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 =  Anomaly in Tax Deduction at Source (TDS) under Double Tax Treaty

 =  Anomalies in Times of India / Economic Times article regarding : "NRIs and PIOs can invest in real Estate in India" 

 =  RBI Replies (23.11.2006)

 =  Anomalies in Mid-term Review of Annual Policy for 2006-07 (04.11.2006)

 =  TDS anomalies regarding Long Term capital gains of NRIs.

 =  " NRE / FCNR interest not Tax Exempt ! "

 =  HURRAY   HURRAY  - NRE/ FCNR INTEREST TAX EXEMPTION CONTINUES  (28.02.2005)

 =  Anomaly 1.4.06

 =  Tax differed to 1.4.2005  (26.08.2004)

 =  Our Memorandum to Hon’ble Finance Minister to continue NRE / FCNR tax exemptions (22.7.2004)

 =  Index of enclosures to Memorandum (22.07.2004)

 =  Bad News - NRE / FCNR to be taxed (July, 2004)

 =  OOPS !!!  - SORRY - The Mummy Returns. (July, 2004)
 =  HURRAY - NRE/ FCNR INTEREST TAX EXEMPTION CONTINUES 

 =  MEMORANDUM re: NON – RESIDENT TAXATION  (January, 2003)

 

 

Anomaly in Tax Deduction at Source (TDS) under Double Tax Treaty

06.12.2008

6th  December 2008.

 

Shri O.P.Bhatt,

Chairman,

State Bank of India,

Mumbai.

 

Dear Shri Bhatt,

 

Sub:    Anomaly in Tax Deduction at Source (TDS) under Double Tax Treaty

 

While congratulating you and the team of State Bank of India for excellent Q2 results amidst very critical times,  I, Rajesh H Dhruva, Chartered Accountant and an NRI Consultant,  am prompted to draw your kind attention about a serious anomaly and erroneous guidance to NRI account holders from Middle-East regarding TDS at concessional rate herein.
 
I also had opportunities of close association with State Bank of India in India and UK by way of addressing innumerable seminars organised by various branches of Gujarat, Mumbai and London; writing articles on the subjects of Non-Resident Indians (NRI) Regulations and India Shining series  in "Namaskar" and maiden issues of "Corporate" -  in-flight magazines of Air India last year being published as adverts of State Bank of India and also last three editions of my booklet "Facilities for Non-Resident Indians", both in English and Gujarati being published by State Bank of India, Mumbai and Ahmedabad for NRI account holders.
 
I am a Chartered Accountant and an Advisor to Overseas Indians in matters pertaining to Foreign Exchange Laws, Tax Laws, Double Tax Treaties & Investments and creator and  chief executive of :
www.nribanks.com . only website displaying  monthly  updated interest rates of almost all banks in India in foreign currencies &  Indian Rupee deposits offered to Non Resident Indians ;
femaonline.com  a comprehensive website. presenting edited & updated version   of  Foreign Exchange Management Act, 1999, Rules and Regulations thereunder as also Tax Laws and Banking Regulations pertaining to Non Resident Indians and  .
nrimutualfunds.com -presenting the very best of Equity and income schemes of Indian Mutual Funds and global indices across the world in $ terms .
 
I am forwarding herewith my notes together with copy of relevant provisions of Treaties wherein the required provisions are penned in red and State Bank of India's circular and proforma of self-declaration for your perusal.
 
I will be happy to provide any clarifications needed in this matter.
 
With regards.
 
Sincerely.
 
 
RAJESH H DHRUVA
Chief Executive
femaonline .com
Tel. No. : 0091 281 246 3367 ; 205 3367 ; 664 3367
Cell : 0091 98240 49944.
 ==========================================.

 


TDS at concessional rate on interest on NRO deposits for residents of Oman[Middle-East ] & UAE:

I. Anomaly re concessional tax rate of TDS for residents of Oman/ Middle-East :
1.   One of our client in Oman is been informed by a Branch Manager in Mumbai as regards concessional rate of tax deduction at source [ TDS ] @10.3% on interest earned on NRO deposits.

2.  He has also been provided part copy of bank circular and a self declaration to be provided by the NRI NRO account holder. [ attachment 1 and 2 to this email ]

3.  
I believe that the intimation as regards TDS at concessional rate is offered erroneously. 


4. As regards this, we would also like to draw your attention as under:

.01.     India and Oman have a Double Tax Treaty wherein a resident is defined in Article 4 as an individual “residing in  contracting state i.e India and Oman ” being a person who is liable to tax in such states , i.e. India.and Oman.[Annex-1]

.02   Thus,  to be covered by the definition of resident under Article  4, an NRI “should

be liable to tax in India and Oman .”

.03   SBI Circular dated 21st August, 2008 in Para 2 (attachment 2 ) refers to 

"NRO Customers residing in the Middle East” and furthermore such NRO account

holders are to provide a self-declaration in place of tax residency certificate.

.04   It seems and is presumed that  said circular is issued by State Bank of India  in view of CBDT’s Circular No.734 , dated 24th Jan.,1996. [Annex - 2]
.05 If it is so or otherwise , it is important to note that said CBDT circular is not applicable to NRIs in Middle-East but  “only to Non-Resident Indians in United Arab Emirates (UAE)”.

   

5. We also draw your attention to the fact that earlier India-UAE Double Tax Treaty also defined a resident in similar manner to the definition of India-Oman Double Tax Treaty, wherein Article 4 defined resident as a person who was liable to tax in contracting states i.e. both India and UAE. [Annex - 4] 

.02  This definition was subsequently changed in India-UAE Tax Treaty  vide Notification No. 282 of 2007 with effect from 28th November, 2007. [Annex - 5]

.03 According to the latest provisions of Article 4 of Double Tax Treaty  between India and UAE, an individual who is present in the UAE for a period or periods totaling in the aggregate of at least 183 days in a calendar year is to be considered resident of UAE for the purpose of. [Annex - 3]

.04 Whereas under said Article the  Treaty defines an individual “residing in India” as a person who is liable to tax in India.
.05 Therefore, presently for the purpose of applicability of Treaty , an individual in UAE is not required  to be a tax resident of UAE by virtue of amended  provisions of Article 4 of Double Tax Treaty  between India and UAE effected vide Notification No. 282 of 2007 dated 26.11.07.[Annex - 3] 
.06 Moreover even the Circular No.734 , dated 24th Jan.,1996,of Central Board of Direct Taxes [ CBDT ] provides that Non-Resident Indians  who are covered by the India-UAE Tax Treaty are entitled to reduced rate of tax under Articles 10(2), 11(2) and 12(2) as regards interest or dividends on bonds and deposits with bank and companies @ 12.5 per cent on the gross amount. [Annex - 2]
.07 Whereas NRI individuals residing in Oman not being taxable entities under the Oman tax laws are not and cannot be covered by the definition of 'Tax Resident "coined under Article 4 of India-Oman Tax Treaty and therefor cannot be eligible for said concessional TDS benefit offered by State Bank of India.
 
