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Home > Business > Personal Finance

More good news for NRIs, PIOs!

A N Shanbhag | October 25, 2003 14:27 IST

I have good news for those non-resident Indians and Persons of Indian Origin who have left Indian shores and have little or no intention of returning to India permanently in the near future.

Such persons find that their assets earned in India while they were in India and assets inherited by them are locked in India. They cannot enjoy the benefits accruing thereon.

Yes, the rupee is still not fully convertible. However, thanks to liberalisation, the lid on the repatriability of the rupee is being slowly lifted.

Now that the forex reserves have reached a more than comfortable level of close to $90 billion, India has taken a giant step in the direction of full convertibility through master circular 5/2003-04 dated July 1, 2003.

Accordingly, NRIs and PIOs and also foreign nationals (including retired employees or non-resident widows of Indian citizens) can-- through Authorised Dealers-- remit up to $1 million per calendar year, out of the balances held by them in the Non-Resident Ordinary Rupee account and sale proceeds of assets, for all bona fide purposes.

The AD will have to satisfy itself about the bona fides of the person making the remittance.

The remittances will be allowed to be made by the ADs without insisting on a no-objection certificate from the income tax department, on production of an undertaking by the remitter and a certificate from a CA in the formats prescribed by the CBDT in its circular 10/2002, dated October 9, 2002.

Moreover, NRIs/PIO are allowed to remit through the AD, within the overall limit of $1 million as stated above, after payment of tax on capital gains:

Sale proceeds of immovable property, held by them for not less than 10 years, subject to payment of applicable taxes.

Amount representing the sale proceeds of assets in India, acquired by way of inheritance or legacy.

This facility is not available to the citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan.

Good news indeed. Many of the NRIs and PIOs felt hard done by because they have plenty of assets in India but their utility was zero.

Now, not only the income arising from these assets but also the base capital can be converted into forex of their choice and taken abroad.

The process is simple; there is no need to approach any authority. A trip to your bank or a mail sent to it with a request to do the needful is more than enough.

To be or not to be

Should one rush to the bank to take advantage of this facility? It depends.

Long ago, when the Gift Tax Act was abolished, I had observed that there is no need to give gifts in bits and pieces any more to build up capital of family and friends. This is so because need-based gifts of any size can now be given at any time.

I would like to make a similar observation today. India is a great parking place for investible funds of NRIs. Money multiplies faster here. This opportunity should not be lost just because it has now become possible to convert rupees in forex and repatriate the same.

The limit of $1 million is quite large and then again this limit is applicable for one calendar year.

In other words one can take $1 million during the first year, the same amount during the second year and so on. Therefore, an NRI should indulge in need-based repatriation instead of doing so at one go.

Interest rate is falling

The RBI has, for the third time in as many months, lowered the cap on Non-Resident External deposits (NRE) from 100 basis points over the London Inter-Bank Offered Rate to just 25 basis points over LIBOR.

With the lowered cap on NRE interest rates, the arbitrage opportunity, which was as much as 200 basis points, has been reduced to 125 basis points. Obviously, it is slated to reduce further.

The move is aimed at checking the huge inflow of foreign exchange into the country from overseas Indians looking to take advantage of interest rate differentials.

Yes, this is true if and only if the NRIs do not look beyond NRE. Now that NRO has become almost equivalent to NRE, the investment opportunities have widened greatly.


NRIs always had the opportunity of investing in pure-growth, open-ended, debt-based schemes of mutual funds either on a repatriable or non-repatriable basis.

Being open-ended, these behave like an SB account where you can deposit and withdraw at will. The only difference is that the banks take five minutes to effect a withdrawal but MFs take five working days or less.

Being debt-based, the safety of the capital as well as the income (around 9 per cent+ at this juncture) is implicitly certain but not explicitly assured.

Being pure-growth, these are so tax efficient that you can earn as much take-home (= tax-free) income as Rs 500,000 on a corpus of Rs 55 lakh (Rs 5.5 million).

These figures are just an example; one can input any number in the model and the numbers will change proportionately.

The last point requires elaboration for better insight. Instead of paying tax on normal income at 10 per cent, 20 per cent or 30 per cent, depending upon the size of the income, it is good to pay it at 10 per cent, which is the rate applicable to long-term capital gains.

Now suppose you invest Rs 80 lakh in a POD and at the end of one year, it grows to Rs 86.4 lakh (= growth rate of 8 per cent p.a.). You decide to strip the growth by withdrawing Rs 640,000.

The capital portion of this withdrawal is Rs 592,593 (= (80 / 86.4) x 6.4 lakh), the rest Rs 47,407 being capital gain. The tax on this growth is Rs 4,701 (= 10 per cent of 47,407).

This implies that you have got Rs 6.4 lakh in hand but tax thereon is only Rs 4,701. This works out at 0.73 per cent tax and not 10 per cent, as is the general impression.

Finally, if you have no other income, your total income is Rs 47,407 and this being lower than the tax threshold of Rs 50,000, you do not have to pay any tax. This facility is not available to NRIs who have to pay tax on capital gains irrespective of the tax threshold.

Those who have got some appetite for risk can vie for better rewards by taking recourse to POEs (equity-based) schemes.

Those with a greater appetite can directly play in the share market, which has the capacity of giving dream returns, but the dream can turn into a nightmare.

Thanks to NRO becoming repatriable, NRIs should invest in India without any hesitation.

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