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HURRAY  !!!       HURRAY  !!!  

HURRAY - NRE/ FCNR INTEREST TAX EXEMPTION CONTINUES 

28.02.2005

 

Dear Friends

 

Good wishes.

 

It is indeed a joyous moment, which calls for celebrations, but the credit goes to Shri P. Chidambaram. Many, many thanks to Hon'ble Minister whose action will not only regain the confidence of NRI but will go a long way in strengthening their economic ties with India.

 

Well, on behalf of nribanks.com and my personal behalf, we sincerely thank Shri P. Chidambaram for kindly considering the submissions made out in our Memorandum as also numerous representations of NRIs across the Globe. As made out in our Memorandum, the tax was not the issue. The issue was the possible hardship of preparing accounts, filing tax returns, assessment procedures and so on and so forth.

 

To summarize, it can be stated that -

.01 interest earned on Non-Resident External [NRE] Account; and

.02 interest earned on Foreign Currency Non-Resident [FCNR] Accounts; will continue to be exempt from income-tax in India.

 

2. It may be noted that the income-tax was leviable w.e.f. 01-04-2005 and as such, till date, no income-tax was levied.

 

3. NOW, as the exemption is restored, in effect, interest earned on NRE & FCNR Accountsnever becomes taxable and continues to be exempt from income-tax.

 

5. Similarly, interest earned on Resident Foreign Currency [RFC] Account in case of Returning-NRIs, which was exempt, was also proposed to be taxed w.e.f. 01-04-2005.

 

6. NOW, the said interest of RFC Account will also continue to be exempt from income-tax till the Returnee-NRI's Residential Status under the Income Tax Act remains as "Non-Resident [NR]" or "Resident but Not Ordinarily Resident [RbutNOR]".

 

6. It may be noted that interest earned on Non-Resident Non-Repatriable [NRNR] Account and State Bank of India's India Millennium Deposits [IMDs] was not proposed to be taxed, and hence, was tax-free and continues to be tax-free.

 

7. Of course, interest earned on Non-Resident Ordinary [NRO] Account has been liable to tax and continues to be. 

NO DOUBT , in spite of the continuation of tax exemption, the returns/yields of Mutual Funds outperformed the interest offers on NRE/FCNR Deposits and Mutual Fund Schemes continue to offer more profitable alternatives to Savings and Deposit Accounts of NRIs.

II. As more interest earning and  tax-free alternatives for  INR as also Foreign currency Deposits, Mutual Fund schemes score better. These are –

II.1 INR ALTERNATIVES :

1. Fixed Maturity Plan [FMP] with assured tax-free return of app.5.75% for 16 Months tenure or the Arbitrage Fund with possible tax-free yield of 6.50% p.a. are quite attractive.as compared to
.01 NRE Savings interest 3.50% p.a.;
.02 NRE 1 to 3-year Deposit interest ranges 4.00% to 4.50% p.a.

2.Interest offered on NRE / NRO Savings interest at 3.50% stands beaten by Floating Rate Funds, app. tax-free yield of 4.75% p.a.too.

II.2 FCNR ALTERNATIVES : 


1. India Millennium Deposits [IMDs] 

.01 India Millennium Deposits [IMDs] being State Bank of India’s Bonds offered in Dec, 2000 and due for maturity on 30-12-2005.

.02 Yield to maturity app. 4.50% up.a.

.03 As the transaction is facilitated by Sellers’ Bankers who provide a guarantee to deliver the Bonds to the Buyer,upon receipt of the funds, the transaction of sale and purchase can be taken up at almost no risk.

.04 However, this Scheme is not open for Residents of USA and Canada.

 

2.Foreign Currency Deposits in Far East and Middle East –

 Foreign Currency Deposits being offered by India Centric Banks at attractive rates of interest.

.02 The interest rates offered are tax-free in the Country of Deposit.

