NRI (non-resident indian)

Starting out in your first professional job is probably one of the most critical periods of your life when you will need to save money. Unfortunately, for many young women, it is also one of the most difficult periods to put anything aside. Setting up a home, making payments on college loan debt, and obtaining the basics of life such as a car and a professional wardrobe make it extremely hard to find any money left over at the end of the month. Fortunately, it is possible to save money as a young professional without sacrificing too much in the way of lifestyle.

Start out by taking a close look at the direct deposit form you’re given on your first day of work. While many people simply have their entire paycheck deposited into their checking account, there are several ways to fills out this form that will help you to save automatically.

For example, very few people realize that it is possible to divide their paycheck among several different accounts. Direct a portion of your paycheck towards a retirement account such as an IRA. If possible, try to save the maximum amount allowed. If you are investing in an IRA, take the $5000 maximum allowable contribution and divide it by the number of paychecks you get in a year. Have this amount deposited into the retirement account every pay period.. Because you have not adjusted your lifestyle to the total amount of your paycheck, it will be much easier to get in the habit of saving for retirement immediately.

Beyond this, also try to set aside at least ten percent of the remaining money every pay period into a savings account. Over time, this will become your emergency and unexpected expenses fund. After doing this, base your budget on the remaining amount of money.

In order to create a budget, you will need to start by writing out a list of all your income. For many young professionals this list will only include the number you calculated in the previous step, but some people will have second jobs, small business profits, or investment income that will need to be included. From the total of this list, subtract all of your mandatory expenses. This includes expenses such as rent, utilities, transportation costs, debt settlement and minimum loan payments, as well as your insurance premiums. Any money that is left over after paying for these things is the amount that can be spent on entertainment and extra debt repayment.

Getting your debts repaid quickly is another way to save money. By paying off debt, a person is not only able to avoid paying interest, but he or she is also able to reduce their monthly expenses. By keeping your expenses low, you will have a lot more flexibility regarding where and when you choose to work.

Ideally, try to devote at least of any “extra” money at the end of every month to paying off debt. Make a list of all your debts and apply the total of this money to the debt with the highest interest rate. By doing this, you will be able to pay off your highest interest debts the fastest and pay less in interest charges.

Taxability in India is dependent on whether an individual qualifies as an Ordinary Indian Resident (ROR), Not Ordinarily Resident (NOR) or Non-Resident (NRI). An ROR is liable to tax on his global income, while a NOR and NRI is liable to tax on the income ‘earned’ in India. NRI benefits are available to a person till the time he holds the NRI status in India; a person loses his NRI status in the same year when he returns to India or within 2-3 years from the date of arrival to India, depending on the number of days of stay in India (explained below).

A returning Indian who has been a Non Resident for 9 years or more, shall be a Not Ordinarily Resident (NOR) for 2 successive years upon permanently returning to India.

Foreign exchange and overseas assets (such as bank accounts, stocks/securities, life insurance policies, loans, company deposits, debentures, bonds etc.) acquired/held/owned by NRI while he was abroad can be continued to be so held and owned even after the NRI returns to India for permanent settlement. Such foreign exchange and overseas assets can accumulate or accrue income outside India and the balances can be utilized for reinvestment or repatriated to India at any time (without attracting Wealth tax in India) within 1 year immediately preceding the date of his return or later. This exemption period is limited to 7 successive years which immediately follow the year in which the NRI permanently returns to India.

Immovable property

NRIs can continue to hold immovable properties outside India. Such properties can be rented out and rentals can be credited to overseas bank accounts. The properties can be sold and the sale proceeds credited to overseas bank accounts. Expenses relating to such properties, such as maintenance, insurance premium etc. can be paid out of the overseas balances.

Important points to keep in mind:

• Immediately on return to India, NRIs should inform their bank to designate their accounts as domestic Resident accounts or transfer the balance in their NRE/FCNR accounts to Resident Foreign Currency (RFC) accounts, if so desired; FCNR accounts can be continued till the date of maturity and upon maturity, can be converted to RFC accounts.
• It is also important to keep in mind the upcoming new Income tax laws – the Direct Tax Code (DTC) that is proposed to come into effect from April, 2012. There is a proposal under the DTC to remove concept of 'NOR'. Under DTC, a person may qualify as Resident Indian on account of removal of NOR concept (whereas he would have become NOR under existing provisions); in such a case, it would bring assets situated outside India under the ambit of wealth tax. DTC also proposes to levy wealth tax on net wealth in excess of Rs 1 crore as compared to 30 lakhs of existing provisions.
• Resident Foreign Currency (RFC) Accounts Scheme - This is a Scheme approved by Reserve Bank of India permitting persons of Indian nationality or origin, who have returned to India on or after 18th April 1992 for permanent settlement (Returning Indians), after being resident outside India for a continuous period of not less than 1 year, to open foreign currency accounts with banks in India for holding funds brought by them to India.

