Knowledge Center NRI FAQs

Security Transaction Tax (STT) is a minuscule amount of tax collected from the following transactions taking place in a recognised stock exchange in India —

1. Purchase and sale of shares.
2. Sale of equity-based MFs.
3. Sale of Options in securities.
4. Sale of Futures in securities.

STT is also charged on redemption of equity-based units of MFs, (but not on debt-based) directly with the fund house which had issued these units. The LTCG arising out of any transaction which has suffered STT is exempt and STCG is taxed at a concessional rate of 15% only.

There are two hidden bombs in this provision. 1. If the gains are exempt, the loss is also exempt and cannot be set off against any other ST or LT gain. 2. Tax on STCG @15% is beneficial only to those who are in 20% or 30% zone; not to 10%.

The exemption is misused by certain persons for declaring their unaccounted income as exempt LTCG by entering into sham transactions. To address this abuse, Sec. 10(38) has been amended to provide that this exemption for income arising on transfer of equity share acquired or on after 1.10.04 shall be available only if the STT had been paid at the time of acquisition. However, to protect the exemption for genuine cases where the STT could not have been paid like acquisition of share in IPO, FPO, bonus or right issue by a listed company, acquisition by non-residents in accordance with FDI policy etc., suitable notifications to exempt these will be issued soon.

It appears that now private sale/purchase transactions between two parties and ESOPs may have to pay the tax.

A new Sec. 50CA has been inserted to provide that where consideration for transfer of share of a company (other than quoted share) is less than the FMV of such share determined in accordance with the prescribed manner, FMV shall be deemed to be the full value of consideration for the purposes of computing capital gains.

The requirement to have the deal in a recognised stock exchange in India applied only to sales and not purchases. Therefore, when bonus shares are sold in the market, after a holding period of 1 year, the tax concessions apply. These used to attract heavy tax since their cost of acquisition was required to be taken as nil. Same is the case for IPOs and right issues but to a lesser extent. Those who have lost the record of cost and date of acquisition need not now worry.

In the case of listed shares and securities which are not sold on any recognised stock exchange in India, such as a ‘buy-back’ of its own shares by the company or direct transaction between two persons, as well as Zero Coupon Bonds (alternatively termed as Deep Discount Bonds) which do not suffer any STT, LT gains is charged to tax @10% without indexation (= sale - cost = profit) or 20% with indexation (= sale - indexed cost), whichever is lower. ST gains are to be added to the normal income of the assessee and charged to tax at the rate applicable to his slab of income.

Debt-based schemes of MFs were in the same league. FA14 has taken away the option of 10% without indexation from the debt-based units of MFs. Now, such units have joined the league of all other assets, such as houses, jewellery, etc., where LTCG is taken as a separate block, charged to tax @20% with indexation and STCG is taxed like any other income at the rates applicable to the assessee.

FA16, consequent upon the judgement of various courts related with the definition of ‘securities’ under SCRA, has clarified that the LTCG arising from transfer of shares of a private limited company shall be charged to tax @10%. Moreover, the period for getting benefit of LTCG in case of shares of unlisted companies has been reduced from 3 to 2 years.

U/s 10(34), dividend received from a domestic company and u/s 10(35) income distributed by any MF, is tax-free. However, this dividend suffers DDT @15%, payable by the company before distributing the dividend to its stakeholders. With the surcharge of 15% (raised from 12% by FA16), and educational cess of 3%, the effective rate works out at 17.7675% (= 15 × 1.12 × 1.03).

In other words, if the company desires to pay Rs. 100 as dividend, it can pay Rs. 82.3535 to the shareholder and pay Rs. 17.7675 to the exchequer.

This DDT is in addition to the normal income tax.

In the case of MFs, the equity-based schemes are exempt from this DDT u/s 115R(2). For individuals & HUFs, on all debt-based funds of MFs, DDT rate is 25%. (= 29.6125%). For all other categories of taxpayers, the rate is 30% (= 35.535%).

MFs have become the best investment avenue for one and all.

If you have risk appetite, go for equity-based schemes. The dividend is tax-free and there is no DDT. Otherwise, go for close-ended growth-based FMPs. These are almost devoid of any volatility because the fund manager invests in investment-graded assured returns schemes.

Sec. 54EC offers exemption of long-term capital gains on all assets, if the LT gains are invested in Bonds of National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) or some more entities as will be notified by the authorities (thanks to the recent FY17) within 6 months from the date of earning capital gain. These Bonds come with a lock-in period of 3 years.
There is a ceiling of Rs. 50 lakh per FY on deposits in these Bonds.

