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NRI & taxation of mutual fund investments

NRI & taxation of mutual fund investments

Query 1]
My daughter purchased shares of Persistent Systems Ltd in 2009. She became NRI since FY 2011-12. The shares continue to be held in same Dmat a/c till date. She now wishes to gift her shares to her mother/father out of natural love. What are the tax implications/other complications, if any? She had invested in lump-sum in few mutual funds while serving in India and also in SIP. If she sells them now, what are the implications? She has no other income in India.(SIP were continued for 2/3 years but installments were paid by mother/father). Please guide. [Arvind Deshpande- arvisneha2000@gmail.com]

Opinion:

Gift of shares by your daughter to her mother/father will not carry any tax implications.
NRI’s income would be taxable in India only if it is earned / received in India (i.e., India sourced income). Income earned outside India and received outside India will not be taxable in India. Income on redemption/sale of mutual fund is income earned in India& so taxable in India. It’s the tax treatment depends upon the nature o mutual fund i.e., whether it is debt fund or equity fund and also upon the period of holding prior to redemption. [The tax treatment for the short-term and long-term capital gains on mutual funds is same for Residents and Non Resident Indians (NRIs). The only difference in the case of NRI investors is that Tax at Source wherever applicable will be deducted at the time of redemption]
Tax treatment:
a] Short-term capital gains:
i] Debt: If investments are sold within three years, gains are added to the income and taxed at normal applicable Income Tax slab of individual.
ii] Equity: If investments are sold before one year, gains are taxed at 15% straight.

b] Long-term capital gains
i] Debt: If investments are sold after three years, gains are taxed @ 20% straight with indexation benefit (excluding surcharge and cess).
ii] Equity: If investments are sold after a year, nil tax on gains.
Filing of Return:
In case of NRI with investment income and long-term capital gains as sources of income are exempt from filing a tax return in India if tax is deducted at source on such income. [It may be noted that such NRI may be a resident of another country & above income of sale of mutual funds may be taxable there. In such a case, provisions of the relevant Double Taxation Avoidance Agreement between India and that other country may be checked so as to correctly comply with the tax laws].

Query 2]
An A/c under senior citizen saving scheme 2004 with Bank of India is opened recently with initial deposit of Rs 1 Lakh though the standard maximum limit of deposit is up to Rs 15.00 Lakh. Please let us know if we could deposit the savings in small lots up to Rs. 15 Lakh in this single A/c from time to time? Also guide us if such A/c attracts exemption under section 80CC of Income tax Act? If so, to what extent? Whether interest of deposit is exempt from tax or not? Any lock in period is there? [Sunita N. Grover- nareshgrover12@yahoo.com]

Opinion:

“After a lifetime of working, raising families, and contributing to the success of this nation in countless other ways, senior citizens deserve to retire with dignity”- Charlie Gonzalez

With interest rate at its lowest in the history & rising of cost of living, senior citizens have niggling financial worries for reasonable flow of income. Further, most of the tax saving instrument like ELSS, LIC etc may not appropriate or feasible for the senior citizens. Five-year Senior Citizen Savings Scheme (SCSS), which was launched in 2004 could be one of the best option as it is not only safe, secure & risk free investment but also provide regularity of income with little higher returns coupled with tax benefit. Investments up to Rs. 1.50 Lacs in the scheme are eligible for deduction under section 80C of the Income Tax Act. While the positives are many, there is one major drawback that interest on SCSS A/c is taxable which is not so with PPF Account. Due to lack of awareness, many citizens have not yet invested in the SCSS. Present write-up will enable senior citizens to know more about the scheme so as to take an informed decision regarding investment:
1.      Rate of interest:
Keeping the requirements of senior citizens in mind, the interest payout is done on quarterly basis which provides regular income flow. Presently, interest rate under the scheme is 8.30% per annum, payable from the date of deposit to 31^st March/30^th June/30^th Sept/31^st December in the first instance & thereafter, interest shall be payable every quarter ending on 31^st March, 30^th June, 30^th Sept and 31^st December. [Interest rate is linked to G-Sec with spread of 100 basis points i.e., 1% over the G-Sec rate].
2.      Amount of Deposit:
The senior citizen saving scheme does not give freedom to invest as per wish. The minimum investment could be Rs 1,000/- & maximum can’t be more than Rs 15 lakh. The total balance of all the SCSS account should not be more than Rs 15 lacs. The investment should be in the multiple of Rs 1,000/-. Also, only one deposit in a senior citizen saving account is permissible. One can open many senior citizens saving account. [As per Rule-3 of SCSS, one can open more than one account, as long as the total deposits in all of the accounts together do not exceed Rs.15 Lakhs collectively].
3.      Age Limit for participating in the account:
a] An individual of the Age of 60 years or more may open the account.
b] An individual of the age of 55 years or more but less than 60 years who has retired on superannuation or under VRS can also open account subject to the condition that the account is opened within one month of receipt of retirement benefits and amount should not exceed the amount of retirement benefits.
c] The retired personnel of Defense Services (excluding Civilian Defense Employees) will be eligible to subscribe under the scheme irrespective of the age limit of 60 years.
4.      Maturity period of account:
Maturity period is 5 years. After maturity, the account can be extended for further three years within one year of the maturity by giving application in prescribed format. In such cases, account can be closed at any time after one year of extended period.
5.      Nomination facility:
Nomination facility is available at the time of opening and also after opening of account. Nomination made by the depositor may be cancelled or varied by submitting a fresh nomination. Nomination can be made in joint account also. In such case, the joint holder will be the first person entitled to receive the amount payable in the event of death of the depositor. The nominee’s claim will arise only after the death of both the joint holders.
6.      Pre-matured Withdrawals:
a] Premature withdrawal is allowed only on completion of one year. In case of premature closure there would be deduction @ 1.50% & after 2 years @ 1% of the deposit amount.
b] If the deposit is withdrawn within a period of 5 years of its deposit, the amount so withdrawn would be taxable in the year of withdrawals. It is advisable not to invest if investment could not be kept untouched till 5 years.
7.      Tax benefit, Taxability of Interest & TDS:
Interest income is not tax free. It would be taxable and would also be subject to Tax Deduction at Source (TDS) if interest amount is more than Rs. 10,000/- p.a. Investment under this scheme qualifies for the benefit of Section 80C of the Income Tax Act, 1961 subject to overall maximum cap of Rs. 1.50 Lack.
8.      Others:
a] Joint account under the SCSS, 2004 can be opened only with the spouse.
b] NRI & HUF’s are not eligible to invest in the accounts under the SCSS, 2004.
c] Loan facility is not available.
d] SCSS, 2004 can be opened in any post office, nationalized bank & one private sector bank, subject to overall cap of Rs. 15 Lakh.

Coming to specific issues raised in the query, it may be noted that
1.      Multiple deposits in the single account of SCSS is not permissible. But you can open new account for depositing the additional amount. Ceiling of Rs. 15 Lakh applies to all the accounts taken together.
2.      Amount deposited under SCSS, 2004 is eligible for deduction u /s 80C subject to overall cap of Rs. 1.50 Lakh.
3.      Interest on SCSS, 2004 is taxable.
4.      Initial lock in period of 5 years is there in SCSS.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
Nagpur-440008
or email it at nareshjakhotia@ssrpn.com]