Some of the features of an RFC account are:

• RFC account can be held singly or jointly in the names of eligible persons.
• RFC account can be maintained in the form of Savings, Current and term deposit; no cheque books are given for RFC-SB account.
• RFC account can be opened and maintained in US Dollars, Pounds Sterling and Deutsche Marks.
• Only certain permissible credits and remittances in any permitted currency from abroad, pension or any other monetary benefits received from abroad, interest on RFC accounts, foreign currency notes/travellers cheques, transfers from other RFC account of the account holder, balance in NRE/FCNR account at the time of his arrival in India and any other amount specifically permitted by RBI are allowed under RFC. Funds in RFC accounts can be remitted abroad for any bona fide purpose of the account holder and his dependents including exchange required for travel and other personal purposes and investments.
• Returning NRIs are required to re-designate their Non-Resident accounts as Resident Rupee/RFC accounts after their arrival in India.
• If the individual subsequently goes abroad to become an NRI, the balance in the RFC account can be converted to NRE/FCNR account. Interest income from RFC is exempt from income-tax till such time the Returning Indian maintain the status of Resident but Not Ordinarily Resident (NOR). Hence, if the Returning NRI had been non-resident for a continuous period of 2 years, he gets exemption from income-tax for subsequent 9 years.

Author

Priya Rao

At the beginning of the NRI Status, most of the people are in dilemma about what kind of Bank account should they hold in India? Should it be an NRO account or should it be an NRE account or a FCNR account? Each of these accounts has their own pros and cons. Understanding them in detail will help you in making better choice.

Non Resident External Account (NRE)

An NRE account is a Rupee denominated account. That is, funds in an NRE account are maintained in Indian Rupees. It can be a savings, current or a fixed / term deposit account.

Advantages of NRE Accounts

• The interest earned on deposits in an NRE account is exempt from tax in the hands of the NRI
• Funds can be repatriated from an NRE account. This means that the funds can be freely sent to any other country
• An NRE account can contain funds remitted from abroad, or obtained from another NRE / FCNR account maintained in India
• Funds can be transferred from an NRE account to an NRO account without any restriction.
• An NRE account can be held jointly, provided the other person is also an NRI
• Nomination is allowed for NRE accounts

Disadvantages of NRE Accounts

• Interest earned on Deposits in an NRE account is very less comparatively to NRO account.
• Balances in the NRE accounts are held in Indian Rupees and thus exposed to Exchange Fluctuation risk.

Tip:

NRE Account are best suitable for people who needs to make payments in INR or want to make investments in India from his/her overseas earnings and at the same time you want your Rupee savings to be freely Repatriable.

Non Resident Ordinary Accounts (NRO)

NRO accounts are also rupee denominated account. This means that the foreign currency is converted to Indian rupees at the prevailing foreign exchange rates when the money is deposited into the account.

Advantages of NRO Accounts

• Interest earned on Deposits in NRO account is very high comparatively to NRE account.
• An NRO account can be held jointly with another NRI or with a resident Indian.
• Nomination is allowed for NRO accounts.

Disadvantages of NRO Accounts

• Funds cannot be repatriated from an NRO account. These funds have to be used only for local (within India) payments in Indian Rupees.
• An NRO account can only contain funds received from within India
• Funds cannot be transferred from an NRO account to an NRE account
• The interest earned on deposits in an NRO account is taxable in the hands of the NRI as per the applicable income tax slab rates.

Tip:

NRO Accounts are best suitable for people who want to deposit his income in India from sources such as rent, dividends etc., and you want your investments in India to fetch higher returns.

Foreign Currency Non Resident Account (FCNR)

FCNR accounts are denominated in foreign currency. The source of funds deposited into FCNR accounts have to be from sources abroad. They can also be from your other NRE or FCNR accounts.

Advantages of FCNR Accounts

• The principal amount and the interest are fully repatriable.
• Interest income earned on the money in a FCNR account is non-taxable in India. However, it may be taxable in your country of residence as per that country's tax rules.
• You can have other NRIs as joint account holders on FCNR accounts.
• FCNR accounts do not carry any forex rate risk as the accounts are always maintained in the foreign currency.

Disadvantages of FCNR Accounts

• Interest Rate on deposits in FCNR accounts are less comparatively to NRO accounts.
• Resident Indians cannot be joint account holders in FCNR accounts with NRIs.
• Savings account option is not available for FCNR accounts.

Tip:

FCNR Accounts are best suitable for people who wish to keep his overseas savings in India but do not want to convert them in INR.

Author

Priya Rao, InvestmentYogi

With the global slowdown and recession looming large over US and the Eurozone, coupled with the fact that the Rupee has slumped as low as 53 against the dollar, India has witnessed significant inflows of capital from the NRI community.

It is a good time to convert your US dollars into Rupees and invest in rupee schemes in India. However, having said this, it is an equally good time to invest in foreign currency deposits more popularly known as FCNR (B).