The total relief obtained shall not exceed Rs. 50 lakh though investment can be made during the FY when the CG occurs and the subsequent FY but within the stipulated period of 6 months.

The current rate of interest is 5.5% fully taxable.

The ITA provides other opportunities for saving tax on long-term capital gains such as by way of Sec. 54 & Sec. 54F. Sec. 54 gives exemption from tax on capital gains arising out of sale (or transfer) of a residential house, self-occupied or not, provided the assessee has purchased within 1 year before or 2 years after the date of sale or has constructed within 3 years after that date, a residential house. If only a part of the LTCG is used, the exemption would be pro-rata and the excess will be taxed.

Sec. 54F deals with capital gains arising out of assets other than residential houses. The stipulations are essentially the same but with 3 differences —

1. The assessee should not be an owner of more than one residential premise on the date of transfer.
2. Sec. 54F requires reinvestment of the net consideration (sale value less expenses) whereas Sec. 54 is content with reinvestment of only the amount of capital gains.
3. In the case of Sec. 54, the assessee is required not to sell the new house within 3 years. If this condition is not satisfied, the cost of the new asset is to be reduced by the amount of LTCG exempted from tax on the original asset and the difference between its sale price and such reduced cost will be chargeable as short-term capital gain earned during the year in which the new asset is sold.

Sec. 54F also requires the assessee not to sell the new house within 3 years. In addition, he is expected not to purchase within 1 year or construct within 3 years, another residential house. If any of these conditions are not satisfied, the capital gain originally exempted shall be treated as long-term capital gain of the year in which the house is sold or another house is purchased or constructed.

An NRI may purchase, sell, receive gift from or give gift of property to an NRI, PIO or Resident. A PIO also has similar rights except that he cannot sell property to either an NRI or PIO.

If the property is agricultural land or plantation property or farm house, an NRI can sell the property or give it as a gift to a Resident. A PIO has also similar rights but he can sell or gift the property only to Indian citizens permanently residing in India. No other transactions are permitted.

An NRI or PIO (or even a rank foreigner) can receive inheritance of any immovable property with specific approval of RBI provided he had inherited it or had acquired it in accordance with the provisions of the then existing forex law in force.

An NRI or PIO who has acquired any immovable property under the general permission of RBI need not file any papers with RBI.

Mortgaging property to party abroad requires RBI’s prior approval.

The payment of purchase price should be made out of funds received in India through normal banking channels by way of inward remittance from any place outside India or funds held in any non-resident account maintained in India and no other mode such as traveller’s cheque, foreign currency notes, etc. No payment can be made outside India.

Repatriation of sale proceeds of residential property purchased by NRI/PIO is permitted to the extent of the amount paid for acquisition of immovable property in forex. Such repatriation is restricted to not more than 2 such properties. There is no restriction on repatriation of number of commercial properties. The balance amount, if any, can be credited to the NRO account and can be remitted under US$ one million facility.

The rental income being a current account transaction is repatriable irrespective of whether the property was purchased through forex or otherwise, subject to tax compliance. Where the house is purchased through housing finance and it is rented out, the entire rental income, even if it is more than the prescribed installment, should be first applied towards repayment of the loan. If it is less than the prescribed installment, the borrower should remit the amount to the extent of the shortfall from abroad or pay it out of his NRE or NRO accounts in India.

Sec. 23 provides for determination of the annual value of house property, subject to the deductions u/s 24. Annual value of a house or part of a house shall be taken as nil if it —

1. is in the occupation of the owner for his own residence or
2. cannot be occupied by him because of his employment, business or profession at any other place and he has to reside at that place in a building not belonging to him. If the assessee has more than one self-occupied house, the annual value of only one of such houses, at his option, can be taken as nil. All the others will be deemed to have been let out. The option can change from year to year.

Sec. 24 allows a deduction on interest payable on capital borrowed (inclusive of processing fee) for acquiring, constructing, repairing, renewing or reconstructing the property with a ceiling of Rs. 30,000 on self-occupied property. FA14 raised the deductibility of interest up to Rs. 2.0 lakh, with two caveats — i) The house should be completed within 3 years (raised to 5 years by FA16) from the end of the year during which the loan is taken, and 2. This higher limit is applicable only for acquisition or construction but not for repairs, renewals or reconstruction, for which the old limit of Rs. 30,000 continues to be applicable.

