Tag Archives: Alternate Investment

Capital Gains tax for NRIs- It’s not that simple

As an NRI, you would have wondered many times, what parts of your Indian Income are taxable and what are not and trust me you are not alone.

Under the Indian Income tax act, the tax rates, deductions from income, exemptions from taxation all change depending on the nature of income and residential status of the individual. With the ever changing tax provisions, even if you searched online the chances of finding the information you are looking for would not be easy and filtering out the tax provisions that are applicable to an NRI is even more difficult.

Not being able to find consolidated tax provisions on common investments used by NRI’s I decided to compile the information myself and hope that fellow NRI’s will find it useful.

NRI’s mostly invest in Fixed Deposits, Bonds, Mutual Funds, Stock and Property which would generally give rise to income under Capital Gains or Other Income (Bank Interest or Dividends) under the Indian Tax laws.

I have tabulated the provisions that an NRI should be aware of for FY 2017-2018 (click on table to open in new window)

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One of the most interesting things to note is that the basic tax free exemption is not available to an NRI on Equity Investments.  What that means is that if an NRI gained 2,50,000 Rupee by investing in stock market the whole 2,50,000 Rupee is taxable. If these gains are long term (asset held for more than 1 year) then there is no tax liability but for short term gains the tax rate is @ 15%. So an NRI would pay Rs.37,500 in taxes, the income would not attract any tax in hands of a resident Indian.

Another interesting fact to note is that the gains on redemption of Sovereign Gold Bonds are not chargeable to tax if held till maturity.

With difference in tax rules being different in different countries an investor should consider the tax domicile of the investment to maximise returns. In Singapore and Hong Kong the Capital gains, Bank Interest and Dividends are not taxable, however in USA and UK these income are taxable.

For example if an NRI bought a mutual fund in India that returned 20% over a period of 6 months then his gains would be taxed at a flat rate of 15% resulting in a post tax return of 17%. Buying this same fund in Singapore would have been as the gains are tax free and the investor pays no tax.

Similarly for bonds the interest is taxable in India and taxed at the marginal rate based on your income bracket but tax free in Singapore and Hong Kong.

E.g . An NRI whose total income is over Rs. 10 lac (30% tax bracket) buys a bond that pays 9% interest p.a. The post tax yield of this investment would be 6.3% . Add to it the cost of transferring funds to India of around 0.8%, the yield drops to 5.5%. If the plan is to remit the money back to Singapore on maturity, which will cost another 1%, the investment would yield 4.5% only.

These are just 2 examples to get you thinking. There innumerable scenarios that I can come up with based on different countries of residence and each individuals tax profile. All I would like to highlight is that an investor should not underestimate the impact of taxation and ancillary costs while making investment decisions and look at all aspects before making an investment decision.

Watch out for an investment comparison tool that I am working and will post it here very soon. Till then keep reading and sharing.

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Tax Free Bonds: Better than NRE FD’s

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Yes, you read it right! Tax free bonds are better than NRE Fixed deposits.

After all these years of recommending NRE FD’s as the safest bet for investing in India, I am changing my recommendation to Tax free bonds (in no particular order) by IREDA, NHAI, NABARD, REC and HUDCO.

Lets compare the bonds to the NRE deposit

1. NRE Fixed usually give the highest rate for a lock in of 2 or 3 years and are averaging between 7.8% to 8.2%, which means that the reinvestment on maturity would be at the prevailing interests rates.
2. NRE deposits have a penalty in case of pre mature withdrawal
3. Interest on NRE deposits is tax free

A Tax free bond on the other hand is giving a 7.64% for a period of 15 years (NABARD which opens tomorrow – 9th Mar 2016) in retail category (less than 10 lacs) or half a percent lesser for amounts exceeding 10 lacs.