6. CONCLUSION : Hence, it may be concluded that the concessional TDS offered to residents of Oman and Middle East is erroneous as the same is contrary to;
.01   Provisions of Article 4 of Double Tax Treaty between India and Oman, which requires residents of both the countries to be tax payers to be eligible for the concessions offered in the Treaty.
.02   CBDT Circular No. 734 dated 24/01/1996 refers to and applies only to the residents of UAE and;
.03   The India-Oman Tax Treaty is not amended in line with Article 4 of India-UAE Double Tax Treaty amended by Notification No. 282 dated 26/11/2007.
 
II. Anomaly re concessional tax rate of TDS for residents of UAE  :
1. We have also gone through the format of self -declaration required by State bank of India  in lieu of the tax residency certificate for extending the benefit of DTAA from NRO account holders of Middle-East which includes UAE .
 
2.  Proforma of Self-Declaration
The proforma  of self-declaration in Para 3, requires a statement to the effect of "My residential status will be that of --------------------------)  (mention the name of the country) Tax Resident. 
.02 Herein  declaration of tax residency is not necessary  for the individuals who are residents of UAE.
.03 For residents of India and UAE stay in UAE matters for the purpose of Treaty and not tax liability in UAE.
.04 Moreover the CBDT Circular is absolutely clear and accordingly the declaration should be as regards stay in UAE totaling to 183 days or more in the relevant calendar year and not tax residency of UAE as is sought in the specified format of Declaration.
 
3.    We, therefore, suggest that the Anomaly of self-declaration seeking declaration regarding  "tax residency " by UAE residents should be removed and the declaration may seek "number of days stay in UAE totaling to 183 days or more in relevant calendar year.
 
4.     By any chance I am missing any amendment or regulation whereby NRIs across the Middle-East are subject to concessional rate of TDS I request to inform and will like to stand corrected otherwise if my suggestions are convincing, then appropriate changes may be made by way of:-
.01   Branches of State Bank of India limiting the offer of concessional tax TDS rate to residents of UAE and not entire Middle-East and .
.02    An appropriate change in self-declaration to the effect of number of days stay in UAE totaling to 183 days or more in relevant calendar year.
 

Copy of relevant extracts of Double Tax Treaty, copy of Notification through which change has taken place in definition of Resident in UAE in India-UAE Treaty wherein the required provisions  are penned in red for your perusal., and copy of SBI Circular dated 21st August, 2008 and copy of self-declaration. are enclosed. 

 

 



 
Encl: Relevant Provisions of Treaties/Notification:-

 

ANNEXURE - 1.

OMAN

 

ANNEXURE

AGREEMENT BETWEEN THE REPUBLIC OF INDIA AND THE SULTANATE OF OMAN FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

 

Article 4 : Resident - 1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows :

  (a)  he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests) ;

  (b)  if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode ;

  (c)  if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national ;

  (d)  if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.

 

ANNEXURE - 2.

 

CIRCULAR NO.734, DATED 24TH JAN., 1996.

 

Applicable rates of taxes under the Double Taxation Avoidance Agreement between India and the United Arab Emirates

 

DOUBLE TAXATION RELIEF

 

SECTION 90

 

1. It has been represented by some Non-Resident Indians in the United Arab Emirates (UAE) that the banks and the U.T.I. have been deducting tax at source on interest and dividend incomes at rates higher than those provided in the Double Taxation Avoidance Agreement between India and the United Arab Emirates . This has forced the Non-Resident Indians to seek remedy by way of refunds. It also appears that in each of such cases where refund was due and where decision on the applicability of the DTAA was involved, they had been advised to file a petition before the Authority for Advance Rulings.

2. The Board in its Circular No. 728 dated 30th October, 1995 (see Annex) have already clarified that in case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, tax should be deducted at the rates provided in the Finance Act of the relevant year or at the rates provided in the DTAA, whichever is more beneficial to the assessee.

3. Once again it is clarified that in respect of payments to be made to the Non-Resident Indians at the UAE, tax at source must be deducted at the following rates :

   (i)  Dividends :

(a)  5% of the gross amount of the dividends if the beneficial owner is a company which owns at least 10% of the shares of the company paying the dividends.

(b)  15% of the gross amount of the dividends in all other cases.

  (ii)  Interest :

(a)  5% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution.

(b)  12.5 % of the gross amount of the interest in all other cases.

(iii)  Royalties :

        10% of the gross amount.

4. It is essential that the above rates which are enshrined in the DTAA between India and the UAE are strictly adhered to so as to avoid unnecessary harassment of the taxpayers.

Circular : No. 734, dated 24-1-1996.

Annex

1. It has been represented to the Board that when making remittances of the nature of royalties and technical fees, tax is being deducted at source at the rates specified in the Finance Act of the relevant year, without taking into account the special rates for taxation of such income provided for under the Double Taxation Avoidance Agreement with the country concerned.

2. The expression rates in force has been defined in section 2(37A) of the Income-tax Act. Under sub-clause (iii) of section 2(37A), for the purposes of deduction of tax under section 195, the expression is to mean the rate or rates of income-tax specified in this behalf in the Finance Act in the relevant year or the rates of tax specified in the Double Taxation Avoidance Agreement entered into by the Central Government whichever is applicable by virtue of the provisions of section 90 of the Income-tax Act, 1961.

3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.

Circular : No. 728, dated 30-10-1995.  

 

ANNEXURE - 3.

UAE

 Agreement for avoidance of double taxation and the prevention of fiscal evasion with United Arab Emirates

Annexure

An agreement between the Government of the Republic of India and The Government of the United Arab Emirates for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital

 

ARTICLE 4 - Resident - 1. For the purposes of this Agreement the term ‘resident of a Contracting State ’ means:

  (a)  in the case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in India in respect only of income from sources in India ; and

  (b)  in the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totaling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE.

2. For the purposes of paragraph 1:

  (a)  The Republic of India , its political sub-divisions or local authority thereof shall be deemed to be resident of the Republic of India ;

  (b)  The United Arab Emirates and its political sub-divisions or local Governments shall be deemed to be resident of the United Arab Emirates ;

  (c)  Government institutions shall be deemed, according to affiliation, to be resident of the Republic of India or the United Arab Emirates . Any institution shall be deemed to be a Government institution which has been created by the Government of one of the Contracting States or of its political sub-divisions or local authority/Governments, which are wholly owned and controlled directly or indirectly by the Government of the Contracting State or political sub-division or local authority/Governments which are recognized as such by mutual agreement of the competent authorities of the Contracting States.

  (d)  For the purposes of this article, Abu Dhabi Investment Authority is recognized as a resident of the United Arab Emirates .