If an assessee has two or more residential properties, only one of the properties at his option, can be treated as self-occupied one. The other one, even if it is not actually rented out, will be deemed to be rented at standard rent depending upon the location and age of the property. A standard deduction of 30% of the annual value is allowed. Thereafer if the property is purchased through housing finance, the entire interest was fully deductible. In other words, the interest amonut should be first set-off from the rent received (under the head ‘Income from house property’) and the balance loss, if any, can be set-off against income under any other head.

The recent FA17 has inserted Subsec(3) in Sec. 71 to put a cap of ` 2 lakh per year on such a set-off under any other head. The balance loss, if any, can be carried forward for similar set-offs for 8 subsequent years as per the normal provisions.

For clarity, suppose the rent received or deemed to be received is ` 1.50 lakh and the interest paid is ` 4.00 lakh for the year. After the set-off of the interest against the rent, the resultant loss is 2.50 lakh. The anount that can be additionally set-off against any other income is ` 2.00 lakh. The balance loss of ` 50,000 can be carried forward.

The balance ` 50,000 cannot be carried forward, If hee has two or more let-out houses, acquired mainly through housing finance, the amount allowed to be set-off remains put at ` 2 lakh against the total interest on all the loans put together.

If this assessee has an additional self occupied house, on which he is paying an interest of ` 2,50 lakh, he can set off ` 2 lakh against income under any head. Unfortunately, the balance ` 50,000 is not allowed to be carried forward. We hope the authorities will take corrective measures at next budget.

Both the concessions, deduction for repayment of capital u/s 80C and of interest u/s 24 are allowed only when the income from house property becomes chargeable to tax. In other words, the construction should be complete, the flat should be ready for occupation and the municipal annual value is known. However, if the interest payable is for a period prior to the year in which the property was acquired or constructed, it shall be deducted in 5 equal annual installments commencing from the year of purchase or construction. Similar facility is not available for repayment of capital u/s 80C.

If the construction or acquisition is completed any time in a FY, the interest paid during the entire FY is deemed to be the normal interest though a part of the FY is pre-construction period.

There is no restriction on the source of the funds borrowed to claim the exemption of interest. It is only the tax deduction u/s 80C that requires the loan to be taken from specified sources.

Housing loan is cheap and the tax concessions make it cheaper. Therefore take as large a loan as possible for as long a period as possible, even if you have enough funds on hand.

It is mandatory to quote PAN on challans for any payments due to the Department, and in all documents pertaining to most of some financial transactions, such as purchase and sale of shares and MF schemes, gold, ornaments, housing properties, etc. Though NRIs are not mandatorily required to possess a PAN, it is advisable to possess a PAN.

UTI Investor Services Ltd. (UTIITSL) and National Securities Depository Ltd. (NSDL) are authorised to issue PAN cards. Details of service charges and delivery time are available on their respective websites.

Coupon number or Acknowledgement number, as the case may be, should be mentioned in all communications.

Application Form-49A can be downloaded from the websites of the Department www.incometaxindia.gov.in, UTIISL www.utiisl.co.in or NSDL or tin.nsdl.com or photocopied (on A4 size 70 GSM paper).

It is illegal to obtain or possess more than one PAN.

With an objective of simplifying the procedures, Foreign Portfolio Investments (FPI) and Foreign Direct Investments (FDI) have been merged together in respect of all the applicable terms and conditions along with composite sectoral caps. ‘Total foreign investment’ in an Indian company will be the sum total of direct and indirect foreign investments. Consequently, Portfolio Investments up to aggregate foreign investment level of 49% or sectoral/statutory cap, whichever is lower, will not be subject to any Government approval or compliance, provided such investment does not result in change in ownership. Other foreign investments will be subject to conditions of government approval and compliance of sectoral conditions as laid down in the FDI policy and the related FEMA Regulations.

Since 90% of such investments come through automatic route the recent FA 17 has taken a further logical step by abolishing Foreign Investment Promotion Board (FIPB) to eliminate the regulatory hurdles and moreover However, strategic areas like defense, telecom etc., will still need clearances.

This is yet another positive step to further liberalise FDI policy framework and attracting investments.

A company shall be considered as owned by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by Resident Indian citizens.

Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs) having underlying of instruments being in the nature of debt, shall not be treated as foreign investment under such composite limit. However, any equity holding by an ROI resulting from conversion of any debt instrument shall be reckoned as foreign investment under the composite limit

For the purpose of these regulations, Notification FEMA 361/2016-RBI dt 15.2.16 has defined an NRI to mean an individual NRI or a PIO with an OCI card. Under PINS, an NRI may acquire securities or units on a Stock Exchange in India on repatriation or non-repatriation basis, subject to the terms and conditions specified in Schedule-3 or Schedule-4 respectively. For the purpose of these Schedules, the term ‘share’ also includes convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle, including REITs, InvIts, AIFs, etc.

An NRI should operate only through one AD.
The bank shall ensure that amounts due to sale proceeds of shares acquired by modes other than PINS, such as underlying shares acquired on conversion of ADRs/GDRs, shares purchased outside India from other NRIs, shares acquired under private arrangement, shares purchased while he was a Resident, do not get credited or debited to his PINS accounts.

The NRI shall operate on delivery basis for shares purchased and sold. In other words, short selling (sale without having the scrip in his godown) is not permitted.

For the purpose of these regulations, Notification FEMA 361/2016-RBI dt 15.2.16 has defined an NRI to mean an individual NRI or a PIO with an OCI card. Under PINS, an NRI may acquire securities or units on a Stock Exchange in India on repatriation or non-repatriation basis, subject to the terms and conditions specified in Schedule-3 or Schedule-4 respectively. In the case of these Schedules, the term ‘share’ also includes convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle, including REITs, InvIts, AIFs, etc.

An NRI may purchase or sell shares, convertible preference shares, convertible debentures and warrants of an Indian company or units of an investment vehicle and warrants of an Indian company or units of an investment vehicle, on repatriation basis, under PINS through a designated AD branch within a limit of 5% of paid-up value on individual basis. Additionally, the limit is 10% on the aggregate paid-up value of these instruments of any company purchased by all NRIs on repatriation basis.

This limit of 10% may be raised to 24% if a special resolution to that effect is passed by the General Body of the Indian company.

The NRI investor should take delivery of the shares/convertible preference shares/ convertible debentures /warrants and units purchased and give delivery of the same when sold;

The investment shall be subject to the provisions of the FDI policy and Schedule 1 of these Regulations in respect of sectoral caps wherever applicable.

All this limit business need not bother you. RBI monitors this limit assiduously on a case-by-case basis and puts the scrip on ‘Caution List’ when the trigger limit is very near the cap. Thereafter it grants permission on first-come first-served basis. When the limit is reached, such shares are kept on banned-for-purchase list.

An NRI may open a designated NRE account with an AD, for routing the receipt and payment for transactions relating to sale and purchase of shares under this Schedule. The designated account will be called an NRE (PINS) Account. The designated branch shall ensure that sale proceeds of securities or units which have been acquired by modes other than Portfolio Investment Scheme such as underlying shares acquired on conversion of ADRs / GDRs, shares / convertible preference shares / convertible debentures / warrants acquired under FDI Scheme or purchased outside India from other NRIs or acquired under private arrangement from residents / non-residents or purchased while Resident, do not get credited in the NRE (PINS) Account and vice versa.

Permitted Credits to NRE (PINS) are —

1. Inward remittances in forex though normal banking channels.
2. Transfer from the NRI’s other NRE or FCNR accounts maintained with AD in India.
3. Net sale proceeds (after payment of applicable taxes) of shares sold on stock exchange through registered broker, and
4. Dividend or income earned.

Permitted Credits to NRE (PINS) are —

1. Outward remittances of dividend or income earned.
2. Amounts paid for purchase of shares on stock exchanges through registered broker under PINS
3. Any charges on account of sale / purchase of securities or units under the Scheme, and
4. Remittances outside India or transfer to NRE / FCNR (B) accounts of the NRI or any other person eligible to maintain such account.

Such transactions should take place only through NRO (PINS) account of the NRI.

Mostly the shares held prior to becoming an NRI or out of Indian assets earned or received thereafter, are non-repatriable. NRIs can invest in SEBI approved Exchange Traded Derivative Contracts on non-repatriable basis, subject to the limits prescribed.

An NRI, including a company, a trust and a partnership firm incorporated outside India and owned and controlled by non-resident Indians, may acquire and hold, on non-repatriation basis, equity shares, convertible preference shares, convertible debenture, warrants or units, without any limit, either on the stock exchange or outside it. This will be deemed to be domestic investment at par with the investment made by residents.

An NRI may contribute, on non-repatriation basis, to the capital of a partnership firm, a proprietary firm or a Limited Liability Partnership without any limit.

