In additions to above, refer the FAQ on Investments in India:
FAQs Relating to Investment:
1 What are Foreign Exchange Assets and Specified Assets?
Ans. As per Section 115C of Indian Income Tax Act, 1961 Foreign Exchange Asset means any Specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible Foreign exchange.
Specified Asset means any of the following assets, namely:
shares in an Indian company;
debentures issued by an Indian company which is not private company as defined in Companies Act, 1956;
deposits with an Indian company which is not private company as defined in Companies Act, 1956;
any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944;
such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.
Foreign Exchange for the purpose of the above means foreign exchange, which is for time being treated by Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973(46 of 1973), and any rules made thereunder.
2 Whether Right Shares and Bonus Shares form part of Foreign Exchange Assets?
Ans. RBI notification is silent on the issue of bonus shares and right entitlements. In the case of bonus shares, one can safely take the view that if the bonus shares are allotted as a result of shares for which payment is made by the way of inward remittance in foreign currency or by debit to NRE / FCNR account they would be treated as foreign Exchange Assets.
Though nothing specific has been mentioned regarding the right entitlement, one can apply the analogy of bonus shares to right entitlements also. If payment for the original shares has been made by the way of inward remittance in foreign currency or by debit to NRE/ FCNR Account they would be treated as foreign exchange assets.
3 What are the various investment options available to NRIs under FDI route?
Ans. Investment options available to NRIs under FDI route can be broadly classified under two heads namely:
I. Automatic Approval Route.
II. Prior Approval from Government Route.
Presently most of the activities are under Automatic approval Route i.e 100% FDI. No approval is required for FDI in case of activities under Automatic Route only a notification to RBI is required within 30 days.
Cases that are not covered under the Automatic Route fall under Prior Approval from Government Route. Approval from government is required in such cases.
4 What is meant by investment through direct subscripttion route?
Ans. As per the regulations NRIs are allowed to invest up to a certain percentage of the total paid up capital of the company by directly subscribing to the equity/convertible debentures of the company either though a public offering made by the company or through private placements on one to one basis. Regulations provide for different ceilings on such investments based on the industry to which the company belongs and also the nature of investments (repatriation/non-repatriation basis).
5 What is the Portfolio Investment Scheme?
Ans. Portfolio Investment Scheme (PINS) is a scheme of the Reserve Bank of India (RBI) defined in Schedule 3 of Foreign Exchange Management Act 2000 under which the ‘Non Resident Indians (NRIs)’ and ‘Person of Indian Origin (PIOs)’ can purchase and sell shares and convertible debentures of Indian Companies on a recognized stock exchange in India by routing all such purchase/sale transactions through their account held with a Designated Bank Branch .
6 What steps does an NRI need to take to begin his or her investment in the Indian stock Market?
Ans. 1. An NRI should open a new bank account with designated bank branch which is approved by RBI (Reserve Bank of India) for this purpose.
2. He should apply for a general approval for investment in Indian Stock Market through his designated bank branch.
3. He should open a Demat Account with a Depository Participant to hold his shares.
4. He needs to register with a broker to execute his buy/sell orders on the stock exchange(s).
7 What is the distinction between NRE and NRO accounts?
Ans. Funds remitted from abroad or local funds, which can otherwise be remitted abroad to the account holder, can be credited to NRE Accounts. Local funds, which do not qualify for remittance outside India, are required to be credited to NRO accounts.
8 What is the permission, which an NRI has to obtain to invest under the Portfolio Investment Scheme?
Ans NRIs are allowed to invest in Indian equity markets under the Portfolio Investment Scheme. Under this scheme NRIs are permitted to invest in shares/debentures of Indian companies through Stock Exchanges in India. These investments require prior approval of RBI Designated branch of authorized banks have been now empowered to issue such permissions to NRIs.
9 Which are the broad schemes under which an NRI can make investments in the Indian companies?
Ans. Broadly, NRIs are allowed to invest under the Portfolio Investment Scheme (buying through the secondary market) and through the Direct Subscripttion route (Investments though IPOs/offer for sale /Private Placements).