3. Where by reason of the provisions of paragraph (1), an indi­vidual is a resident of both Contracting State , then his status shall be determined as follows :

  (a) he shall be deemed to be resident of the State in which he has a permanent home available to him ; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic  relations are closer (centre of vital interests) ;

  (b) if the State in which he has his centre of vital interests cannot be  determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

  (c) if he has an habitual abode in both States or in either of them, he shall be deemed to be a resident of the State of which he is a national ;

  (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

4. Where by reason of the provisions of paragraph (1), a person other than an individual is  a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.

 

ANNEXURE - 4.

 

UAE

 Agreement for avoidance of double taxation and the prevention of fiscal evasion with United Arab Emirates

Annexure

An agreement between the Government of the Republic of India and The Government of the United Arab Emirates for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital

 

ARTICLE 4 - Resident - 1. For the purposes of this Agreement the term ‘resident of a Contracting State ’ means any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2. Where by reason of the provisions of paragraph (1), an indi­vidual is a resident of both Contracting State , then his status shall be determined as follows :

  (a) he shall be deemed to be resident of the State in which he has a permanent home available to him ; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic  relations are closer (centre of vital interests) ;

  (b) if the State in which he has his centre of vital interests cannot be  determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

  (c) if he has an habitual abode in both States or in either of them, he shall be deemed to be a resident of the State of which he is a national ;

  (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph (1), a person other than an individual is  a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.

 

ANNEXURE - 5.

 

INDIA AND THE GOVERNMENT OF THE UNITED ARAB EMIRATES –

AMENDMENT

NOTIFICATION NO. 282 OF 2007, DT. 28TH NOV., 2007

 

28 / 11 /2007

 

 

Double Taxation Avoidance Agreement between the Government of the Republic of India and the Government of the United Arab Emirates – Amendment

 

 

 

ANNEXURE

 

PROTOCOL AMENDING THE AGREEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNMENT OF THE UNITED ARAB EMIRATES FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME SIGNED IN INDIA ON 29TH APRIL 1992

 

ARTICLE 1

 

Paragraph 1 of article 4 (Resident) shall be replaced by the following:

 

“1. For the purpose of this Agreement the term “resident of a Contracting States” means:

 

(a) in case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however does not include any person who is liable to tax in India in respect only of income from source in India; and

 

(b) in the case of United Arab Emirates: an individual who is present in the UAE for a period or periods totaling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE.

 

2. For the purposes of paragraph 1 :

 

(a) The Republic of India, its political sub division or local authority thereof shall be deemed to be resident of the Republic of India;

 

(b) The United Arab Emirates and its political sub divisions or local Governments shall be deemed to be resident of the United Arab Emirates;

 

(c) Government institutions shall be deemed, according to affiliation, to be resident of the Republic of India or the United Arab Emirates. Any institution shall be deemed to be a Government institution which has been created by the Government of one of the Contracting States or of its political sub division or local authority / Governments, which are wholly owned and controlled directly or indirectly by the Government of the Contracting State or political sub division or local authority / Governments which are recognized as such by mutual agreement of the competent authorities of the Contracting States.

 

(d) For the purposes of this article, Abu Dhabi Investment Authority is recognized as a resident of the United Arab Emirates.”

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 

 


 

 


 

Anomalies in Times of India / Economic Times article regarding : "NRIs and PIOs can invest in real Estate in India"

01.12.2008

 
 
 
1st December, 2008
To
The Editor,
Times of India,
Mumbai/Ahemdabad / Rajkot.
 
Sub:    Anomalies in Article.
 
With reference to the above, I, Rajesh H Dhruva, Chartered Accountant and an NRI Consultant,  to inform as under:-
 
I am a Chartered Accountant and an Advisor in the matters pertaining to Foreign Exchange Laws, Tax Laws, Double Tax Treaties & Investments and NRI's Mutual Fund Portfolio Management.   I am also Chief Executive of :
www.nribanks.com . only website displaying  monthly  updated interest rates of almost all banks in India in foreign currencies &  Indian Rupee deposits offered to Non Resident Indians ;
femaonline.com  a comprehensive website. presenting edited & updated version   of  Foreign Exchange Management Act, 1999, Rules and Regulations thereunder as also Tax Laws and Banking Regulations pertaining to Non Resident Indians and  .
nrimutualfunds.com -presenting the very best of Equity and income schemes of Indian Mutual Funds and global indices across the world in $ terms .

I have read with interest Mr. Ashish Gupta's  article on the subject of "NRIs and PIOs can invest in real estate in India" in in Rajkot Plus in the Times of India, Ahmedabad edition of Monday the 24th instant. and e-edition of the Economic Times at  http://economictimes.indiatimes.com/quickiearticleshow/3740588.cms ..  The said article has multiple Anomalies and certain errors of omission and commission.
 
I am forwarding herewith my notes together with copy of relevant regulations and copy of his article wherein the errors are penned in red for your perusal.
 
I am sure you will  publish the corrected content for the benefit of readers at large.  Please inform if any clarifications are needed in this regards.
 
With regards.
 
Sincerely.
 
 
RAJESH H DHRUVA
Chief Execuitve
femaonline.com
Tel. No. : 0091 281 - 246 3367 - 305 3367 - 664 3367.
Cell : 0091 98240 49944.

==========================================.

 
Anomalies are listed herein :-
 
1. It has been written that  a PIO who is a citizen of Pakistan, China or Bangladesh has restrictions in acquiring property.
.02 But according to the provisions of Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000 ,  a citizen of Afghanistan, Sri Lanka, Iran, Nepal and  Bhutan also is restricted to acquire or transfer immovable property in India without prior permission of the Reserve Bank  . [Annex - 1]
 
2. It has been written that the NRI/PIO may transfer the property without any approval from the Reserve Bank of India (RBI) to anybody - which includes a resident of India as also another NRI/PIO.
.02 However, a PIO can transfer by way of sale a property other than agricultural farms etc. only to a person resident in India . [Annex - 2]
 
3. It has been written that in case the property is acquired from rupee funds held in India, the remittance depends on the holding period of the property.
.02 However according to the provisions of Master Circular No. 03 /2008- 09, Dated July 1, 2008 [Annex - 3.] and also Circular No. 12 ,Dated November 16, 2006 [Annex - 4] , the lock-in period of 10 years for remittance of sale proceeds of immovable property has been dispensed with.
 
4. It has been written that up to one million US$  per calendar year can be repatriated out of the balances held in NRO accounts.
.02 However as per the provisions of Foreign Exchange Management (Remittance of Assets) Regulations, 2000, repatriation of one million US$ is permitted in each financial year (April-March) [Annex - 5]
 
5.  It has been written that ,in case of sale, the sale proceeds of upto two properties can be remitted outside India without RBI approval.
.02 This restrictions on remittance of sale proceeds apply to residential properties only. An NRI has no such restrictions as regards commercial or other properties.[Annex - 6]
 
6. It has been written that, the instalments of the loan, interest and other charges should be paid by the NRI/PIO through remittances from outside India through normal banking channels or out of funds in his NRE/FCNR/NRO account in India.
.02 However as per the provisions of  Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000, the repayment of  housing loan can also be made by any relative of the borrower in India. [Annex - 7]
 
Enclosed please find extracts of relevant regulations/notification in the Annexures for your referenceand also the article published by you, whereby  anomalies are highlighted with red colour.
 