A little more about FCNR (B)

FCNR is a freely repatriable time deposit investment held in foreign currency. It is available in 6 currencies viz. US Dollar, Canadian Dollar, Australian Dollar, Japanese Yen , Sterling Pound and EURO. Since it is held in these currencies, you as an investor are not exposed to a direct exchange rate. Also the interest income earned on these deposits is not taxable in India. The deposits are held for a minimum tenor of 1 year to a maximum tenor of 5 years. The interest is compounded every 180 days. Since you can invest in these deposits only through overseas funds or through NRE funds, these deposits are freely repatriable, which means you can credit them back to your local bank abroad on maturity or whenever you need them without any documentation. One important point to note about them is that since the minimum tenor is 1 year, if you withdraw the money prematurely, before the completion of 1 year, no interest is paid out.

What has changed?

Liberalization of Currencies

Effective September 23^rd, you can now open an account in any of the freely convertible currencies along with the ones mentioned above. The others that are included in the list are the Singapore Dollar, Hong Kong Dollar, Swedish Krona, Danish Krona, Swiss Franc and Malaysian Ringgit

Most banks have not started offering this as yet. You will need to check with your bank on availability of this offering.

Increase in Interest Rates

The interest rates are regulated by the Reserve Bank of India and the maximum rate that banks can offer is 100 bps above the 1 year LIBOR rate in that currency as published by FEDAI (Foreign Exchange Dealers Association of India). Effective November 23^rd, RBI has increased this ceiling to 125 bps.

Most banks have increased their rates by 25 bps and this means you can now earn 25 bps more on all your investments in FCNR (B) deposits going forward. It will be a good idea to check with your bank on the rates being offered and do a quick comparison with the other banks before making further investments.

Author

Daisy Fernandes

The Foreign Currency Non Resident Deposit (or the FCNR-B), is an exclusive deposit for Non Resident Indians, that is maintained in select currencies of choice. For those NRIs sending money across to India, the possibility of foreign exchange risk exists, by way of conversions done at the time of investment and again at the time of repatriation. To beat such risks, the FCNR deposit is an ideal option, earning the depositor a decent interest too. Here is a quick sneak peek into how the FCNR deposit works.

FCNR at a Glance

Eligibility- Any Non Resident Indian(NRI) and Person of Indian Origin (PIO) is eligible to open and maintain a FCNR deposit, provided the source of funds is from abroad or from another NRE account/FCNR deposit.

Permissible currencies- FCNR deposits could be maintained in:

Ø US Dollar

Ø British Pounds

Ø Euros

Ø Japanese Yen

Ø Canadian Dollars

Ø Australian Dollar

Remittances in other currencies would have to be converted into any one of these six currencies before the deposit is opened.

Interest income- The FCNR deposit earns a regular rate of interest. The interest rate is paid out on the basis of 365 days as per the Reserve Bank of India guidelines. For deposits of up to a year, the interest is calculated at the applicable rate, without any compounding. For deposits of more than a year, the interest is calculated at intervals of 180 days, and thereafter for the remaining days. The interest paid out in an FCNR deposit will be in the currency of the deposit.

Duration of deposit- The duration of FCNR deposits range from one year to a maximum of up to five years.

Tax aspect- The interest earned on the deposit is not subject to tax. Also the principal amount of the deposit will not come under the purview of Wealth Tax.

Repatriation of funds- The principal and the interest earned on a FCNR deposit is fully repatriable abroad.

Opening a FCNR Deposit

To open a FCNR deposit, most banks prescribe the following set of documents:

1) Completed application form for the deposit as per banks requirement.

2) Passport and Visa

3) Initial Remittance

4) Other commonly asked enclosures are cheque drawn on bank account abroad, latest overseas bank statement in original, copy of telephone / electricity bill, and cancelled paid cheque of your overseas bank A/c, copy of proof of drawing income / employee ID / labour card.

Joint Account Holder and POA Holder

FCNR deposits could be opened along with a joint account holder. However, joint account holders must be a NRI or a PIO, and complete similar account opening documentation.

Power of Attorney (POA) could be given in favour of a resident or a non resident. Resident power of attorney holders are restricted to only withdrawals for local payments, or make investments in India. Resident POA holders are not permitted to repatriate the deposit outside, other than to the account holder. He is not permitted to make payment as a gift to a resident on behalf of the account holder, or transfer funds from the account to another NRE account.

FCNR Premature Withdrawal

FCNR deposits could be prematurely withdrawn. A penal interest of around 1% is generally levied in such a case. For deposits less than 6 months, no interest would be paid and a penalty may be applicable as per directives from the apex bank and RBI guidelines that prevail on these terms. Deposits closed prematurely for the purpose of further renewal to avail of any increase in interest rates, for a period more than the unexpired period and renewed under the same currency, no penal interest is charged.

