'Is it advisable to put some funds in Sovereign Gold Bonds or you would recommend sustained investment through online buying/selling of gold whenever rates are favourable?'
Anil Rego, CEO, Right Horizons, answers your personal income tax queries.
Prem Soni: Dear Sir, Good day to you. Shall appreciate your expert advice based on the following facts:
Am 59 years old & came back to India on 6th November’20 after my stint with an MNC overseas, for 14 years & 9 months. What is going to be my status for the current financial year viz. 2020-21? All my overseas salary were transferred to my NRE Rupee or US $ fixed deposits.
Anil Rego: Since you have spent more than 182 days in FY2020-21 overseas, your residential status for FY2020-21 remains as NRI and since you are not planning to move back, the residential status will change in FY2021-22 to Resident but Not Ordinarily Resident (RNOR).
Prem Soni: I do have some small income in the form of dividend on shares, interest on ordinary rupee FDs, house rent etc. Most probably, I will not be working abroad any more. What will be the tax treatment of my NRE deposits which are going to mature in future or have been renewed after my return to India in November’20? As per my standard instructions to the banks, the same are being auto renewed on due dates.
Anil Rego: Usually, the interest earned on NRE account and FCNR deposits shall be exempt from tax in India. However, since you have returned to India permanently you will have to convert your existing NRO / NRE savings account and deposits into resident savings account and deposits. You may also convert your funds in NRE account /deposits into resident foreign currency deposits (RFC). However, the interest rate on RFC deposits is low.
Since you have been outside India continuously for 14 years or so, with NRI status and returned to India for permanent settlement, you can continue the status of 'not ordinarily resident' for two years after arrival. The interest from RFC account shall be exempt only till the year your residential status is non-resident.
Prem Soni: I would like to know if there are any specific investment products other than NRE/RFC FDs, for the NRIs whose status is going to change in near future.
Anil Rego: There are lot of investment options for residents which is both taxable and tax free. You need to have a right mix to optimize the tax and maximize your returns. Mutual funds are an option for you to consider as they provide tax efficient returns if they become long term as per the definition of the Income Tax laws. However, it must be noted that it is difficult to predict any changes in tax laws. Tax has been imposed on tax free avenues in the recent years. The good part is that changes in tax are prospective and not retrospective (ie. for the past periods). Hence, you could enjoy tax free avenues till there are changes in tax laws.
Prem Soni: Most all my savings are in NRI only, but classified under NRE deposits.
Are there products currently available where an investor could invest lump sum & get the returns on monthly basis, akin to pension? As per my understanding such monthly returns are going to be subject to tax as per prevailing laws.
Anil Rego: Yes, there are many options where you can invest lumpsum amount and get payouts on monthly basis. Usually, these kinds of plans are taxable. Some monthly income Insurance plans are tax free.
Mutual funds are tax efficient and you can avail of a systematic withdrawal plan.
There are taxable interest payout options (monthly to yearly) available including, post office monthly income scheme, FDs, bonds, etc.
If planned well, you can use a combination of taxable options, tax free options and tax efficient options to plan for your retirement needs.
Prem Soni: Is it advisable to put some funds in Sovereign Gold Bonds or you would recommend sustained investment thru online buying/selling of gold whenever rates are favourable? In spite of 2.5% interest applicable on the Sovereign Bonds, I guess funds getting blocked for a longer tenor weighs against this option. What are the tax implications of investing in Sovereign Gold Bonds?
Anil Rego: It is always a good idea to diversify your portfolio with different asset mix. Gold is one of those investment options which helps in better diversification, especially if you also invest in equity avenues.
Of this, sovereign gold bonds (SGBs) are a very good option to choose if lock in is not an issue. If liquidity is important, then you can also invest into Gold ETFs.
SGBs are tax free if you hold them till maturity (8 years). The interest income is fully taxable and will be added to the income of the investor and will be taxed as per the marginal slab rate. There is no TDS on interest paid.
You can also redeem this at a price based on the simple average closing price of gold of 999 purity of the previous three business days from the date of repayment. This premature withdrawal is possible from the fifth year onwards and it taxed at 20% post indexation with the help of concerned bank/ stock holding corp etc. This redemption can be made only if you approach at least 1 day before coupon payment date.
This SGB is also listed in stock exchanges. In case the gold bonds are sold before one year, the gains, if any, will be added to one’s income and will be taxed as per the slab rate. After one year, the gains will be treated as long-term and will be taxed at 10%.
Prem Soni: In terms of guaranteed tax-free returns, do you think PPF is still the best option for non-employed investors even though the prevailing ceiling is still very low viz. Rs. 1.50 Lacs?