Encl: Relevant Provisions of Regulations/Notifications.

 

Annexure - 1.

Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000

 

7.  Prohibition on acquisition or transfer of immovable property in India by citizens of certain countries.

 

No person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan without prior permission of the Reserve Bank shall acquire or transfer immovable property in India, other than lease, not exceeding five years.

 

Annexure - 2.

 

Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000

 

3.  Acquisition and Transfer of Property in India by an Indian Citizen resident outside India.

                   

A person resident outside India who is a citizen of India may -

a)acquire immovable property in India other than an agricultural property, plantation, or a farm house:

Provided that in case of acquisition of immovable property, payment of purchase price, if any, shall be made out of

  (i) funds received in India through normal banking channels by way of inward remittance from any place outside India or

  (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank.

Provided further that no payment of purchase price for acquisition of immovable property shall be made either by  traveller's cheque or by foreign currency notes or by other mode other than those specifically permitted by this clause.

b)transfer any immovable property in India to a person resident in India, and

c)transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India.

 

4.  Acquisition and Transfer of Property in India by a Person of Indian origin.

A person of Indian origin resident outside India may -

(a)acquire immovable property in India other than an agricultural property , plantation, or a farm house :

Provided that in case of acquisition of immovable property, payment of purchase price, if any, shall be made out of

  (i) funds received in India through normal banking channels by way of inward remittance from any place outside India or

  (ii) funds held in any non – resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank.

Provided further that no payment of purchase price for acquisition of immovable property shall be made either by traveller's cheque or currency notes of any foreign country or any mode other than those specifically permitted by this clause.

(b)acquire any immovable property in India other than agricultural land / farm house / plantation property by way of gift from a person resident in India or from a person resident outside India who is a citizen of India or from a person of Indian origin resident outside India;

(c)acquire any immovable property in India by way of inheritance from a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations or from a person resident in India;

(d)transfer any immovable property in India other than agricultural land/farm house/plantation property, by way of sale to a person resident in India;

(e)transfer agricultural land/farm house/ plantation property in India, by way of gift or sale to a person resident in India who is a citizen of India;

(f)transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India who is a citizen of India or to a person of Indian Origin resident outside India.

 

Annexure - 3.

RBI/2008- 2009/16
Master Circular No. 03 /2008- 09

July 1, 2008

Master Circular on Non-Resident Ordinary Rupee (NRO) Account

6.1 Remittance Of Assets By A Foreign National Of Non-Indian Origin

A citizen of a foreign state, not being a citizen of Nepal or Bhutan or a Person of Indian Origin (PIO), who has retired from an employment in India, or has inherited the assets from a person referred to in sub-section (5) of Section 6 of the FEMA; or is a widow resident outside India and has inherited assets of her deceased husband who was an Indian citizen resident in India, may remit an amount, not exceeding USD 1 million per financial year out of the balances in the account, on production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter and an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes vide their circular no.10/2002 dated October 9, 2002.

 

6.2 Remittance of assets by an NRI/PIO

(a) NRI/PIO may remit an amount, not exceeding USD 1 million per financial year, out of the balances held in NRO accounts / sale proceeds of assets / the assets in India acquired by him by way of inheritance / legacy, on production of documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, and an undertaking by the remitter and certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes vide their circular no.10/2002 dated October 9, 2002.

 

(b) NRI/PIO may, within the overall limit of USD 1 million. As stated above, remit sale proceeds of assets acquired under a deed of settlement made by either of his parents or a close relative (as defined in Section 6 of the Companies Act, 1956) and the settlement taking effect on the death of the settler, on production of the original deed of settlement and an undertaking by the remitter and a certificate by a Chartered Accountant in the formats prescribed by the Central Board of Direct Taxes vide their circular no.10/2002 dated October 9, 2002.

 

6.3 Assets acquired in India out of rupee funds

NRI/PIO may remit sale proceeds of immovable property purchased by him as a resident or out of rupee funds as NRI/PIO, without any lock-in-period, subject to the above limit of USD 1 million, per financial year.

 

6.4 Restrictions

(a) The remittance facility in respect of sale proceeds of immovable property is not available to citizens of Pakistan, Bangladesh, Sri Lanka, China, Afghanistan, Iran, Nepal and Bhutan.

(b) The facility of remittance of sale proceeds of other financial assets is not available to citizens of Pakistan, Bangladesh, Nepal And Bhutan.

 

Annexure - 4.

 

 

Foreign Exchange Management Act 

RESERVE BANK OF INDIA
FOREIGN EXCHANGE DEPARTMENT
CENTRAL OFFICE
MUMBAI - 400 001

 

RBI/2006-07/180
A.P. (DIR Series) Circular No. 12

November 16, 2006

 

To

 

All Category - I Authorised Dealer Banks

 

Madam/Sir,

Facilities to NRIs/PIO and Foreign Nationals - Liberalisation

Attention of Authorised Dealer Category - I (AD Category - I) banks is invited to Regulation 4 of Foreign Exchange Management (Remittance of Assets) Regulations, 2000 notified vide Notification No. FEMA.13/2000-RB dated 3rd May 2000 and as amended from time to time, and A. P. (DIR Series) Circular No. 67 dated January 13, 2003.

 

2. The existing regulations permit Non-Resident Indians (NRIs) and Persons of Indian Origin (PIO) to remit up to USD one million per calendar year for any bonafide purpose out of the balances in their Non-Resident Ordinary (NRO) accounts. The balance in the NRO accounts may also include the sale proceeds of immoveable property acquired by the non-resident out of her/his resources in India, or sale proceeds of property received by way of inheritance or gift. The remittance of sale proceeds of the immoveable property is at present subject to a lock-in period of 10 years.

 

3. With a view to further liberalise the procedure and provide greater flexibility, the lock-in period of 10 years for remittance of sale proceeds of immovable property has been dispensed with. Accordingly, AD Category - I banks may, now allow remittances out of balances in NRO accounts including sale proceeds of immovable property provided the amount does not exceed USD one million per financial year (April-March). Other terms and conditions will remain unchanged.

4. AD - Category I banks may furnish, on a quarterly basis, a statement on the number of applicants and total amount remitted, as per proforma annexed, to the Chief General Manager-in-Charge, Foreign Exchange Department, Foreign Investments Division (NRFAD), Reserve Bank of India, Central Office, Mumbai-400001 within 10 days of the reporting quarter. Click here to send the soft copy of the statement by e-mail.

 

5. Necessary amendments to the Foreign Exchange Management (Remittance of Assets) Regulations, 2000 are being notified separately.

 

6. AD Category- I banks may bring the contents of the circular to the notice of their constituents concerned.

 

7. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law.

Yours faithfully,

(Salim Gangadharan)
Chief General Manager-in-Charge

 

 

Annexure - 5.

