gain arising during the year after the month of September, the six-month period overlapped two financial years and hence potentially Rs 10 million ($166,000) could be invested as against the specified limit of Rs 5 million.
Now it has been clarified that the intended limit is Rs 5 million only and one cannot invest Rs 10 million no matter when during the financial year the capital gain is earned.
Any provisions in the India Budget with respect to mutual funds?
— Sanjeev Rana
There is one major announcement with respect to mutual funds that will affect all classes of investors. Currently all mutual fund units qualify as long-term assets after a holding period of one year. Also, while equity oriented units are tax-free, the long-term gains on non-equity oriented units is taxed at 10 per cent.
The Budget proposes to do away with the concessions to non equity oriented mutual funds since the shorter period of holding etc. was originally introduced for encouraging investment in the stock market where prices of the securities are market determined.
Accordingly, it is proposed that any unlisted security and non equity mutual fund units will have to be held for a minimum period of three years to qualify as long-term asset. Consequently, the rate of tax on long-term capital gains will only be 20 percent (after indexation) and not the earlier 10 per cent without indexation.
The class of investments that will suffer the most is the fixed maturity plans. An FMP used to function as a tax efficient fixed deposit — now it has been brought almost on par with a normal fixed deposit.
Also note that this new provision applies not only to FMPs, but also to all non-equity funds i.e. gold funds, monthly income plans, liquid plans etc.