Anil Rego: PPF is always a good option to consider for conservative investors and are attractive due to its EEE status. If you are an investor who doesn’t need liquidity and are fine with the lockin of the scheme, it is one of the best low risk investment options.
Prem Soni: Which are the organisations that provide portfolio management services with some indicative assured returns? Am ok to park a portion of my savings in a portfolio of good scrips;
Anil Rego: There are number of organizations including ours that provides Portfolio Management Scheme (PMS) services. By regulations, PMS Companies are not allowed to assure returns on market linked avenues. One cannot have the best of both worlds. Higher returns would require you to take higher risk. However, if you are a long-term investor, then the risk comes down significantly if you hold a portfolio for a longer tenure. Further by investing in a diversified portfolio, your risk can also be reduced.
Prem Soni: Actually I would like to have a judicious mix of investments worth Rs. 50 Lacs-Rs 100 Lacs for getting tax free returns, if possible. I seek your advice from the point of view of tax & other aspects. Insurance coverage is not what I am interested in, but if the product offers insurance coverage also as an added benefit, it should be ok.
Anil Rego: If you are looking to invest in tax free avenues, you would have some guaranteed return insurance plans which you can evaluate (which you can evaluate by looking at the IRR of the scheme, ignoring the benefits of life cover), you can also look at tax free bonds from many PSU infrastructure companies and avenues like PPF. However, PPF does not give you an interest payout option. You only have a cumulative option.
Apart from tax free avenues, you can use tax efficient avenues like Mutual Funds. The tax can reduce significantly if you plan your investments well to achieve tax efficient long term returns and even use systematic withdrawals that help defer the tax. Deferral of tax helps, because the funds become long term subsequently.
It is good to get in touch with an investment advisor who can help you build a portfolio based on your risk profile. It is good to have diversified investments in your portfolio.
Conniecowboy: Can I claim rebate for medical insurance premium paid by me for my "IN LAWS "???
Anil Rego: You can avail tax benefits on medical expenses for one’s parents (not in laws) as per the income tax laws. Section 80D, allows a taxpayer to avail a tax deduction for premiums of medical insurance for self, spouse, dependent parents and dependent children. Thus, your spouse can avail tax benefits on medical insurance premiums of your in-laws, if they are dependent.
Vikas: I have a LTCG from property sale of 425000 & do not have any other income this FY 2020-21 apart from some interest from bank
Can I adjust the LTCG in non-taxable income & what will be my tax outgo in LTCG?
Anil Rego: If your other income is lower than the basic exemption limit, you can adjust capital gains income for any shortfall in basic exemption limit. This will accordingly reduce your income tax outgo.
Further, you can reduce capital gain raised out of sale of property by different ways:
- Exemptions under Section 54F when you buy or construct a Residential Property.
If the sale proceeds obtained from selling your old property is used to purchase a new one, you can claim exemption from capital gains tax under Section 54F under certain conditions for buying a new house.
- Purchase Capital Gains Bonds under Section 54EC
You also have the option of investing into approved capital gain bonds. This must be invested within six months of selling the property. This bond cannot be sold or transferred to anyone. The investment in a 54EC bond can be for a maximum of 50 lakhs.
Bala I: This is with respect to co-operative housing societies.
Kindly let me know the tax liability of a co-operative housing society for interest received:
1. against FDR with a co-operative Bank
2. against FDR with a Nationalised Bank
3. against FDR with a Private Banks
The Bank says after Rs.40000 interest in a year TDS will be deducted. Please clarify.
Anil Rego: I am assuming that you are asking about interest received by you from the above-mentioned sources. All interest received from Fixed Deposits, regardless of the bank (private, nationalized or co- operative bank), is fully taxable and TDS needs to be deducted above a threshold.
There is an option of giving a declaration under form 15G/15H if your income from various sources falls below the taxable limit. This will only ensure no tax is deducted at source. Even if tax is not deducted at source, you need to add it to your income and accordingly pay tax, if any.
Bala I: Whether interest received against FDRs of Statutory Funds like Sinking Fund, Repairs Fund and Reserve Fund are taxable in the hands of Co-op Housing Societies? If it is not taxable, then how come TDS applicable with a threshold of Rs.40000
Anil Rego: Fixed Deposit interest in the hands of the co-operative societies are fully taxable. The interest amount will be added to the total income of the assesse. Based on the tax slab in which society falls into, the tax rate for the TDS will be decided.
The Co-operative Society can however claim benefit under Section 80P. Any income received from other cooperative societies is fully exempt from tax.
Photograph: Leonhard Foeger/Reuters
Do you have any personal income tax query? Please mail us at email@example.com with the subject line 'Ask Anil' and Anil Rego will answer all your tax queries.
Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.