Overdraft on FCNR Deposit

Banks offer an overdraft or loan against FCNR deposits if so required. Generally up to a maximum of 85% of the deposit is sanctioned. RBI guidelines however restrict the maximum loan amount to Rs. 20 Lakhs. Such loans cannot be used for the purpose of re-lending, for agricultural and plantation activities or for investment in real estate business. They could be used for specific investments in India on non-repatriable basis and for purchase of a house subject to conditions.

FCNR Deposit and Change in Residential Status

When FCNR account holders return to India for good, the deposits may be allowed to continue till maturity. However, except for the applicable interest rate, these deposits are treated as resident accounts, effective from the account holder’s date of return to India. On maturity of the deposit, these deposits would be converted into either a Resident Foreign Currency Account or a regular Resident Rupee deposit.

Written by Ramya Ramachandran

If you are an NRI having dependants or Rupee needs in India for which you have to undertake frequent remittances and you are reading this article, then you have more than one reason to worry along with the depreciating dollar!

The Government of India has made the following amends to the Service Tax Rules, 1994 and issued a set of guidelines for effective 1^st April, 2011 which are called the Service Tax (Second Amendment) Rules, 2011.

This is a change from the erstwhile regime which gave an option to the service provider to charge fees on the remittances and levy a service tax of 10.3% on the fees charged. Wherever no fees were charged, the service tax was to be levied at 0.25% of the value of the remittance. Obviously, most remittance service providers chose to levy a nominal fee and charge service tax on the fee, which for most of you would have been inconspicuous on account of its small value.

The GoI has recommended 2 methods for levy of service tax. Service Providers are free to choose any one method but need to stick to that method of valuation of service tax for the rest of the financial year.

Method 1:

A service tax of 10.3% is to be levied on the spread that a service provider charges on the RBI reference rate. Hence the Taxable Value is valuated as follows: (RBI published interbank rate – Rate of Conversion charged by the bank) * Units of foreign Exchange.

Method 2 :

The method 2 is a slab wise calculation of the INR value of the amount remitted. The slabs prescribed are as follows:

(a) 0.1 per cent. of the gross amount of currency exchanged for an amount up to rupees 100,000, subject to the minimum amount of rupees 25; and

(b) Rs. 100 and 0.05 per cent. of the gross amount of currency exchanged for an amount of rupees exceeding rupees 100,000 and up to rupees 10,00,000; and

(c) Rs. 550 and 0.01 per cent. of the gross amount of currency exchanged for an amount of rupees exceeding 10,00,000, subject to maximum amount of rupees 5000:

In addition education cess @ 3% will be levied on the service tax. The table below summarizes the Method 2 of valuation

With the complexity of implementing the first method, most service providers have chosen to go with the second method. In the second method, the maximum service tax applicable is capped at Rs. 5,150.

Taking Method 2 as the basis for calculation, let’s take three scenarios to assess how to calculate this. The rate of exchange assumed for each of these transactions is 45 (1 USD = Rs. 45)

Scenario 1 : You remit USD 500

Equivalent INR Amount: INR 22,500

Service tax applicable: INR 25.75

Amount you will actually get: INR 22,474.25

Scenario 2 : You remit USD 10,000

Equivalent INR Amount: INR 4, 50,000

Service tax applicable: INR 283.25

Calculation Methodology:

Rs.100 + 0.05 %*( 3, 50,000) = Rs. 100 + Rs. 175 = Rs. 275

With applicable cess: Rs. 283.25

Scenario 3 : You remit USD 10,00,000

Equivalent INR Amount: INR 4, 50, 00, 000

Service tax applicable: INR 5,150

This structure is already in force effective April 1, 2011. The next time you decide to remit you may want to check with your service provider on what is the structure they are following and assess the amount you finally get into your account.

Written by Daisy Fernandes

When it comes to NRIs they do not have as much tax saving options open to them as the Resident Indians do. Here we show you the list of tax saving options available for NRIs and how NRIs can make maximum profit from them:

1. Section 80C - From the various tax saving avenues available to Indian tax savers –

(i) ELSS (Tax saving Equity Mutual Fund schemes) – ELSS are equity-oriented mutual fund schemes that invest in a diversified portfolio of Indian stocks. ELSS schemes can be purchased online and come with a lock-in period of 3 years. They are ideal for long-term tax-free savings.

(ii) House property – Buying a house property in India is a good investment if you plan to come back in the future. The principal and interest payments made every year for a home loan availed in India are allowed as deductions subject to an overall limit of Rs 1 lakh per year on principal payments (under section 80C) and full interest payments made during the year (under section 24b) - in case of let-out property.

(iii) Life Insurance and Pension Plans – There are many life insurance and retirement/pension plans of Insurers that can be bought by an NRI. You can buy retirement plan with or without life cover and also choose between a traditional plan (endowment, money-back) and a unit-linked plan depending upon your risk appetite. Point to note is that the policies are issued in Indian Rupees only. There is also a facility available with few insurers like LIC for NRIs to obtain insurance cover from their present country of residence where all formalities are completed in their present country of residence, subject to fulfilment of certain rules and restrictions on sum insured amounts and add-on riders.