.03 The Deposit and interest are fully reparable., and

.04 The interest rates are comparatively better than interest rates offered in India, 

.05 As interest rates world over are on the rise , it is appropriate to place deposits for 1 or at the most 2 years.
1 Year foreign currency deposit rates of India-centric banks in Far East and Middle East are :

-  US$  3.52% p.a.  ;    GBP  5.11% p.a.   and    Euro  2.36%  p.a.


3.The yield of 3-year FCNR Deposits at US$ 3.60% p.a., GBP 4.66% p.a. and Euro 2.55%  do not compare well to FMP tax-free yield of 5.75% over 16 Months, which together with Foreign Exchange Forward Cover provides yield in the range of US$ 3.80%, GBP 5.75% and Euro 2.80%.

 

Copy of our Memorandum can be found at : http://www.femaonline.com/memo_04-05.htm

 

Best wishes.

 

RAJESH H DHRUVA
Chief Executive

nribanks.com

Tel. No. : 0091 281 2464099 / 2463367
Cell : 0091 98240 49944

 

 

Anamoly 1.4.06

 

Dear Clients

Unfortunately, the press release quoting the Minister of State for Finance is a misnomer.

 

2. Replying to question in Rajya Sabha, the Hon'ble Minister of State for Finance has said that interest on NRE/FCNR Deposits will be liable to tax with effect from 01-04-2006. 

 

3. Technically, with effect from 01-04-2006 means Assessment Year 2006-07 relating to Financial Year 2004-05.

.02 Accordingly, A.Y. 2006-07 means Financial Year commencing from 01-04-2005.

.03 Therefore, there is no modification nor extension and as finalized in the Union Budget of
2004-05, interest on NRE/FCNR Deposits will be liable to income-tax with effect from 01-04-2005.

 

 


 HURRAY  !!!       HURRAY  !!!     Tax differed to 1.4.2005


Dear Friends,


Cheers !!!


Hon’ble  Finance Minister being concerned about NRI’s  wooes and  to woo NRI’s has  differed taxation of interest income of NRE and FCNR deposits till 1st April 2005.


Hence, NRIs will not be taxed on said income w.e.f 1st September 2004 & of course a glitter of hope is seen on horizon with expectation of  rethinking in the ensuing finance bill 2005-06 to be presented in Feb. 2005.

 

Best wishes
RAJESH H DHRUVA

Aug-26-2004 12:06:      

 

Lok Sabha passes Finance Bill 2004-05

 

The Finance Bill has been passed. The tax on NRI, NRE deposits has been deferred till April 1, and the tax-free income limit raised to Rs 1.09 lakh.

 

The Finance Bill 2004-05 was passed in Parliament, unopposed after the NDA  decided to boycott proceedings in the Lok Sabha. 
Finance Minister P Chidambaram has deferred the tax on non-resident Indians, NRI and NRE deposits till April 1 2005. He has also deferred the tax on aircraft leasing till April 1. The tax-free income limit has also been raised from Rs 1 lakh to Rs 1.09 lakh.
With its passage, the Lok sabha has given effect to the taxation proposals of the Budget. This was without debate as the entire BJP-led opposition boycotted the proceedings. This is for the first time in the annals of history of Parliament that a Finance Bill has been passed in the absence of the Opposition and without discussion. As many as 55 amendments to the Bill moved by the Finance Minister were adopted by the House. ......

  • economic times

Lok Sabha to vote on Budget on Thursday

 

REUTERS [ WEDNESDAY, AUGUST 25, 2004 01:06:38 PM ]

 

NEW DELHI: The union budget for this financial year will be put to vote in the Lok Sabha on Thursday.

The lower house approved the Appropriation Bill, which outlines spending on various projects by government ministries in 2004/05 (April-March), without any discussion on Wednesday because of differences between the opposition and the government.