 

                 Foreign Exchange Management (Remittance of Assets) Regulations, 2000

 

4. Permission for remittance of assets in certain cases.

A Non-Resident Indian (NRI)/Person of Indian Origin (PIO) may remit an amount, not exceeding US $ 1,000,000 (US Dollar One million only) per financial year,

Out of the balances held in NRO accounts/sale proceeds of assets/the assets in India acquired by him by way of inheritance/legacy on production of :

(a)

documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter, and

(b)

an undertaking by the remitter and certificate from a Chartered Accountant in the format prescribed by the Central Board of Direct Taxes, Ministry of Finance, Government of India in their Circular No. 10/2002, dated October 9, 2002.

Under a deed of settlement made by either of his parents or a close relative (as defined in section 6 of the Companies Act, 1956) and the settlement taking effect on the death of the settler, on production of:

(a)

the original deed of settlement; and;

(b)

an undertaking by the remitter and certificate from a Chartered Accountant in the format prescribed by the Central Board of Direct Taxes, Ministry of Finance, Government of India in their Circular No. 10/2002, dated October 9, 2002.

 

 

Provided that where the remittance under clauses (i) and (ii) is made in more than one instalment, the remittance of all instalments made through the same Authorised Dealer.

 

Annexure - 6.

 

 6.  Repatriation of sale proceeds

 

(a)A person referred to in sub-section (5) of Section 6 of the Act, or his successor shall not, except with the prior permission of the Reserve Bank, repatriate outside India the sale proceeds of any immovable property referred to in that sub-section.

 

(b)In the event of sale of immovable property other than agricultural land/farm house /plantation property in India by a person resident outside India who is a citizen of India or a person of Indian origin, the authorised dealer may allow repatriation of the sale proceeds outside India, provided the following conditions are satisfied, namely:

 

(i)the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations;

  

(ii)the amount to be repatriated does not exceed (a) the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident Account or (b) the foreign currency equivalent ,as on the date of payment, of the amount paid where such payment was made from the funds held in Non-Resident External account for acquisition of the property; and

 

(iii)in the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.

 

Annexure - 7.

 

 

Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000.

8.  Providing housing loan in rupees to a non-resident.

An authorised dealer or a housing finance institution in India approved by the National Housing Bank may provide housing loan to a non-resident Indian or a person of Indian origin resident outside India, for acquisition of a residential accommodation in India, subject to the following conditions, namely:

a) the quantum of loans, margin money and the period of repayment shall be at par with those applicable to housing finance provided to a person resident in India;

b) the loan amount shall not be credited to Non-resident External (NRE) / Foreign Currency Non-resident (FCNR)/Non-resident Non-repatriable (NRNR) account of the borrower;

c) the loan shall be fully secured by equitable mortgage of the property proposed to be acquired, and if necessary, also by lien on the borrower's other assets in India;

d) the installment of loan, interest and other charges, if any, shall be paid by the borrower by remittances from outside India through normal banking channels or out of funds in his Non-resident External (NRE)/Foreign Currency Non-resident (FCNR) account in India, or out of rental income derived from renting out the property acquired by utilisation of the loan; or by any relative of the borrower in India by crediting the borrower’s loan account through the bank account of such relative.

Explanation - The word ‘relative’ means ‘relative’ as defined in section 6 of the Companies Act, 1956

e) the rate of interest on the loan shall conform to the directives issued by the Reserve Bank or, as the case may be, by the National Housing Bank.

 

 

 

Encl: Article.

 

Quickies
NRIs and PIOs can invest in real estate in India
 
Ashish Gupta, ET Bureau

Anon-resident Indian (NRI) and person of Indian origin (PIO) can acquire residential property in India. They can rent it out, transfer it, or sell it as well. They can take the rental income and their investments in the property out of the country , subject to the foreign exchange regulations.

Under the present relaxed conditions, NRIs can invest in property in India easily. A NRI is an Indian citizen residing outside India. A PIO is an individual who at any time held an Indian passport, or whose father or grandfather was a citizen of India.
However , a PIO who is a citizen of Pakistan, China or Bangladesh has restrictions in acquiring property.

Also, NRIs and PIO cannot buy agricultural land, plantation property and farm house. A NRI/PIO may use his own funds to acquire immovable property. He can also avail a housing loan from a bank.

Own funds is money received in India through an inward remittance from overseas out of income earned overseas, personal savings outside India, and funds held in non-resident external (NRE), non-resident ordinary (NRO), or a foreign currency - non-resident (FCNR) bank account.

In addition to own funds, he may also avail a housing loan from a bank. The authorised banks have been permitted to provide housing loans to NRIs and PIO for acquisition of a residential property in India. It is to be noted that this is subject to certain conditions.

However , the quantum of loan, margin money and the period of repayment are on par with the housing loans provided to residents in India. The loan amount cannot be credited to the NRE/FCNR account of the NRI/PIO. It has to be fully secured through an equitable mortgage of the property proposed to be acquired.

If required , the bank may also have a lien on the other assets of the buyer in India. Further, the instalments of the loan, interest and other charges should be
paid by the NRI/PIO through remittances from outside India through normal banking channels or out of funds in his NRE/FCNR/NRO account in India.

The loan and interest can also be repaid out of the rental income of the property purchased.
The NRI/PIO may transfer the property without any approval from the Reserve Bank of India (RBI) to anybody - either a resident of India or another NRI/PIO.

In case the property is let-out , the rental income can be credited into the NRO/NRE account. In case of sale, the sale proceeds of upto two properties can be remitted outside India without any RBI approval. Remittance for third and subsequent properties requires an RBI approval .

The remittance of the sale proceeds depends upon the mode of acquisition - whether it was acquired out of funds remitted from outside or out of rupee funds. A property can be acquired out of rupee funds by a NRI before leaving India, or acquired after leaving India but from his savings bank account here.

It should be with income earned in India. The proceeds can be repatriated provided the amount does not exceed either the amount paid for acquiring the property in foreign exchange received from overseas, the amount paid from the FCNR account, or the foreign currency equivalent of the amount paid from the funds held in a NRE account

In case the property is acquired from rupee funds held in India, the remittance depends on the holding period of the property. In case the property has been held for more than 10 years, up to one million USD per calendar year can be repatriated without any RBI approval. If the property is sold after being held for less than 10 years, remittances can be made if the sale proceeds were held for the balance period in a NRO account or other eligible investments.

For remittance of sale proceeds of assets acquired through inheritance or settlement , there is no lock-in-period . In all other cases, specific approval of the RBI is required.

Wherever a specific approval of the RBI is not required, the sale proceeds of the property as well as the rental income may be remitted outside India through normal banking channels, after obtaining an appropriate certificate from a chartered accountant, certifying that applicable taxes have been paid or provided for.

 

 

 

RBI Replies

23.11.2006

Anomalies in Mid-term Review of Annual Policy for 2006-07

04.11.2006

 

04/11/2006

 

The Governor,

Reserve Bank of India,

Mumbai.