10 Can an NRI have investments under Portfolio Investment Scheme on repatriation as well as non-repatriation basis?
Ans. Yes. Investment can be made on repatriation as well as non-repatriation basis. However, an NRI will have to open NRE account as well as NRO account with designated bank branch as the sale proceeds of non-repatriation investment can only be credited to NRO account.
11 Under what circumstances can investments made under Portfolio Investment Scheme be repatriated?
Ans. The repatriation of the sale proceeds, net of taxes, are allowed if the original purchase was made on repatriation basis and such investments were made out of funds from NRE/FCNR account or by means of remittance from abroad.
12 Can NRI invest in shares/debentures of Indian Cos., and other securities on a non-repatriation basis?
Ans. Yes, NRIs can invest without any limit on non-repatriation basis in shares and convertible debentures of Indian Cos., issued either by public issue or private placement or right issues. NRI can also purchase Govt. Securities (other than bearer securities), treasury bills, units of domestic mutual funds etc on non-repatriation basis.
13 Can NRIs invest in Govt. Securities etc. on repatriation basis?
Ans. Yes. NRIs can invest on repatriation basis in:
Govt. securities(other than bearer securities), treasury bills or units of domestic Mutual Funds;
Bonds issued by PSUs;
Shares in Public Sector Enterprise disinvestments by Govt. of India;
Fund for such investment are to be received through foreign inward remittance or to debit of NRE/FCNR accounts.
The above securities can be sold through stockbrokers on a recognized stock exchange or tender units of mutual funds to the issuer for repurchase or for payment of maturity proceeds or tender Govt. securities/Treasury Bills to RBI for payment of maturity proceeds. The sale proceeds can be repatriated net of Indian Tax.
14 Can NRI/PIO invest in any immovable property in India?
Ans. An NRI does not require any permission to acquire any immovable property in India or transfer any property in India to a Resident citizen of India.
PIO’s who are citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, require prior permission of RBI for acquiring or transferring any immovable property in India.
PIO has some restrictions. He does not require any permission to
Purchase a property out of forex.
Acquire a property by way of gift from a ROI.
Acquire a property by way of inheritance from a Resident or 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 FEMA.
Sell any immovable property in India to a Resident.
Gift or sell agricultural property to a Resident who is a citizen of India.
Gift or sell a residential or commercial property in India to a Resident or person Resident outside India.
FAQs relating to Repatriation:
1 Can an NRI remit money outside India?
Ans. NRIs and PIOs (other than citizens of Pakistan and Bangladesh) can remit their money under following circumstances:
· For any bonafide purpose (other than sale proceeds of immovable property);
· Sale proceeds of immovable property acquired out of rupee sources (when resident or from the NRO account);
· Sale proceeds of immovable property acquired by inheritance / legacy;
· Sale proceeds of immovable property acquired out of funds remitted from abroad/NRE/FCNR accounts;
· Maintenance of close relatives abroad by citizens of foreign states (other than Pakistan) employed in India, who are not permanently resident in India;
· Foreign student/trainee (other than citizen of Nepal or Bhutan or a person of Indian origin);
· Foreign tourists from NRO account;
· Current income (Rent, dividend, pension, etc.) out of NRO account.
2 What is the procedure required for remittance of money out of India?
Ans. In order to remit money outside India, an NRI is required to obtain a certificate from a Chartered Accountant, which has to be submitted to RBI along with an undertaking, which will be signed by the individual himself or by any other person authorized by him.
3 Can proceeds on sale of shares be repatriated out of India?
Ans. An NRI should authorize only one branch of only one bank in India for the Portfolio Investment Scheme (PIS). Power of attorney should be granted in favour of a resident Indian/relatives to carry out the various formalities. The dividend and the capital originally invested along with the capital gains thereon can be repatriated only after he obtain a certificate from a Chartered Accountant declaring that proper tax has been paid or satisfactory arrangements have been made to pay it in proper time or if the NRI so wishes a no-objection certificate can be obtained from the Income-tax Department.