 

"The finance bill will be taken up for voting and passage on Thursday," Parliamentary Affairs Minister Ghulam Nabi Azad told lawmakers in the lower house.
Congress Party spokesman Anand Sharma said the budget would also be passed without discussion as had been agreed in a meeting with opposition members.


Proceedings in parliament have been disrupted since last week over the inclusion of members charged with crimes such as corruption and attempted murder in Prime Minister Manmohan Singh's council of ministers.

 

Copy of our memorandum can be viewed at : http://www.femaonline.com/memo_04-05.htm 

 

 

OOPS !!!  - SORRY - The Mummy Returns.

 

While we had just forgotten the proposals of "Vijay Mathur working groups" for taxing interest income of NRE and FCNR deposits,  with the finance bill 2004-05 " the mummy returns ".  

 

The said bill proposes to tax interest income earned on NRE and FCNR deposits by NRIs. Well, we have presented a memorandum; details whereof can be found at : http://www.femaonline.com/memo_04-05.htm  and in the meanwhile, hopeful the best.

 

If you as an NRI are concerned with the said matter, you may in your personal capacity or preferably through community or business related association of NRIs write to the Hon.Finance Minister and mark a copy to Hon.Prime Minister, Shri Manmohan singh. We welcome your queries on the subject.

 

We once again wishing and hoping for the very best.    

 

Best Wishes,

RAJESH H DHRUVA

 

 

 

MEMORANDUM re: NON – RESIDENT TAXATION

Page | 1 | 2 | 3 |

HURRAY  !!!

As you all are aware, VIJAY MATHUR WORKING GROUP ON NRI TAXATION had proposed deletion of income tax exemptions as regards interest earned by NRIs on NRE and FCNR deposits. It was also proposed to delete concessions offered vide Chapter XII A.

We had made presentation to the Hon. Finance Minister to continue the tax exemptions/concessions. We are happy that our request  has found favour with the Hon. Finance Minister and the said exemptions continue to be operative.

HURRAY !!! . And of course, many many thanks to Shri Jaswant Singhji, Hon. Finance Minister.

"MEMORANDUM re: NON – RESIDENT TAXATION"

Dear NRIs, 
A Working Group for 'Study of Non-Resident Taxation'  was recently appointed by "Task Force on Direct Taxes " which in turn was appointed by Government of India. Said Group has made recommendations which means nothing but  "Bad  News" for NRIs. These  recommendations are : 

1.

Deletion to tax exemption granted to NRIs as regards interests income from NRE and FCNR(B) Deposits.

2.

Deletion of chapter XII - A granting concessional tax rate for investment income and capital gains and.

3.

Removal of "Not Ordinarily Resident" Status.

We have jointly prepared a memorandum being submitted to Government of India on behalf of Confederation of Overseas Indians (In Formation) being prepared by key stakeholders: Shri Praful Patel (London), Shri Russi J. Patel, ACA and Shri Bharatkumar Shah (UAE), Shri Rajesh Kapadia (FCA) and Shri Rajesh Dhruva (FCA) (India). This is presented herein below: 

==================================================================================

Report (Part)

Representation / Memorandum

 Memorandum re: R but NOR

 

Report of the Working Group on Non - Resident Taxation

January, 2003

Ministry of Finance & Company Affairs
Government of India
New Delhi.

The Government appointed a Task Force on Direct Taxes under the Chairmanship of Dr. Vijay Kelkar, which presented a "Consultation Paper" in November 2002 Para 3.15 of the "Consultation Paper" relating to tax treatment of non-residents, the Task Force recommended the creation of a Working Group headed by the Director General of Income Tax (International Taxation) and comprising representatives from trade and industry to examine various issues pertaining to non-resident's taxation.

