Holdings may lose some sheen

When staying overseas, Indians have different options to deposit their money back home. But as recent news reports reveal, come April 2011, non-resident Indians may be in for disappointment as they will have to pay a flat but higher tax on interest or other investment income.

Generally, NRIs can simply keep their domestic accounts, which would transform into NRO (non-resident ordinary) account the moment they leave the country. This is a high interest but a high taxed account on par with domestic account. But if they want they can transform it into an NRE (non-resident external) account. This would be a low taxed account, but the interest is linked to LIBOR and hence offers low interest. Money deposited in this account is easily repatriable.

In extension, there is the FCNR (Foreign Currency Non-Resident account) in which one can simply keep their money in foreign exchange for a specified term.

Traditionally, for Gulf NRIs, the NRE account has been the most popular. For Indians in the west, FCNR has offered a better holding pattern. In all the cases, there is no tax on the foreign exchange (forex) principle. In NRO, only the interest is taxed. But Jyotirmoy Jain, adviser on banking and taxation to Assocham, an industry apex body, says that the practicability of the FCNR is making it popular even in the Gulf region.

But there is also a strong trend of sending money directly to the resident account of a relative, especially by the Gulf NRIs, points out V. A. Joseph, chairman of South Indian Bank.

Once back home permanently, the non-resident account has to be transformed into a resident account within six months of return. A simple letter to the bank would do. For term deposits, the status remains unchanged until the end of the term.

Recent press reports suggest a draft Direct Tax Code, which proposes to treat interest income (such as on NRO bank deposit) and capital gains earned by the NRIs in India as "income from special sources". There may be a flat tax of 20 per cent and 30 per cent on these incomes respectively. In effect, a resident who has a taxable annual income of Rs2.5 million (Dh191,250) will pay a tax of Rs400,000. But an NRI with equal capital gain, if taxed 30 per cent, will end up paying more than twice this amount.

Will this be a disincentive? Opinions vary.

"Majority of NRIs make investments in properties in India to reside there, when they return eventually," former chairman and managing director of the Bank of India, T.S. Narayanasamy says. "Capital gains will arise only when the property is sold and money is repatriated. As long as the person remains non-resident, he is not affected even if the tax is levied on capital gains since the payment of Tax depends on the country of his residence. The proposed tax code has removed the distinction between short and long term capital gains. This may not act as deterrent/disincentive towards NRI investment."

But Jain, disagrees. "Yes, the new [draft] tax code is detrimental to the interests of NRI in as much as they will now be treated at par with the residents in respect of income tax provisions in the new tax code in respect of income accruing or earned in India in their non-resident accounts," he says. He further explains that this measure is a show of India's growing competitiveness and a departure from the forex-starved past.

"It is assumed by the authorities that the investments by NRI in equity or property in the first place-at the time of investment - are exempted from payment of any tax," he adds. "On disposing the assets the treatment of income as special income and provision of flat rate without any exemptions (except STT on shares) has tried to bring equity between the NRI as well as non NRI income treatment."

Advice: Investments