Time to think for Indians to save on taxes back home

Residents in Dubai and the UAE do not have to pay income tax. There’s an all round good feeling about this that attracts people from all over. When it comes to non-resident Indians (NRIs), the feeling is doubly good. They don’t have to pay tax back home for income earned abroad. But those earning an income from investments made in India have to be attentive to taxes that accrue on them.

What attracts tax is the non-residents’ investments in shares, debentures, deposits and properties in India. The exemption limit is Rs. 160,000.
The deadline for filing taxes is months away but it is not too early to think about it. Those who have to file tax, the deadline is July 31.

However there are ways to save taxes provided you know the ways to go about it.
On the tax issue, to start with, it’s important to understand one’s status clearly.


Income tax

Under the Income Tax Act, an NRI is a person who has stayed outside India for 182 days or more in a financial year (from April 1 to March 31). If you have come back after being an NRI for nine consecutive years, then you are an R-NOR (Resident but not ordinarily resident), and can still obtain some of the benefits for two consecutive financial years.
You can also obtain NRI benefits if you have been in India for not more than 729 days during the preceding seven financial years.

NRIs don’t need to think about income earned outside the country, until and unless the organisation the individual is employed with is Indian. Neither does the person have to think twice before parking money in a Non-resident External (NRE) account. However, interest accrued on a non-resident ordinary account (NRO) is taxed at the rate of 30.9 per cent is deducted by the bank at source.

Also, once income is earned on money (convertible foreign exchange) invested in India, the question of tax arises. These are called the Foreign Exchange Assets (FEA) and the categories are:

•a. Shares in Indian company
•b. Debentures issued by a public limited company
•c. Deposits in a Public Limited Company
•d. Securities of the Central (federal) Government
•e. Any other notified asset
The interests gained from these investments are taxed at a flat rate of 20 per cent.
And profit out of long-term capital gains, that is, selling a capital asset such as a property, gold after holding it for 36 months, attract a flat tax of 10 per cent. Similar gains from equity shares and equity mutual funds are tax exempt if held for more than 12 months. But if sold before 12 months, there is a short-term capital gains tax of 10 per cent.

Capital gains are determined at the rate of exchange on the date of sale. But there is a catch here.

The sale of these investments is tax-exempt if the sale proceeds are reinvested in similar investments within six months. If the sale proceeds of these assets are partially re-invested, then the exemption is proportionate to the amount re-invested.

Filing returns

But, if the income from foreign exchange assets and long-term capital gains is the only income of an NRI, then there is no need to file a return. In calculating the total income on any foreign exchange asset, no deduction is allowed in respect of any expenditure or allowance under any provision of the Act.

Tax returns need to be filed only if your Indian income including the rent is more than Rs. 160,000. One may also file for tax refunds if the NRI had his taxes deducted at source and his income was less than the exemption limit of Rs. 160,000.

Moreover, as Rajesh Singla, a New Delhi-based chartered accountant specialising on tax issues, says: “A non-resident Indian may also elect not to be governed by these provisions for any assessment year by furnishing to the assessing officer the return of income for that assessment year and declaring therein that these provisions shall not apply to him for that assessment year. If he does so, then his total income and tax will be computed in accordance with the normal provisions of the Act.”

In others words, an NRI may choose to be assessed as either an NRI or as an ordinary Indian resident. This is particularly beneficial for low-income group NRIs, who will pay less tax for the chosen assessment year, if he chooses to be taxed as an ordinary Indian. In such a case, the non-resident has to file a declaration with his return of income, that these provisions would not be applicable to him. The normal provisions of the Income Tax Act would be applicable with respect to the mentioned investment incomes.

There are more ways of saving taxes on long-term capital gains. That is, by investing in the following products, though it’s important to note that all are foreign exchange assets, that is, bought with convertible foreign exchange.

•Certain Mutual Funds such as those of UTI (Unit Trust of India).
•Some notified savings certificates for NRIs, such as, National Saving Certificate VI and VII issues are notified.
•NRI Bonds 1988 and NRI Bonds (Second Series).
•NRIs residing in countries with a Double Taxation Avoidance Agreement with India (UAE is one of them) may also obtain tax benefits by providing proof of residency from the country of residence while opening a bank account in India.
Pension

There still remains the question of saving the pension income. Tax consultant R.N. Lakhotia recommends taking advantage of the deduction up to Rs100,000 (Dh8,072) under section 80C. In other words, a tax payer can invest this amount in Public Provident Fund, Employees Provident Fund, pension plan, National Savings Certificate, repayment of home loans and payment of children’s school fees.

But what really dampens the spirit of the NRIs are the procedural complexities in the system. The process of taxation cannot take place without acquiring a PAN (Permanent Account Number) Card, which is issued by the Income Tax Department. Often an NRI who has been living outside India for a considerable period of time finds it difficult to furnish a local address that is required for any tax filing purpose.

Additionally, claiming tax refunds is a complex process. Even the process of scrutiny of information furnished by an NRI is also very cumbersome. Many NRIs feel disadvantaged by the situation.

“Since NRI’s are contributing a considerable part of foreign exchange to the Indian economy and are participating directly in the growth process of the country, what I feel, they should at least continue to get the advantage of a No Taxation,” says E.G. Varghese, a former NRI who stayed in Dubai for more than a decade and is presently an R-NOR. “Please remember, at present, they are even deprived of the basic right of an Indian citizen — their voting rights”. But Singla disagrees.

“Tax incentives need to be rationalised keeping in view the phasing out of deductions and exemptions,” he says. However, deductions on taxes on several grounds have been on the decline.

Many like him insist on more taxation on NRIs to fund infrastructure growth in the country. There have been some noises to that effect recently. But until any such thing happens, the NRI will generally tax his mind a little lesser than his resident friends