2. Section 80D - [Health insurance premium payment] -

NRIs can purchase health insurance policy in India for themselves, their family and also dependant parents and claim deduction for the premium paid up to Rs 35,000 per annum [Rs 15,000 in case of non-senior citizens and Rs 20,000 for senior citizens];

3. Other Deductions u/s 80 –

(i) Deduction under 80G - for specified donations;

(ii) Deduction under 80E – for interest payment towards Educational loan taken from any bank/approved financial institution for higher studies (comprising full time as well as vocational studies pursued after passing senior secondary examinations studies) for self or any of immediate family members (children, spouse)

Investments not available for NRIs – PPF (Public Provident Fund), NSC (National Savings Certificate), SCSS (Senior citizens savings account), tax saving infrastructure bonds under section 80CCF and POTD (Post office time deposits) are not available for NRIs. However, if you had already opened any of these accounts when you were a Resident Indian, you can continue to service the account(s) till maturity.

The overall limit on section 80C, 80CCC is Rs 1 lakh per annum.

Written by Priya Rao

Tax Calculator

More NRI Personal Finance articles

DTAA or Double Taxation Avoidance Agreement is a tax treaty that India has with 65 other countries. In plain language, what this means for an NRI is, if he/she is a resident in any of those 65 countries and is paying taxes on the income earned in that country, then he/she is eligible for a lower deduction of tax on income earned in India in that financial year.

These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However, the source country is also given the right but such taxation in the source country has to be limited to the rates prescribed in the agreement. The rate of taxation is on gross receipts without deduction of expenses.

Excerpts from the Indian Income Tax website: The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the source country which is generally lower than the rate of tax under the domestic laws of that country. The double taxation in such cases are avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country

Today for an NRI, tax is withheld on the interest income on deposits and accounts at the rate of 30%. Under DTAA, basis the documentation that is submitted to the authorized dealer, the NRI can benefit from a lower incidence of tax on his interest income. This ensures that since he is paying taxes on the income in his resident country as well, the incidence of tax on the source country is lower, thereby encouraging investments in the source country viz. India.

Simplifying, this means that if you are a US resident paying taxes in the US and qualifying as an NRI/PIO as per the FEMA definition, then you can submit the requested documents by your bank/AD and avail a lower withholding of tax. You will be taxed @ 15% for the interest income earned on your NRO account/deposits rather than the standard 30%.

Each bank will have its own process and documentation that it seeks from the NRI to determine eligibility for the DTAA benefit. This is beneficial to ensure that the rate under DTAA is applied on your TDS withholding. In case you have not claimed for this benefit with the bank, you are eligible to seek a refund from the revenue authorities under this treaty.

If you have been eligible but have not claimed your benefit in this year, to get a refund for past periods, you may have to place a refund request with the Indian Income Tax authorities.

One important aspect for claiming DTAA, is that the Permanent Account Number (PAN) has been made mandatory to avail the benefit of lower withholding under DTAA. Also important to note, there is an expiry date on the documentation and the same needs to be refreshed every financial year with the bank/AD to ensure validity.

With the current financial year ending on Mar 31^st, it will be a good idea to connect with you bank and check on the requirements/renewal of the DTAA facility for your NRO accounts/deposits.

One important thing to keep in mind is that with the Direct Tax Code coming into picture, effective April 2012, submission of a TRC (Tax residency Certificate) issued by the revenue authority in the country of tax residency has been made mandatory. While this will make the documentation process uniform across banks, it will be cumbersome process for the customer.

Details on the treaty with the countries can be referred to on the link below.

http://finmin.nic.in/the_ministry/dept_revenue/index.html

Written by Daisy Fernandes

More NRI investment and tax articles

I remember the first time I heard about a PIO Card, I was travelling to India and was waiting on my visa. My very blond hair and blue-eyed friend told me I should get a PIO Card. After some research and conversations with my husband, I too became a PIO Card holder.

InvestmentYogi gives an overview of the advantages and disadvantages of PIO/OCI status and the new Government proposed merger of the two.

NRI, PIO and OCI

It is important to know what each abbreviation stands for. An NRI (Non-Resident Indian) is an Indian citizen who is ordinarily residing outside India and holds an Indian Passport. As to where a PIO (Person of Indian Origin) /OCI (Overseas Citizen of India) card holders are people whose ancestors were of Indian Nationality and who is presently holding another countries’ citizenship/nationality (i.e. he/she is holding foreign passport). In respect of facilities available in economic, financial and educational field, PIO/OCI is considered the equivalent of an NRI.

Although PIO and OCI cards have the same description and are similar in nature, they do each have distinct differences. Let’s take a closer look:

PIO vs. OCI

A PIO (Person of Indian Origin) card allows for visa-free travel to and from India. However, a PIO card is only valid for 15 years. Also, if your stay in India is going to exceed 180 days on any single visit you will need to register within 30 days of the expiry of 180 days with the concerned Foreigners Regional Registration Officer/Foreigners Registration Officer or local Police Authorities.