 

Respected Sir,

 

Sub: Anomalies in Mid-term Review of Annual Policy for 2006-07.

 

I take this opportunity to congratulate you for presenting once again a dynamic policy, which will give further fillip to the momentum of economic growth, while simultaneously reining the inflationary pressures. Sir, the marathon presentation will further encourage large and small entrepreneurs in their efforts for growth and development of their trade and industry, which in turn will boost the growth of the Nation. 

 

Sir, the highlights amongst others proposes two changes, namely :

 

- Resident individuals would be free to remit up to US $ 50,000 per financial year as against the earlier limit of US $ 25,000 -

 

- Lock-in period for sale proceeds of the immovable property credited to the NRO account to be eliminated, provided the amount being remitted in any financial year does not exceed US $ one million -

 

Both the proposals mention / link the limits to a "calendar year", whereas the original regulations stipulated and have linked the limits to a "financial year" as reflected in part of copy posted herein.

 

Possibly, the intention is to delink the limits to a "calendar year", and now link the same to a "financial year". But if it is not so, I suggest that appropriate provisions / changes be made linking the limits of US$ 50,000 and US$ 1 mn, respectively, to "calendar year".

 

I once again take this opportunity to congratulate you and wish you the very best in all your endeavors for taking forward the economy and the Nation into a new era of progress and prosperity.

 

With respectful regards,

Sincerely,  

 

 

RAJESH H DHRUVA

Chief Executive

femaonline.com
Cell : (0) 98240 98240

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

 

RESERVE BANK OF INDIA
FOREIGN EXCHANGE DEPARTMENT  
CENTRAL OFFICE  
MUMBAI – 400 001

January 31, 2004

RBI/2004/36

A.P.(DIR Series) Circular No.62

To
All Authorised Dealers in Foreign Exchange

Madam / Sirs,

Liberalised remittances facilities to NRIs/PIO and Foreign Nationals

 

·         Amendments to FEMA Regulations

·         Clarificatory Guidelines

 

Attention of Authorised Dealers is invited to paragraph 4 of A.P.(DIR Series) Circular No.67 dated January 13, 2003, permitting them to allow remittances upto USD 1 million, per calendar year, out of balances held by NRIs/PIO/Foreign Nationals (including retired employees or non-resident widows of Indian citizens) in NRO accounts/sale proceeds of assets, on production of the following documents :

 

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

 

RESERVE BANK OF INDIA
FOREIGN EXCHANGE DEPARTMENT  
CENTRAL OFFICE  
MUMBAI – 400 001

February 4, 2004

RBI/ 2004/39

A.P. (DIR Series) Circular No. 64

To
All Authorised Dealers in Foreign Exchange

Madam/Sirs,

 

Liberalised Remittance Scheme of USD 25,000 for Resident Individuals

 

As you are aware, we have been closely monitoring the macro-economic developments of the country and initiating suitable policy changes in tune with the changing scenario. As a step towards further simplification and liberalization of the foreign exchange facilities available to residents, it has been decided that resident individuals may freely remit upto USD 25,000 per calendar year for any purpose for which a Scheme has been formulated as detailed below:  

 

TDS anomalies regarding Long Term capital gains of NRIs.


6th March, 2006.
 


Shri P. Chidambaram,
Honorable Finance Minister,
Ministry of Finance,
New Delhi.

 

Respected Shri P.Chidambaram,

 

Sub:    TDS anomalies regarding Long Term capital gains of NRIs.

 

Good wishes and I take this opportunity to heartily congratulate you for presentation of a progressive and balanced budget, which will definitely enhance the pace of economic development and provide an opportunity to the rural population living in the farthest corner of India  to take a better share of prosperity and opportunities widening for Indians.

 

Sir, vide my letter  dated 3rd January, 2005, I had forwarded submissions regarding TDS anomalies pertaining to Short Term capital gains of Equities and Equity Schemes  and Long Term gains of Debt and Hybrid Schemes in case of Non Resident Indians.
I sincerely thank you for implementing appropriate changes and providing for TDS @ 10% on income by way of Short Term capital gains of Equities and Equity Schemes by insertion of  Sub-clause ( C ) being  Clause 1 (b) (i) (C) of Part-II of THE FIRST SCHEDULE bringing  the TDS rate at par with the 10% rate of Income Tax , which will definitely bring a sigh of relief to NRIs across the world.

While the said amendment is being made , a simultaneous change suggested and necessary regarding Long Term capital gains  arising  from Debt and Hybrid Funds of Indian Mutual Funds  being taxed at 10%  but TDS being levied at 20% continues to be a part of the Statute as the same is covered by Clause 1 (b) (i) (D)  of  Part-II of THE FIRST SCHEDULE, which continues to represent the erstwhile Clause 1 (b) (i) (C) of the Finance Act, 2005.

 

I once again request you to look into this aspect and provide for TDS @ 10% in case of Long Term capital gains arising out of Debt and Hybrid Schemes of Indian Mutual Funds in case of Non Residents as the rate of income-tax for such gains  is prescribed at 10% vide First Proviso to Section 112 of the I.T.Act,1961.

 

I am enclosing copy of relevant part of Section 112 of the Income Tax Act, 1961, which provides for tax at 10% and also relevant part of THE FIRST SCHEDULE of Finance Bill 2006, which provides for TDS at 20%.

 

In case any clarifications are necessary, I shall be more than happy to provide appropriate assistance to the best of my ability.

 

Thanking you in anticipation. 

Sincerely, 

 

RAJESH H DHRUVA

Chief Executive

nribanks.com

Tel. No. : 0091 281 2464099 / 2463367

Cell : 0091 98240 49944

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

THE FIRST SCHEDULE

(See section 2)

 

PART II

 

RATES FOR DEDUCTION OF TAX AT SOURCE IN CERTAIN CASES

 

In every case in which under the provision of sections 193,194, 194A, 194B, 194BB, 194D, and 195 of the Income – Tax Act, tax is to be deducted at the rates in force, deduction shall be made from the income subject to the deduction at the following rates :-

 

1. In the case of a person other than a company –

 

(b) where the person is not resident in India –

 

(i) in the case of a non-resident Indian-

(A) on any investment income                                                                                  20 per cent;

(B) on income by way of long-term capital gains referred to in section 115E                 10 per cent;

(C) on income by way of short-term capital gains referred to in section 111A      10 per cent;

(D) on other income by way of long-term capital gains [not being log-term

capital gains referred to in clauses (33), (36) and (38) of section 10]                     20 per cent;

(E)  …. …………..

PROVISO TO SECTION 112 OF THE INCOME-TAX ACT, 1961


112.
(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggre­gate of —……

         [(c)            in the case of a non-resident (not being a compa­ny) or a foreign company,—

(i)      the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

   (ii)      the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;]

[Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second provi­so to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.


