Non Resident Gains

Are you an Indian living abroad but with your sights on the investment market in India? If you do, you will find banks more than willing to handle your account. The catch, however, is that your status as an NRI investor bristles with formalities. So, before you plough back your hard-earned foreign exchange, run an eye down our two-part NRI investment guide.

Who is an NRI?

Any Indian citizen staying abroad for employment, business or vocation for an uncertain duration is an NRI. This covers people who have been sent abroad on deputation by the central or state governments or in the capacity of a United Nations official.

 

However, under the Constit-ution of Indian Citizenship Act, 1995, even non-resident foreign citizens of Indian origin can claim to be at par with NRIs and can opt for operating bank accounts and investing in India. This is possible if they held an Indian passport at any point, or either of the parents, grandparents or spouse is a citizen of India. But, remember, this definition of an Indian citizen does not cover citizens of Indian origin who have settled in Pakistan or Bangladesh.

Banking facilities:

NRIs are allowed to maintain accounts in foreign currency as well as in rupees. However, the account in foreign currencies can be maintained only with banks holding authorised dealers licences or banks specifically authorised by the Reserve Bank of India (RBI). Some cooperative and commercial banks have also been allowed to maintain NRI accounts even though they are not authorised dealers, but only for the rupee accounts.

The proceeds of foreign currency notes and travellers cheques brought by the account holder during his visit to India can be credited by the authorised dealers. If the total amount tendered exceeds $ 10,000, or its equivalent, the forex should be declared to customs on the Currency Declaration Form when you arrive.

Rupee accounts:

You have a choice of three kinds of rupee accounts: Non Resident (External ) rupee account (NRE accounts), Non- Resident Ordin-ary Rupee account (NRO account), and the Non-Resident Non-Repatriable rupee deposit accounts (NRNR). The accounts can be current, savings or fixed deposit in nature.

The decisive factor depends on what kind of transactions you intend to conduct. If you dont intend to take some money back to the foreign country after you have deposited it in India, you simply opt for the NRO account. In other words, the funds from an NRO account can only be used for local payments in rupees. The NRO account is also for the NRIs who have earnings in India as well, say, in the form of rent or interest payment. This income is non-repatriable and cannot be taken out of the country. Moreover, the interest earned is taxed at source.

On the other hand, the balance held in an NRE account can be repatriated abroad freely provided it qualifies under the Exchange Control Regulations. This allows a great deal of flexibility.

The NRNR account covers both problems. Here the principal amount cannot be repatriated but the interest that you earn on it can be taken back as and when you please. All you need to do is remit funds in any convertible currency with an authorised dealer. Under the NRNR scheme, the rupee deposits can be kept for a period of six months to three years.

NRIs can also open such accounts by simply transferring the funds from their NRE or even the Foreign Currency Non-Resident (FCNR) account depo-sits. No penalty is charged for premature withdrawal of NRE/FCNR deposits if the money is used for investing in the NRNR scheme. Banks are provided the freedom to determine the interest rates to be charged on this scheme.

Even foreigners staying in India can open an NRNR account for short terms and get attractive interest rates apart from some tax benefits.

Foreign currency account:

The drawback of rupee accounts is that the risk of the exchange rate has to be borne by the account holder and not by the bank. So, if the rupee is strong when your money comes into a rupee account you tend to lose out. To avoid such losses, you can instead opt to put your forex earnings in the FCNR accounts. This gives you the flexibility of converting the forex into Indian rupees whenever the situation turns more favourable for you. Moreover, funds in the FCNR account with authorised dealers can be repatriated abroad.

However, only four types of foreign currencies can be kept in an FCNR account. These are the Pound Sterl-ing, U S Dollar, Deutsche Mark, and Japanese Yen.

FCNR accounts are term deposits that are fixed for tenures ranging from six months to three years. They cannot be current or savings accounts. Pre-mature withdrawal of the FCNR account is allowed but a penalty is levied. The interest in such cases is paid at one per cent below the interest rate payable for the term for which the deposit has actually run. But if an FCNR deposit of six months is prematurely withdrawn then it earns no interest.

What kind of investments can NRIs make?

They can invest in government securities, UTI, National Saving Certificates, company shares and debentures, non-convertible debentures, domestic public or private sector mutual funds or money market mutual funds floated by commercial banks and financial institutions on a non-repatriation basis.

RBI permission is not needed for investing in proprietary or partnership concerns and investments in new issues of Indian companies. However, the income or interest earned on investments or deposits held in India can be repatriated.

If you want to acquire residential or commercial property in India or even sell it, go right ahead. You dont require RBIs permission to conduct these transactions. NRIs are also permitted to bring upto 5,000 grams of gold to India as part of their baggage once in six months provided they have stayed abroad for a continuous period of six months.

What happens when you return?

If after being abroad for more than one year, you wish to return and settle permanently in India then you are permitted to open foreign currency accounts with banks in India for the funds you bring back. These are the Resident Foreign Currency (RFC) accounts and can be held in any currency.

Apart from the total forex brought by the returning Indian, the money in his NRE and FCNR accounts can also be credited to the RFC account. The RFC has two advantages: you can remit funds abroad for yourself or your dependents and you can withdraw it freely for local payments. If you hold an NRO account, that is simply converted to a resident account by the bank.

Can NRIs retain their assets abroad when they come back to India permanently?

From July 17, 1992, the government has granted exemption from the surrender requirement to certain individuals. If you have stayed abroad for more than one year and have acquired funds or assets in contravention of FERA, 1973 or out of foreign exchange earned through employment , business or vocation outside India while you enjoyed NRI status, you are allowed to retain your foreign currency accounts with banks abroad.

Tax concessions:

Income from interest on money in NRE/FCNR account is exempt from income tax. The gifts from such accounts are also tax-free. For an NRNR account holder, income from the deposits is tax free and the deposit is exempt from gift tax if it is gifted only once. However, residents who are joint holders cannot avail of this tax exemption once they become the owners of the account.

(The second part of this reckoner will appear on June 26)