On receiving such NOC or Chartered Accountant's certificate, the proceeds would be repatriated or credited to the NRE/FCNR account of the NRI (which is equivalent to repatriation).
4 What are the provisions regarding repatriation of sale proceeds on sale of immovable property?
Ans. In the event of sale of immovable property by a PIO, the sale proceeds may be repatriated outside India, provided ---
The immovable property was acquired by the PIO in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or FEMA. There is no lock in period for the sale of such acquired properties.
The amount to be repatriated does not exceed the amount paid for acquisition of the immovable property in forex and in case of residential property the repatriation of sale proceeds is restricted to not more than two such properties. There is no restriction on the repatriation of number of commercial properties.
5 Can income earned in India repatriated from India?
Ans. PIO can freely rent out their immovable property, whether purchased through the application of forex or otherwise, without seeking any permission from the RBI. The rental income being a current account transaction is repatriable outside India, only if proper tax has been paid on the same. The AD is empowered to arrange for such repatriation.
6 What are the rules pertaining to investments by NRIs in shares and debentures of Indian Cos., on repatriation?
Ans. NRIs can invest in shares & debentures of Indian companies on repatriation basis as per general permission granted by RBI provided,
· The investee company is not engaged in any activity outside the automatic route of RBI
· Subject to sectoral caps on investment as prescribed by RBI
· Funds for investment are received through foreign inward remittance or to the debit of NRE/FCNR accounts.
· Upon disinvestments on a recognized stock exchange in India, through a stockbroker at ruling market prices the proceeds can be repatriated net of Indian Taxes.
7 Can NRI place deposits with companies on repatriation basis?
Ans. Yes, provided the company accepts the deposits under public deposit scheme for the period not exceeding 3 years and has obtained necessary ratings etc.
RETURING INDIANS
1 What happens when NRI/PIO returns to India?
Ans. When an NRI/PIO returns to India
· He continues holding any assets in foreign currency (foreign securities and properties situated outside India), if the same were acquired while being an NRI or a PIO.
· Balances will continue to remain in NRI accounts in India.
· Balances held in NRO account will have to be converted to resident status.
· Balances lying in the NRE/FCNR Term Deposit may be continued till maturity at the original contracted interest rates or can be converted into Resident Foreign Currency Account (RFC), at the option of the account holder.
· Any proceeds of assets held outside India at the time of return as well as salary/pension or other dues received subsequently can also be credited to these deposits.
All the above funds are free from all restrictions on usage
2 Can NRI/PIO returning to India hold assets abroad ?
Ans. Under section 6(4) of FEMA, a person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.
There is no need of any approval from RBI even after the NRI becomes, after his return, a person resident in India.
This general permission will not apply in respect of any asset received after becoming a resident by way of gift or inheritance from abroad. Similarly, the benefit is not available on earnings from employment secured subsequent to the return. If the ex-NRI wishes to retain such assets abroad or liquidate them and deposit the money in an RFC account, he has to apply for permission from RBI.
3 What will be status of the accounts of an NRI on his/her return to India?
Ans. A returning Indian’s NRE/FCNR accounts will be designated as Resident account. However, they will continue to run till maturity at the contracted rate of interest.
4 Is NRI subject to tax after returning to India and can he maintain a Foreign Currency Account?
Ans. Yes, earnings of NRIs are subject to tax laws of India and the returning NRI can get his NRE, FCNR accounts converted into RFC accounts.
5 Who can open RFC account?
Ans. A returning NRI who was resident outside India earlier and is returning now for residing permanently is permitted to open RFC account.
6 What are the benefits of RFC accounts?
Ans The benefits of RFC accounts are:
(1) In case of conversion from FCNR accounts, there is no exchange loss. Balance in RFC account can be used for local payments and can be remitted abroad for all bonafide purposes.
(2) In case the NRI was residing abroad continuously for a period of 9 years out of previous 10 years, then no tax on interest earned of RFC accounts for next 2 years. In the event of the returning Indian regarding his NRI status the balances in his RFC account can be reconverted into NRE/FCNR (B) deposits.