The consideration for investment under this Schedule shall be paid by way of inward remittance through normal banking channel from abroad or out of funds held in NRE / FCNR / NRO account maintained with a bank in India:

The sale/maturity proceeds (net of applicable taxes) of the securities or units acquired under this Schedule shall be credited only to NRO account irrespective of whether the consideration for acquisition was paid by direct remittances from abroad or the type of account maintained in India.

Use of credit card in India by an ROI shall not be deemed as borrowing or lending in rupees.

The rate of interest and margin on all loans may be decided by the ADs, subject to the latest RBI directives.

The funds borrowed either by a Resident or an ROI can be used for his personal requirements and / or own business but not for —

1. Business related with the prohibited transactions such as chit fund, agriculture or plantation, TDRs, etc.
2. Any investment, whether by way of capital or otherwise, in any company, partnership firm, proprietorship concern, any entity whether incorporated or not, or for relending. Such investment includes purchase of immovable property or shares, debentures, bonds, etc., issued by companies in India, including margin trading or derivatives.

Loans can be granted against the security of NRE, FCNR and NRO term deposits but not SB. The term of the loan shall not exceed the balance maturity period of the deposit. The facility of premature withdrawal of NRE / FCNR deposits shall not be available where loans against such deposits are availed of. This requirement should be specially brought to the notice of the deposit holder while sanctioning the loan.

ADs may permit overdraft in the account of the holder.

An AD or its overseas branch or correspondent can grant loans against security of the funds to the account holder or a third party in or outside India without any limits. Premature withdrawal of such deposits is not permitted.
Rupee loans may be granted by ADs provided —

• There is no direct or indirect forex consideration paid to the NRI depositor for agreeing to pledge his deposits.
• There is no transaction between the guarantor and the borrower involving forex until the guarantee is invoked or the loan is settled. If the guarantor is forced to discharge his guarantee, the NRI may enforce his claim against the Resident borrower. If the liability is discharged by payment out of rupee balances, the amount recovered becomes non-repatriable
• A Resident, being a principal debtor can make payment to any ROI who has met his liability. The amount remitted or credited shall not exceed the rupee equivalent of the amount paid by the ROI guarantor against the invoked guarantee.

Forex loans in or outside India can be granted by ADs provided the document is executed by the deposit holder himself and not by his PoA or LoA holder.

If the repayment is made by using the NRO account, the interest has to be charged at the full commercial rate in force.

FEMR (Deposit) permits a branch outside India of an AD to give a forex loan against the security of NRE or FCNR deposit.

An AD can grant a loan in India in rupees to NRIs on non-repatriable basis against the security of shares or other securities or immovable property in India.

AP (DIR) Circular 24 dt 27.9.03 grants general permission to borrow up to US$ 2,50,000 or its equivalent on a repatriable basis by an individual Resident from his close NRI relative subject to—

• The loan shall be free of interest.
• The minimum maturity period of the loan shall be 1 year.
• The amount of loan is received by inward remittance in free forex through normal banking channels or by debit to the NRE account of the NRI.

AP (DIR Series 2011-12) Circular 95 dt 21.3.12 allows the borrower to repay the installments, interest and other charges directly to NRE account of the lender concerned.

A resident individual is permitted to make a rupee loan or gift to a close relative NRI/PIO by way of crossed cheque or electronic transfer subject to:

1. The loan is free of interest and the minimum maturity of the loan is one year.
2. The loan (or Gift) amount should be within the overall LRS limit of US$ 250,000 per FY.
3. The loan shall be utilised for meeting the borrower's personal requirements or for his own business purposes in India. It shall not be utilised, either singly or in association with other person, for any of the activities in which investment by persons resident outside India is prohibited.
4. The loan(or Gift) amount should be credited to the NRO a/c of the NRI /PIO.
5. The loan (or Gift) amount shall not be remitted outside India.
6. Repayment of loan shall be made by way of inward remittances through normal banking channels or by debit to the NRO or NRE account of the borrower or out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

A Resident individual, partnership or proprietorship firm, may borrow in rupees on repatriable or non-repatriable basis from an NRI subject to—

• The term of the loan shall not exceed 3 years
• The rate of interest should not exceed 2% over the bank rate.

Various provisions do exist to penalise the defaulting assessee in case incorrect information is furnished to the Department. However, there is no penal provision for furnishing of incorrect information by the person who is responsible for certifying the same. A new Sec. 271J has been inserted to levy penalty on an accountant, merchant banker or registered valuer who furnish the incorrect information in a report or certificate. The amount of penalty shall be ` 10,000 for each such inaccurate report or certificate.