Unlike a PIO, an OCI card has lifelong visa-free travel and does not require the holder to register with any office regardless of the length of their stay.

Eligibility for PIO/OCI

A person is eligible for a PIO/OCI Card if they at any time held an Indian Passport or either of his/her parents, grandparents or great grandparents was born in and are/were permanent residents’ in India as defined in the Government of India Act, 1935 and other territories that became part of India thereafter provided neither was at any time a citizen of Bangladesh, Pakistan, Sri Lanka or other countries which may be specified by the Central Government from time to time.

The difference between OCI and PIO eligibility is:

The PIO scheme is broad-based and includes up to four generations and also the foreign spouse of a citizen of India or a PIO/OCI card holder. OCI states that the spouse of the eligible person can apply for OCI only if they are eligible in their own capacity. Foreign Nationals, who are not eligible for an OCI, but married to someone who is eligible for an OCI, still cannot be granted an OCI.

Benefits and Disadvantages*

The chart below gives a few of the advantages and disadvantages in comparison of PIO and OCI cards.

*(sourced by www.immihelp.com)

PIO/OCI Finances in India

As a PIO/OCI card holder you can hold a rupee bank account and lend in rupees to Indian residents. As far as investments go, you need to be careful. Holding mutual funds and ETFs can be a cause of headache due to US tax implications for holding non USA-Based mutual funds and ETFs. These are considered to be “Passive Foreign Investments” and involve special rules. All NRI/PIO/OCIs need to submit an FBAR if they are holding $10,000 or more, (this includes all accounts summed together), if they have accounts outside the USA.

PIO/OCI Taxation in India

PIO/OCI card holders who are not residents of India are liable to pay taxes in India only for income earned in India and do not have to declare or pay taxes for income earned abroad. You can read, How do I determine my Residential Status?, to determine your residential status.

In Conclusion

With all that said, in January, 2011, the PM of India, Manmohan Singh, announced that the government will be merging the PIO and OCI cards. What benefits or draw-backs that holds is still unclear. Rumour has it that the program/process will be to convert PIO holders to OCI status and abolish PIO all together. PM Singh stated that under this new act, NRIs will have voting rights. But again, it is still unclear and no official breakdown has been reported. One thing I will say, if you have wanted to get a PIO or OCI card, now is the time to do it.

Written for InvestmentYogi by Lisa Chanamolu

Bravo if you’ve been lucky enough to inherit financial assets in India such as mutual funds, stocks, or bonds. You’ll need to make a choice of retaining the investments in India or moving them to the USA. Some investments are not permissible for NRIs to hold. These must be sold. You may need (or want) a financial advisor to help you through this process. Some investments such as mutual funds and ETFs will create difficulties when paying USA taxes, complicating the returns and increasing taxation. It would be wise to dispense with these assets as well, replacing them with more appropriate investments or selling them.

US tax law dictates you must declare worldwide income. You may not need to pay taxes on an inheritance but if the inheritance brings you assets that produce income you will need to pay taxes on that income. You may also owe taxes on the sale of investments, depending on the cost basis.

Mutual Funds and ETFs (Exchange Traded Funds): Special Considerations

Inheriting mutual funds or ETFs can prove tricky because the US tax implications for holding non USA-based mutual funds/ETFs are complex. These are considered “Passive Foreign Investments” which involve special rules:

You will pay income tax on any dividends, interest or other income as earned income, not with the favourable tax treatment of “capital gains”.

              
The tax reporting becomes complex and expensive as you must calculate and declare earned income on the funds each year, even if that information is not provided by the foreign mutual fund itself, and it generally is not. Many accountants are neither experienced at doing this nor want to, so in and of itself, it will be expensive and hard to get the job done.

               
If you inherit mutual funds, we suggest you contact an experienced international financial planner or US Tax Accountant used to dealing with such issues to help you. Usually liquidating the mutual funds and choosing more tax friendly investments in India, if you choose to leave the money there, is a good idea.

We do not recommend proceeding with any buying or selling without consulting a professional. Buying and selling investments will attract tax consequences and should be well planned.

Declaring Foreign Bank and Investment Accounts

There are strict rules for US Residents and Citizens on declaring the existence of foreign financial accounts. You must file an FBAR (Foreign Bank and Financial Accounts) report on a yearly basis, due on June 30. Fines vary from $500 to the greater of $100,000 or 50% of the account in question that is not reported. If a criminal penalty is imposed the fine can be up to $500,000 along with a jail sentence of up to 10 years.

These rules apply even if you are not the owner but are simply a co-signer (with your mother, for example) on a foreign account. Signature authority on an account does not necessarily make you liable for taxation, but it does require an FBAR filing. Likewise, a full power of attorney over a foreign financial account would generally require an FBAR filing (for example if you hold the power of attorney for an incapacitated relative or a minor).