7 Can I have multiple NRE and NRO accounts with designated branches of different authorized banks for the purpose of investing in Indian equity markets under the Portfolio Investment Scheme?
Ans. No. All investments in Indian equity markets under the Portfolio Investment Scheme must be routed through only one dedicated NRE and NRO account opened with any one of the designated branch of authorised banks. Although you can have multiple NRO and NRE account with different banks/branches but Investments under Portfolio Investment Scheme cannot be made through more than one NRE or NRO account maintained with the designated bank branch
8 Do investments made though subscripttion to Initial Public Offerings (IPOs) or Private placements also come under the preview of Portfolio Investment Scheme?
Ans. No. Investments made by NRIs through subscripttion to Initial Public Offerings (IPOs) or Private placements are not covered by Portfolio Investment Scheme. Such investments are covered by RBI’s regulations with regard to Foreign Direct Investments.
9 Do NRIs need any permission of RBI to subscribe to Initial Public Offerings (IPOs) or Private placements of equity shares/convertible debentures of existing or new companies?
Ans. No. NRIs do not require any permission to invest though Initial Public Offerings (IPOs) or Private placements. In such cases, the Issuing company should comply with all necessary regulations for issuing securities to a person resident outside India.
10 Do NRIs need any approval from Reserve Bank of India for selling of the securities acquired through IPOs/Private Placement?
Ans. No. NRIs can sell such shares/debentures on the Exchange without any approval. However, while seeking the credit of sale proceeds to NRE/NRO account, the bank should be provided with the details regarding date of allotment and cost of acquisition to calculate the taxes, if any.
11 Do NRIs need to route the sale of securities acquired through IPO/Private Placement through the designated bank branch for Portfolio Investment Scheme, if any?
Ans. No. The shares/convertible debentures acquired under IPO cannot be routed through designated bank branch, as this is not covered by Portfolio Investment Scheme.
12 Is there any limit for purchase of shares/convertible debentures by NRIs under the Portfolio Investment Scheme?
Ans. Yes. An NRI can purchase up to a maximum of 5% of the aggregate paid up capital of the company (equity as well as preference capital) or the aggregate paid up value of each series of convertible debentures as the case may be. For the purpose of this ceiling, investment under the Portfolio Investment Scheme on repatriation as well as non-repatriation basis will be clubbed together.
Convertible debentures acquired through Private Placement are excluded for the purpose of above limits.
TAXATION
1 What is meant by long term capital gain and short term capital gain in respect of shares or securities?
Ans. Capital assets can be either short-term capital assets or long term capital assets and so be the capital gains arising there from.
Short term capital gain: Any capital gain arising out of sell of shares/debentures held for a period not more than 12 months from the date of its acquisition shall be a short term capital gain.
Long term capital gain: Any capital gain arising out of sell of shares/debentures held for more than 12 months from the date of its acquisition shall be a long term capital gain.
2 How is amount of capital gain determined?
Ans. Capital gain is the difference between the net sale consideration (sell price less brokerage) and the cost of acquisition (purchase price plus brokerage) of the concerned holding. Value of holding is calculated on FIFO (First In First Out) basis.
3 What is the cost of acquisition of bonus shares?
Ans. Cost of bonus shares is taken as NIL. At the same time, the original holding on which the bonus shares have been issued shall continue to carry the same cost of acquisition.
Example: Cost of acquisition of 100 shares of company ‘A’ is Rs.500 per share. Bonus shares in the ratio of 1:1 are allotted. Cost of acquisition of 100 bonus shares will be Rs.0 and original 100 shares will continue to have the cost of Rs.500 per share.
4 How can NRIs, residing in any of these countries, take benefit of ‘Double Tax Avoidance Agreement’?
Ans. To avail benefit of lower rates of tax as per double taxation avoidance treaty entered into by India, NRIs need to submit the Residency Certificate issued by Tax Authorities of the country of his residence. These documents should be submitted to the designated bank branch at the time of opening the bank account or subsequently. New TDS rate shall be applied only after the acceptance of the Residency Certificate by the designated bank.