You must be wondering why am I recommending the bonds when they give lesser interest and are tax free like the NRE FD? The Central Bank interest rates across the world are going down and India has already had a few rate cuts which makes these Bonds attractive. As the interest rates will be reduced the value of these bonds will increase (capital appreciation) . These bonds are more liquid than a FD as they are traded on the stock exchanges which means that one can sell the bond without incurring pre mature withdrawal penalty in case of FD. Further for a slightly lesser interest rate these bonds let you lock in a higher interest rate for next 15 years.

If this has not convinced you then let me tell you the most important reason why I am recommending these bonds – interest on NRE FD’s becomes taxable if a NRI returns to India. Depending on the individual residency criteria in section  6 of the Income Tax of India on return a NRI becomes a Tax Resident in 6 months to 2 years, upon which the NRE accounts are converted to a Resident Rupee Account, which means that any interest that accrues on your NRE account after you become tax resident becomes taxable.

These bonds on the other hand assure tax free income for next 15 years from the date of allotment.

Now the fine print – not all bonds are open to NRI’s for investment, however if you have a resident bank / brokerage account you could use that to apply for these bonds and / or purchase them from open market and benefit from capital gains and long term tax free interest income.

Postal Stamps: A long forgotten treasure

It had been years since I had looked at my stamp collection and while on vacation this year I wanted to spend some time ensuring that the stamps were still there and in good condition.

Collecting stamps was a childhood hobby and maybe something that was passed down the family (at-least in my case) – my Grandfather, Father, Uncle had all all indulged in stamps at some point or the other in their lives. As a kid I always wanted to have all stamps from all countries and felt the collection I had was not big enough – in retrospect I could nor be more wrong.

So on the second day of my holidays I pulled out the case with all my stamps.I must say it was pretty heavy (much heavier than what I had imagined) – There were many albums filled with stamps, first day covers, miniature sheets, postcards and various other postal items. There were stamps from Russia, China, America, Britain, Hungary and of-course India. Browsing through the collection I felt like a little kid who has been left in a candy store – everything was so pretty and brought back memories of childhood.

Having some time on hand I decided to catalogue the collection for future reference and started with the slow process of noting everything on a spreadsheet. The real challenge was to keep myself focused and not get carried away admiring the stamps. After many hours I had finally listed all the indian stamp sheets that I had and this was just a small portion of the overall collection.There were quite a few stamps of which I had more than one sheet and out of curiosity I thought of why not selling off the extra stuff to buy more stamps (once a collector, always a collector).

So here I was checking the listed prices of my extra stamps on auction sites – and what I saw was nothing short of complete amazement!!

Most stamps had shot through the roof and were selling at 50-100 times the face value.

It was hard to believe what I was seeing and initially I just brushed it aside as people ask crazy prices, but having seen the valuations I had to dig around a little more – after all, this could be a lot of money and what I found left me wide eyed. The prices I was seeing were transacted prices.

The stamp sheet from my collection that had appreciated the most were from 2003 – Aero India and Temple Architecture of India

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The temple architecture sheetlet set had 5 sheets which I had bought for Rs.80 each (~1.25USD) and they now commanded a price of Rs.10,000 each (~165USD) a massive 132 times appreciation in 10 years – yielding me a 55% annualised return.

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Similarly the Aero India sheet set o 4 sheets with a face value of Rs.600 (~USD10) was valued at Rs.40,000 (~670) an annualized return of 40%

Just as with China the valuation of Indian collectibles increased with the general growth in the country. I also found an old stamp from China which was valued at $50 in the international market and was again baffled to see that one could get upto USD 3000 for the same stamp in Mint condition (unfortunately mine was cancelled and used)

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Having looked at the valuation of some parts of my collection I am all re-convinced about stamps as an alternate investment. As with any investment there are risks and for stamps the 2 biggest risks are lack of liquidity and risk of destruction – after all they are delicate pretty thing on paper.

Next I had a look at some coins and they took me on another roller coaster ride of awe and disbelief, but that is for another post..,