The Working Group for 'Study of Non-Resident Taxation' (Working Group) was constituted by the Ministry of Finance and Company Affairs vide order F.No.153/221/2002-TPL dated November 14, 2002. (Appendix-I)

 Chapter - 4

Domestic Law

4.1 Definition of India
The definition of India as appearing in the domestic law and that appearing in various DTAAs is not the same. The domestic law, infect, is narrower in its scope. The Working Group is of the view that the definition of India provided for in the DTAAs should be introduced in the Income Tax Act, 1961 also for the sake of uniformity. The Treaties Division in the ministry of External Affairs may be consulted in this regard.
4.3  Status of "not ordinarily resident" (NOR)
The existing tax law provides that a person is said to be "not ordinarily resident" if he has not been a resident in India in nine out of the last ten previous years preceding the year under consideration or has not been in India for 730 days or more out of the last seven years. Such a person enjoys the benefit of not being taxable in respect of his income accruing or arising outside India unless it is derived from a business controlled in or a profession set up in India. Such a provision acts against the grain of ' residence based taxation', which provides for taxation of a resident of a country in respect of income from any source wherever situated. India follows the concept of 'residence based taxation'. India also is a signatory to more that 65 DTAAs. A person availing of the status of 'not ordinarily resident' in India is not taxed on his overseas income but only on the DTAAs. A resident in India escapes taxation on has passive income in India because of the NOR provision and is required to pay tax only at very concessional rates in the tax at full rate in either country. There is no rationale for continuing with the concept of taxation on global basis in the case of a resident. By doing away with the status of NOR an individual would be taxable in India on global basis if he becomes a resident and the Tax Department would thereafter have to give credit for the taxes payable in the foreign country in respect of the same income. The individual would therefore not be tasted twice on the same income and the Government would get share of revenue. The Working Group recommends deletion of the provision regarding NOR.
4.5  Withdrawal of certain exemptions: 
4.5.1 Section 10(4)(ii) excludes, in the case of an individual, from computation of income, interest accruing in a Non-Resident (External) Account. The exemption from tax is available only to non-resident India's (NRIs). under the existing tax regime, non-residents do not pay any tax in India on the interest on such deposits. They may ordinarily be paying tax in the country where they are resident on such interest income. In this manner tax in any case is being paid in the country of residence. The Working Group is of the view that with more than 65 DTAAs in place, there is no need for India to of exemption does not really flow to the taxpayer but to the other country's treasury. The interest accruing on such deposits should be taxed at source in India at the DTAA rate and credit for the taxes paid can be claimed in the country of residence by the NRIs as provided in DTAAs. In this manner double taxation in respect of the same income in the hands of the same individual would continue to file his return in the country of residence along with his claim for credit of tax payable in India. The Working Group, therefore, recommends that the provision of section 10(4)(ii) be omitted.
4.5.2  In line with the above, the Working Group also recommends that the provisions of section 10(15)(iv)(fa) and section 10(15)(iv)(fa) be deleted which relate to interest on foreign currency deposits by banks and interest on foreign currency loan taken by housing companies respectively.
4.10 Removal of Chapter XII-A
Chapter XII-A of the I.T. Act deals with special provisions relating to certain incomes of NRIs. Income from long term capital gains or investment income from specified assets are taxable on a gross basis at the rate of ten or twenty per cent respectively. With regard to such income they ordinarily should be paying full tax in the country of residence and getting credit for taxes paid in India. The tax should be neutral to the residential status of a person. In addition the DTAAs take care that the NRis would not be taxed twice on the same income. On the basis of the above, the Working Group recommends the abolition of Chapter XII-A in the I.T. Act.
4.13.3 There are certain provisions in the Act viz. section 194H, 194I, 1919J etc., which require tax to be deducted in respect of payments to any person (including non-residents) for payments of the nature of commission, rent, professional fees, etc. Section 195 deals with all payments except interest on securities and salary payable to non-residents. The Working Group recommends that the payments referred to in section 194H, 1941I, 194J etc. should exclude payments made to non-residents because they are covered by the provisions of section 195. This would obviate avoidable overlapping of the provisions.
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