COPY OF LETTER /MAIL Dt. 3.01.2005

----- Original Message -----

Sent: Monday, January 03, 2005 6:11 PM

Subject: TDS Anomalies re: long-term and short-term capital gains of NRIs

 

Shri P. Chidambaram,,
Honourable Finance Minister,
Ministry of Finance,
New Delhi.
 

Respected Shri P.Chidambaram,

 

Sub : TDS Anomalies re: long-term and short-term capital gains of NRIs

 

Good Wishes and wishing you a very happy year 2005.

 

While presenting the tax proposals in the Union Budget 2004-05 as Hon. Finance Minister while recognizing the capital gain  tax as a vexed issue , Sir , You have revamped the capital gain tax by granting total tax exemption to long-term capital gains from security transactions i.e. equity shares and equity schemes of Mutual Funds held for a period exceeding 12 months and short-term capital gains thereof at 10% stating that “ the new tax regime will be a win-win situation for all concerned."


Unfortunately, Your encouraging initiatives are grossly defeated  by anomalies in the provisions of Tax Deduction at Source ( TDS ) pertaining to these long-term and short-term capital gains being :

 

.01 Anomaly of 30% TDS from short term gains of equity shares & equity oriented units  being taxed at 10%.

.02 Anomaly of 20% TDS from long term Debt & Hybrid funds being taxed at 10%.   

 

2. The anomalies are detailed herein  with remedial suggestions and unless corrective action is taken immediately, the NRIs will definitely be shaken off from investment in equities and equity , debt and hybrid schemes of Indian Mutual Funds.

3. Should you require any clarifications ? I will be more happy to provide assistance to the best of my ability.

 

I once again request you to kindly look into the matter and if thought proper, request for appropriate corrections.

 

Thanking you in anticipation. 

Sincerely,

 

RAJESH H DHRUVA

Chief Executive

nribanks.com

Tel. No. : 0091 281 2464099 / 2463367

Cell : 0091 98240 49944  

 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 

I. ANOMALY OF 30% TDS FROM SHORT TERM GAINS OF EQUITY SHARES & EQUITY ORIENTED UNITS BEING TAXED AT 10 %
--------------------------------------------------------------------------------------------------------------------------------------

1.The Finance Act, 2004 has exempted Long Term Capital Gains [LTCGs] from Equity Shares and Units of Equity-Oriented Funds and
.02 levied tax rate of 10% in case of Short Term Capital Gains [STCGs], arising out of Equity Shares and Units of Equity-Oriented Funds i.e. gains from units held for a period 12 months or less.
1.2 Accordingly, Equity and Units of Equity-oriented Funds are taxed as under –
.01 -  0%  tax, in case of Long Term Capital Gains [LTCGs]
.02 - 10% tax in case of Short Term Capital Gains [STCGs]. 
2. The Provisions relating to Tax Deducted at Source [TDS] in case of a person "Not Resident in India" lays down  -
.01 -   0% TDS from LTCGs  &

.02 -  30% TDS in case of STCGs - not specifically provided – hence covered by residual  clause –

"whole of the other income"

[ paragraph 1(b) (i) (G) of PART II  OF FINANCE ACT,  2004 – Annexure-I ]

 

3. THEREFORE, in case of "Non-Resident", although tax payable on STCGs arising out of Equity Shares and Units of Equity-oriented Funds is 10%.

.02 Tax is to be deducted at 30%. 

4. This seems to be a drafting anomaly as the intention of the Statute is to levy tax at 10% only. 

5. This will also create serious hardships for Non-Residents, as this will require filing of Tax Return to claim the refund of excess tax deduction of 20%, i.e. 30% TDS - 10% tax payable. 

6.  REMEDIAL SUGGESTION:

A Clause should be inserted in Part-II of THE FIRST SCHEDULE of ensuing Finance Act, prescribing the rate of TDS at 10% in case of STCGs on assets referred to in Section 10(38) in case of "a person not Resident in India".

 

II.  ANOMALY OF 20% TDS FROM LONG TERM DEBT & HYBRID FUNDS BEING TAXED AT 10%

--------------------------------------------------------------------------------------------------------------------------------------

 

Similarly, LTCGs arising from Units of Unit Trust of India or Units of Mutual Funds, other than Units of Equity-oriented Funds are taxed at the rate of 10% by virtue of Section 112 of Income-tax Act, 1961.

[ Proviso to Section 112 of the Income Tax Act, 1961 – Annexure-II ] 

 

2. However, provisions of Tax Deduction at Source (TDS) require  deduction of tax at     the rate of 20% as provided in paragraph-1 (b) (i) (C) of Part II of the Finance Act, 2004.
[ paragraph 1(b) (i) (C) of PART II  OF FINANCE ACT,  2004 – Annexure-III ] 

 

3. Such deduction is prescribed year after year by relevant Finance Act and continues to be at 20%  since many years. 

 

4. ANOMALY : THEREFORE, whereas LTCGs of Debt Schemes and Hybrid Schemes of units, i.e. Schemes other than Equity-oriented Funds are to be taxed at 10%,

.02 The tax deduction is prescribed at 20%.

 

5.  This seems to be a drafting anomaly as the intention of the Statute is to levy tax at 10% only.

 

6. REMEDIAL SUGGESTION

A Clause should be inserted in paragraph 1 (b) (i) of Part-II of THE FIRST SCHEDULE of ensuing Finance Act prescribing the rate of TDS at 10% in case of LTCGs arising out of listed Securities, Units of Unit Trust of India and Units of Mutual Funds.  

ANNEXURE-I :  paragraph 1(b) (i) (G) of PART II  OF FINANCE ACT,  2004

Part II

Rates for deduction of tax at source in certain cases

 1. In the case of a person other than a company—

(b) where the person is not resident in India—

(i) in the case of a non-resident Indian—

G) on the whole of the other income

30 per cent


ANNEXURE-II :
PROVISO TO SECTION 112 OF THE INCOME-TAX ACT, 1961


112.
(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggre­gate of —……

            [(c)            in the case of a non-resident (not being a compa­ny) or a foreign company,—

(i)      the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

   (ii)      the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;]

[Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second provi­so to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.

[Explanation.—For the purposes of this sub-section,—                       

(a)   “listed securities” means the securities—

(i)        as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956); and

(ii) listed in any recognised stock exchange in India;

   (b)     “unit” shall have the meaning assigned to it in clause (b) of Explanation to section 115AB.]

 

ANNEXURE-III : PARAGRAPH1(b) (i) (C) OF PART II  OF FINANCE ACT,  2004

Part II

Rates for deduction of tax at source in certain cases

 

1. In the case of a person other than a company—

(b) where the person is not resident in India—

(i) in the case of a non-resident Indian—

(C) on other income by way of long-term capital gains [not being long-term capital gains referred to in clauses (33), (36) and (38) of section 10]

20 per cent

 

 

" NRE / FCNR interest not Tax Exempt ! "

 

6th Feb. '06

Shri P. Chidambaram,,
Honorable Finance Minister,
Ministry of Finance,
New Delhi.