5 What is "Tax Deduction at Source (TDS)" on capital gains arising out of sale of holdings by NRIs?
Ans. As per Indian tax laws, all the capital gains arising out of sale transactions are subject to tax. In the case of NRIs, the capital gain arising out of sale transaction is subject to deduction of tax at source (TDS) i.e. at the time of crediting the sale proceeds to the respective NRE/NRO account by the concerned bank branch. Accordingly, the concerned bank shall determine the tax liability and tax will be deducted at source. The concerned bank, which has deducted tax at source, shall issue a certificate in this regard.
6 What are provisions relating to permissibility of Gifts?
Ans. Any gift received, either in cash or in cheque or in any other mode, on or after 1st September, 2004, in excess of Rs.25,000/- would be taxed in the hands of the recipient. However, gifts received on marriage or from relative or under will or inheritance or from employer in recognition of the services rendered would not be subject to tax. It is better to prepare a gift deed and get it registered (with related stamp duty) but such a precaution is normally needed in the case of high-value gifts, particularly related with real estate.
7 What are the provisions relating to TDS (Withholding tax)?
Ans. Any amount remitted to an NRI/PIO outside India, being income earned from rent, royalties, dividend, interest, capital gains, etc., other than salaries, tax is deducted at source at the time of actual payment or credit, whichever is earlier.
Tax is deducted u/s. 195 at the prevailing tax laws in India or as per DTAA provisions.
Under section 197 of ITA, an NRI can apply for the lower/NIL deduction certificate to the Income-tax Officer in Form No. 13.
For receipt of any sum, other than interest and dividend, application can be made by an NRI for lower/NIL deduction of tax in Form No.15D.
The payer/deductor, on the basis of the certificates issued by the Income-tax Authorities, deduct the tax at the specified rates.
The payer/deductor of tax issues Form No. 16A, TDS Certificate, for claiming the TDS credit, which is filed along with the Income-tax Returns filed in India.
8 Is TDS deductible if the sale proceeds are credited to NRO Bank account?
Ans. No TDS is deductible if the sale proceeds are credited to NRO Bank account.
9 What are the tax implications for seafarers’ bank accounts?
Ans. Tax implication of seafarers NRE bank accounts would depend upon the residential status of the seafarers. i.e. Interest on NRE deposit is exempt to NRI u/s 10 (4) (ii) of Income Tax Act, 1961, however it is taxable in the case of ROR/ RNOR.
10 What is an advance ruling in the realm of the Income-tax Act, 1961?
Ans. An advance ruling is a ruling that is given by an authority especially set up for this purpose. It enables a non- resident to know in advance, with a degree of finality of tax liability, that would arise out of a transaction or proposed transaction that a non resident has entered into or proposes to enter.
11 Who can apply for advance ruling?
Ans. A non-resident can apply for an advance ruling to ascertain its tax liability. In addition, a resident can also apply for such a ruling to find out the tax liability that would arise in the hands of the non-resident, in respect of a transaction entered into or proposed to be entered into with him.The application can be made in the required form together with the fees of Rs.2500.
12 Are advance rulings binding?
Ans. The advance rulings are binding on the applicant that has sought the ruling and on the tax
commissioner and his sub-ordinate tax authority in respect of the transaction in relation to which the advance ruling is sought. Unlike court orders the rulings that are awarded do not set a precedent for other cases.
13 Can the application for an advance ruling be rejected?
Ans. The application will be rejected if the questions raised are pending in the applicant’s case before any income tax authority, the tribunal or court.
The application may also be rejected if the questions raised relate to a transaction that is designed prima facie for avoidance of income tax.
The AAR (Authority for Advance Ruling) also dose not give advance ruling if it involves determination of the fair market value of any property.
14 What is the composition of the bench giving the ruling and the timeframe within which the ruling is to be given?
Ans. The chairman of this authority is a retired judge of the Supreme Court. In addition there are two members of the rank of an addition secretary to the government of India, one is drawn from the Indian revenue service and the other from the Indian legal service.
The advance ruling is required to be pronounced by this authority within six month of the receipt of a valid application.
CAclubindia
