A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answer your questions on NRI investment.
A new Rediff India Abroad feature:
My wife (64) and I (67) are US citizens with PIO cards. We are returning to India on our retirement, next year. We own residential properties in Bangalore and Chennai, where we plan to settle down with our children. Here are some issues that need clarification and advice:
a) We shall have our Social Security payments remitted to our, say, Citibank dollar account. This will be our main source of income, other than our savings. Will this be subject to income tax?
b) Depending upon where we live, may rent one of the above properties. Will the rental income be subject to tax; if so, at what rate?
c) Are we entitled to benefits under Transfer of Residence Rules -- such as used home appliances like fridge, washing machines, TVs, VCR, computers, cars etc? What are the taxes, if any? We have never availed TR facility before.
d) Are we allowed to take paid/unpaid employment?
e) Are we allowed to invest in business, property or stock market (IPOs) etc? If so, under what category, as NRI or Resident Indian?
f) How will our Rupee (NRO) a/c, currently operative because of taxed rental income be treated? Can we continue to maintain this, and invest from this account?
g) We have NRE and separate foreign ($) accounts. What will be their status?
h) Is there any police/local authorities registration formalities involved? My understanding is that a PIO card gives all benefits except voting and holding of public office.
i) Since as NRIs we received RBI permission to buy and sell shares under portfolio management scheme, do we need to intimate to them the changed status as US citizens and PIO card holders?
We would like to follow the law, and don't want to claim ignorance.
-- K P Eswara
a) Social Security Benefits will not be taxed in India as per the DTAA between the USA and India.
b) Rental income is definitely taxable, and the rate will depend upon your other income. In other words, income tax is to be paid at the slab rate applicable to you. Depending upon your income slab, you will have to pay tax.
c) Yes, you are entitled to the TR benefit. TR passengers are allowed additional allowance, besides the general allowance of Rs 12,000 on personal and household effects up to Rs 5 lakh (Rs 500,000), provided such articles have been in the use of the passenger for at least one year, or were purchased by him from duty-free shops. The customs duty is 30 per cent on these goods.
TR is not available to each member of the family if they were having a common establishment and staying together. Not more than one unit of each item can be imported by a family.
d) Yes, you can take employment in India.
e) You will be allowed to invest in business, property or the stock market whether you are an NRI or a Resident.
f) NRO account will have to be redesignated as a Resident account.
g) An NRI who has returned to India permanently is allowed a reasonable time to inform all banks about the change in his status, wherever hehas his investments. On receipt of this information, the bank will redesignate the NRE/FCNR accounts as a 'Resident' account. These can be run up to their maturity, but the interest on NRE becomes taxable from the date of return, whereas the FCNR interest is tax-free as long as the holder remains an NRI or becomes an RNOR.
h) Yes, your understanding is correct.
i) You will have to inform your DP about the change in your Residential status.
I have lived in the US as an alien resident since 1973, and became a citizen in 1990. I have a house which was allotted to me in 1984; the building was completed and handed over to me in 1990. I paid for the house from US funds. The house has appreciated, and I would like to sell the house and buy an apartment of lesser value. Can I buy the apartment from the sale proceeds of the house? Please let me know the tax consequences, and whether I can repatriate any portion of the sale proceeds?
-- Y. M. Jain
We assume that the houses you refer to are in India.
When you sell the first house, you will earn long-term capital gains. The tax on such gains is at 20 per cent. You can save this tax by purchasing a residential house within one year before or two years after the date of sale of the old house. Alternatively, you may construct a residential house within three years after the date.
The entire amount of capital gain has to be reinvested in the new house for full exemption. If you invest only a part, the exemption is proportionate.
If you intend to repatriate the sale proceeds, you invest in the new house using your own funds and repatriate the funds earned from selling the old house. This is because the law doesn't require the same money (that you receive from the sale of the old house) to be used in purchasing a new house. However, if you use part of the sale proceeds in buying a new house and part for repatriation, it could lead to complications.
The repatriation can be effected only when it is sought for all bonafide purposes to the satisfaction of the AD. An undertaking by the remitter and certificate by a Chartered Accountant in the format prescribed by CBDT vide their Circular 10/2002 dt 9.10.02 has to be produced.
It is necessary to file Form-A2, FEMA Declaration, Certificate from an accountant, and undertaking for payment of income tax in the specified format. A No-Objection-Certificate from the income tax department will be useful, but not necessary.