 

Respected Shri P.Chidambaram,

 

Sub : Anomalies re: tax exemption of NRE & FCNR accounts of NRIs.

 

Good Wishes and wishing you a very happy year 2006.

 

While critically examining the provisions of Section 10(4)(ii) of the Income Tax Act, 1961 , whereby income-tax exemption is granted to Non Resident Indians on interest earned on moneys in a Non-Resident ( External ) Account and Foreign Currency Non Resident ( FCNR )  deposits held in any bank in India , serious anomalies are noticed  in the Income-Tax Provisions and Foreign Exchange Regulations.

Said anomalies defeat the intention of the Statute and result in tax exemption not being available to NRIs on the interest earned on NRE and FCNR accounts  since 1st day of June, 2000 ,  when Foreign Exchange Management Act , 1999 (FEMA) replaced the earst-while law of Foreign Exchange Regulations Act, 1973 (FERA)The same are detailed herein


The anomalies are detailed herein  with remedial suggestions . If any clarifications are needed , I will be happy to provide assistance to the best of my ability.

 

I once again request you to kindly look into the matter and if thought proper, request for appropriate corrections.

 

Thanking you in anticipation. 

Sincerely, 

 

RAJESH H DHRUVA

Chief Executive

nribanks.com

Tel. No. : 0091 281 2464099 / 2463367

Cell : 0091 98240 49944  
-----------------------------------------------------------

 

NRE / FCNR interest not Tax Exempt !
------------------------------------------------------------

 

1. Interest on Non Resident External ( NRE ) and Foreign Currency Non Resident ( FCNR )  deposits is exempt from Income Tax in India.

 

2. Said exemption is granted vide provisions of Section 10(4) (ii) of the Income Tax Act Act, 1961 ( I.T. Act ) [ Annex. 1 ]

 

3. Said section states as under :

 

 " In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 ( 46 of 1973 ) and the rules made thereunder :

 

Provided that such individual is a person resident outside India as defined in clause (q) of Section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account " .

 

4. Now, a critical study of the section shows that the exemption is granted as regards interest on moneys in NRE A/c  in India in accordance with Foreign Exchange Regulation Act, 1973 ( FERA ) and rules made thereon.    
.02 The Foreign Exchange Regulation Act, 1973 is repelled and has been  replaced by Foreign Exchange Management Act, 1999 ( FEMA )  with effect from 1st June 2000.

 

5. THUS, since 1st June 2000, Non Resident External  A/cs  are maintained and governed by the provisions of Schedule-1 of Foreign Exchange Management ( Deposit ) Regulations, 2000 and
Foreign Currency Non Resident  A/cs are maintained and governed by the provisions of Schedule-2 of Foreign Exchange Management ( Deposit ) Regulations, 2000.[ Annex. 2 ]

 

6. AS SUCH, presently NRE and FCNR A/cs are not maintained under FERA 1973 but are maintained under the Foreign Exchange Management Act, 1999 ( FEMA ) and further governed by Foreign Exchange Management ( Deposit ) Regulations, 2000. 

 

7. WHEREAS , the exemption under Section 10(4)(ii) continues to exempt interest earned on NRE A/c maintained in accordance with FERA 1973.

 

8. HENCE it can be concluded that NRE A/cs not being maintained under FERA 1973 and further more as the tax exemption under Section10(4) (ii) is granted / related to NRE A/cs maintained under FERA 1973,  it is imperative that interest earned on NRE and FCNR A/cs maintained under Foreign Exchange Management  ( Deposit ) Regulations, 2000 is not exempt vide provisions of Section 10(4) (ii) of I.T. Act.

9. CONCLUSION : It can therefore be concluded that , presently ,  interest earned on NRE and FCNR A/cs maintained under Foreign Exchange Management  ( Deposit ) Regulations, 2000 is liable to tax and not exempt income.

10. REMEDIAL SUGGESTIONS :

 

.01 Section 10(4)(ii) should be appropriately amended. The exemption should be linked to Non Resident External  and Foreign Currency Non Resident  A/cs maintained under the regulations Foreign Exchange Management Act,  1999.

 

.02 Such amendment should be made retrospectively , giving effect to the changes since 1st day of June, 2000.


II. MOREOVER , the  exemption is granted to an individual who is determined as and covered by the definition of an NRI , i.e. ' a person residing outside India ' as per the provisions of FERA, 1973 as is evident from the language of the Proviso to Section 10(4)(ii) herein :
"Provided that such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account;]
Appropriate changes should be made herein too in context of FERA being replaced by FEMA.

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Annexure 1 :      Section 10(4) of Income Tax Act, 1961

CHAPTER III  : INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

 

Incomes not included in total income.

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included

[(4)      (i) in the case of a non-resident, any income by way of interest on such securities or bonds as the Central Government may, by notification in the Official Gazette67, specify in this behalf, including income by way of premium on the redemption of such bonds:

68[Provided that the Central Government shall not specify, for the purposes of this sub-clause, such securities or bonds on or after the 1st day of June, 2002;]

69[70(ii) in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules made thereunder:

Provided that such individual is a person resident outside India as defined in clause (q) of section 271-73 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account;]]

     Following second proviso to sub-clause (ii) in clause (4) of section 10, which was inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2006, shall be omitted by the Finance Act, 2005, w.e.f. 1-4-2006:

     Provided further that nothing contained in this sub-clause shall apply to any income by way of interest paid or credited on or after the 1st day of April, 2005 to the Non-Resident (External) Account of such individual;

Annexure 2 :     Regulation 5 of Foreign Exchange Management (Deposit) Regulations, 2000

Foreign Exchange Management (Deposit) Regulations, 2000

Notification No.FEMA 5 /2000-RB dated 3rd May 2000 1    10   11   9   5   6   7   8   12   2

[G.S.R. 388 (E)]

In exercise of the powers conferred by clause (f) of sub-section (3) of section 6, sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank makes the following regulations relating to deposits between a person resident in India and a person resident outside India, namely:

 

1.

Short title and commencement.

 

i)

These regulations may be called the Foreign Exchange Management (Deposit) Regulations, 2000.

 

ii)

They shall come into force on 1st day of June, 2000.

 

5.

Acceptance of deposits by an authorised dealer/ authorised bank from persons resident outside India:-

 

(1)

An authorised dealer in India may accept deposit

 

 

i)

under the Non-Resident (External) Account Scheme(NRE account), specified in Schedule 1 , from a non-resident Indian [***]

 

 

ii)

under the Foreign Currency (Non-Resident) Account Banks Scheme,(FCNR-B account), specified in Schedule 2, from a non-resident Indian [***];

 

 

iii)

under the Non-Resident (Ordinary) Account Scheme, (NRO account), specified in
Schedule 3, from any person resident outside India;

 

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%.

 

Best wishes.

 

RAJESH H DHRUVA
Chief Executive

nribanks.com

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

 

 

 

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