If you liquidate the accounts immediately after the inheritance and repatriate the funds to the USA, consult with an accountant on how to handle the situation in terms of the FBAR filing. In our experience, things don’t always move lightning-fast in India, so from the date of death to the movement of the funds to the USA, there may be a significant time period, possibly requiring FBAR filing.

The author, Ariadne Horstman, is a financial planner at InvestmentYogi.

You’ve inherited financial accounts in India. Now, what to do with them? InvestmentYogi takes a look at what are some of the choices and how to manage them.

Option 1. Leave inherited assets in India

a. Keeping assets in India  means managing them and filing annual income tax returns in India, as well as declaring the income and accounts on the USA tax return, and filing FBARs

b. It is recommended if you are not in India to retain a property manager for physical property, and a professional for financial investments. This can make your life easier for filing Indian taxes, rebalancing accounts and keeping an eye on the investments and their performance.

c. It may be important for you emotionally or financially to retain assets in India for various personal reasons.

d. Having assets in other countries can add diversity to your portfolio in terms of currency and other factors. However, the same can be achieved, often with more ease, simply by investing in foreign or Indian accounts from USA funds.

Option 2. Bring funds to USA

a. This choice may simplify your life in the long run if you remain in the USA: One set of tax laws to deal with, one set of financial data.

b. Transferring funds to the USA entails certain steps. Transfer of assets rules:         

The Authorised Dealers in India have been permitted to allow the facility of repatriation of funds by NRIs/PIOs in their Non-Resident Ordinary Rupee (NRO) account up to US $1 million per calendar year representing sale proceeds of both financial and immovable property, acquired by way of inheritance/legacy.

Remittance is permitted up to US $1 million per calendar year, out of balances held in NRO account.

Remittance is permissible provided

The NRI is a lawful beneficiary of legacy in India;
The legacy is supported by necessary documents; and
The balance is held in an NRO account with a bank in India. 

Exchange Control Regulations

As of Regulation 4 of the Foreign Exchange Management (Remittance of Assets Amendment) Regulations, 2009, remittance of up to US $ 1 Million per calendar year is allowed without RBI (Reserve Bank of India) permission.

Documentary evidence in support of acquisition, inheritance or legacy of assets by the remitter is required as well as a tax clearance/no objection certificate from the Income Tax authority.

Regulation 6 of the Foreign Exchange Management (Remittance of Assets Amendment) Regulations, 2009 states that persons who wish to make remittance of assets over that level may, in the following cases, apply to RBI. RBI permission is required for remittance exceeding US $ 1 million per calendar year.

Application to be made as per instructions in Form LEG on account of legacy/ bequest or inheritance to a citizen of foreign State permanently resident outside India;

Remittance to a person resident outside India on the ground that hardship will be caused to such a person if remittance from India is not made;

Application must originate from an NRI / PIO regarding assets in India acquired by him by inheritance / legacy.

Note: Even if an NRI does not wish to repatriate funds, it is advisable to remit the funds and re-invest the same into NRE/Foreign Currency Non Resident (B)  (FCNR) or Foreign Currency Plan ( FCP ) account due to the following reasons –

Do check with your accountant about taxability and repatriation planning using NRE/FCNR/FCP /NRO accounts.

The author, Ariadne Horstman, is a financial planner at InvestmentYogi.

More NRI articles

What happens when you inherit money or property or are gifted the same? Read below to learn more about the rules for inheritance and gifting in India and the USA.

US Rules on Inheritance and Gifting

If a US person (this definition includes both residents and citizens and even companies, trusts and partnerships) receives a gift or inheritance from a non US person (or people) in total of over $100,000 in a given calendar year, an information form needs to be filed with the IRS. For more information go to the IRS website: www.irs.gov/businesses/article/0,,id=200722,00.html.

The gift or inheritance to an individual is excluded from gross income on the tax return. The form to be filed is not a tax return because there is no tax on gifts from foreign persons. However, this informational form must be filed to avoid strict penalties.

If the gifts are coming from foreign partnerships or corporations, they may be considered taxable income. Gifts from foreign trusts also have special rules.

As per the IRS site, “A gift to a U.S. person does not include amounts paid for qualified tuition or medical payments made on behalf of the U.S. person.”

Gifting rules in India

The Gift Tax was abolished in India in 1998. However, gifts exceeding Rs 50,000 received from any person who is not a close relative* of the receiver is to be included in the taxable income of the receiver as per the provisions of the Indian Income Tax Act, 1961.

The above provision will be applicable to the recipient irrespective of his residential status - resident or non-resident.

*Close relative – Immediate family members and close blood line of parents and spouse’s parents.

Exclusions to taxing of gifts in the hands of recipient -

Taxing of gifts shall not apply to any money or property received:

i) From any relative; or

ii) On the occasion of the marriage of the individual; or

iii) Under a will/by way of inheritance; or

iv) In contemplation of death of the payer or donor, as the case may be; or From any local authority; or

v) From any Fund, Foundation, University, Educational institution, hospital, other type of medical institution, or any trust or Institution (referred to in clause (23C) of section10 of the Income Tax Act; or

vi) From any trust or institution registered under section 12AA of the Income Tax Act.

The author, Ariadne Horstman, is a financial planner at InvestmentYogi.     

More NRI articles

InvestmentYogi takes a look at what it takes to become Know-Your-Customer (KYC) compliant if you are an NRI or a PIO card holder.

As of 1^st January, 2011, Know-Your-Customer (KYC) norms are mandatory for all retail investors, irrespective of the amount you are investing. In the past, retail investors who had invested less than Rs 50,000 had not been required to follow KYC guidelines. That has now changed.

How to become KYC Compliant

CDSL Ventures Limited (CVL), a wholly owned subsidiary of Central Depository Services (India) Limited (CDSL), has been appointed by the mutual fund industry, to do the KYC verification of the investors in India.

You will need to submit the following mandatory documents at a CVL Points of Service (POS) location:

1) Completed KYC application form

2) Address Proof (A utility bill, passport, letter from your employer or housing society, ration card, voter ID card, or drivers licence are all acceptable forms of residential proof.)

3) PAN Card

If you are submitting your KYC application in person you will need to have the original documents with you, as well as the copies to be processed. Originals will be returned to you after they are verified as accurate.

If you are sending the document through a courier, documents need to be attested by a Notary Public, Gazetted Officer, or Manager of a scheduled commercial bank.

As of now, there are no charges/fees for KYC verification.

Additional Information for NRIs and PIOs

Additional information for NRIs and PIOs (Person of Indian Origin) will be:

1) Certified True Copy of Passport

2) Certified True Copy of the Overseas address

3) Permanent address

4) For PIO – A certified true copy of the PIO Card

All documents must be submitted in English and can be attested by the Consulate office or overseas branches of scheduled commercial banks registered in India.

How to be compliant if you live outside India

As mentioned above, you will need to get the soft copy of the KYC form that is made available on the website of all Mutual Funds, AMFI and Central Depository Services (India) Limited (CDSL). The same duly completed along with the necessary attested documents (see above list) can be submitted at the POS or mailed to your representative or distributor who can complete the KYC formalities.

When someone dies with no will, an Inheritance Certificate (can also be called a Succession Certificate) must be granted by the court to recognize the debts and securities of the deceased and to give valid discharge. A Succession Certificate empowers the person holding it to receive interest or dividends, and/or negotiate the transfer of these with respect to the assets of a deceased person.

How can I get an Inheritance certificate?

Step-1: The person requiring the Succession Certificate may file an application in the court where the properties of the deceased relative are situated or where he/she normally resided.

Step-2: Depending on the value of the estate of the deceased, the matter shall go to the type of court which can conduct cases for that value [This is known as “pecuniary jurisdiction” of the court]. The case includes the names of all other heirs of the deceased as the respondents in the matter.

A newspaper notice must be issued apart from mandatory notice to the respondents.

Step-3: Upon the expiry of the time period (normally 1 and a half months) from the date of the newspaper publication of the notice, and after the respondents have given their “No Objection”, the court passes the orders for issuance of the Succession Certificate to the person(s) making such an application.

Step-4: Judicial Stamp papers of sufficient amount (as per the prescribed court fees structure) are to be submitted in the court. After the Certificate is typed by the court staff and duly signed, it is then sealed and delivered.

It may take 3 to 4 months from the date of filing to receive your certificate.

The author, Ariadne Horstman, is a financial planner at InvestmentYogi.

Cost Basis of property as per USA tax law

While you may not have to pay inheritance taxes, you should know the cost basis of what you inherit. If you inherit a house in India worth 200,000 US$ and the fair market value of the house the date of death is the same, then this is your cost basis. This means that if you sell the house for 200,000 US$ you will pay no taxes in the USA. You may even take a loss if there were costs of sale and the home price did not cover them beyond the basis. This calculation is the same whether you inherit real estate, other physical assets or financial accounts.

In times of financial turbulence such as a market that is going sharply down or up, you may want to choose the option to select the “Alternate Valuation Date”, or the cost basis 6 months after the date of death (DOD). This does not apply to all types of assets, but can be used with many.

Determining the Cost Basis in India of a property

If the property was bought by the previous owner before April 1, 1981 then Fair Market Value (FMV) as on April 1,1981 is the cost, which again is inflated by applying the Cost of Inflation Index (CII) applicable for the relevant year of the transaction. Indian Revenue Authorities publish CII for each year.

If the property was bought by the previous owner on or after April 1, 1981 then the actual cost incurred by the previous owner will form the cost basis of an inherited property, which again is inflated by applying the CII applicable for the relevant year of the transaction.

You may want a qualified accountant to help you through these calculations which can be complex.                   

The author, Ariadne Horstman, is a financial planner at InvestmentYogi.