Are you looking to return back home?

Watch out for the clause in Wealth Tax Act, highlighted in the new budget 2012

Wealth tax: A quick summary
All resident Indians are required to pay wealth tax and file a wealth tax return if their net wealth from assets exceeds Rs 30 lakh. ‘Assets’ in this case include land, property, jewellery, cars, aircrafts, yachts and cash in excess of Rs 50,000. For Resident Indians (Resident Ordinary Residents – ROR), wealth tax is payable on all these assets, irrespective of whether they are located in India or abroad.
For Non Resident Indians (NRIs), wealth tax is payable only on those assets that are located in India.

The new clause
A new clause has been added to section 17 of the Wealth Tax Act. This section deals with ‘wealth escaping assessment.’ Under this section, if a taxpayer fails to disclose certain assets and pay wealth tax on those assets, the assessing officer has the right to open the taxpayer’s returns for the last 4 years. In addition, if this net wealth that has escaped assessment is likely to be more than Rs 10 lakh, the assessing officer has the right to open returns for the last 6 years.
The intention of the new proviso is to bring to book all those tax evaders with significant assets in offshore locations or global tax havens.

Grey area
But this clause has a shade of grey. According to this clause, asset includes financial interest in any entity. That is, it could include shareholding in foreign entities. However, this inclusion of financial interest appears only in this clause. The main definition of ‘asset’ as defined in the Wealth Tax Act does not seem to be amended to include financial interest. One can only wait for clarity on this aspect.

NRE deposits hit 10-year high in Jan on rising rates, weak Re

Further to the article posted on 11^th March on is the rupee undervalued? The NRE deposits have hit an all-time high.

At a time when the government is looking for ways to attract foreign fund inflow, the spike in non-resident (external) rupee (NRE) deposit rates has brought some relief with non-resident Indians (NRIs) routing their savings substantially into NRE accounts.

While NRI fund inflow into NRE deposits in the month of January hit a 10-year high of $1.56 billion (over Rs 7,800 crore), the total inflow for FY’12 till January stood at $5.09 billion (around Rs 25,000 crore).

With data for February and March still to come, this is the highest-ever inflow in the NRE account in a financial year after FY’03 — when the net inflow stood at $6.19 billion.

NRE accounts are where NRIs can park their overseas savings that are remitted toIndiaby converting into rupee.

The surge in inflow can be primarily attributed to the move taken by the Reserve Bank ofIndiain December 2011 to deregulate interest rates on NRE deposits, following which banks raised their offering on such deposits from around 3.8 per cent to up to 9.5 per cent. The depreciation of rupee during the recent times also played a crucial role.

The rupee was trading at over 50 against a dollar till January, pushing investors to route their investment into rupee accounts to take the advantage.

Economists feel that even though this money is debt creating there is nothing to worry about since the composition of money has changed post liberalisation and also this is a stable source of funds.

Is the Rupee undervalued?

Votaries of a weak rupee point to the example of China which – to the rest of the world’s annoyance – has deliberately kept the yuan undervalued, forcing US legislators to consider officially declaring Beijing a ‘currency manipulator’. The comparison with India though is not valid. China is the manufacturing workshop of the world. Exports comprise around 32% of its GDP. Last year, it displaced Germany as the world’s largest exporter (with annual exports of $2 trillion). In contrast, exports account for only 18% of India’s GDP. A weak rupee does not help the other 82% of India’s economy. Quite the contrary: a current account deficit arising from an import bill of $460 billion (over 25% of Indian GDP) erodes the currency, pushes up inflation and lowers competitiveness.

A stronger rupee will not only trim India’s  trade and current account deficits and temper inflation, it will attract more FDI and FII. Today, foreign investors factor in a historical 4% annual depreciation of the rupee when computing their return on investment. Were the rupee to strengthen, dollar returns would rise concomitantly. Average central bank lending rates in the west and Japan are 0.25-3%. In India, the RBI’s repo rate, at which it lends funds to banks, has averaged 7.00-8.50% in the recent past. The gap mirrors precisely the historical annual depreciation of the rupee against the dollar. A stronger rupee would reduce that gap and bring India in line with advanced economies.

Wouldn’t Indian services – especially IT software – suffer if the rupee hardens? Service exports sell increasingly on quality, not price. Many (especially refined petroproducts and polished diamonds) have high import content. Besides, services include sectors such as foreign tourism that benefit from a stronger rupee. The biggest long-term beneficiaries of a stronger rupee would be India’s manufacturing productivity.

Cheaper imports would allow companies to ramp up foreign technology and build infrastructural and manufacturing assets. These, in turn, would lead to a spike in competitiveness, boosting exports based on quality, not marked-down prices. This would create a virtuous cycle of high productivity and quality allied with low inflation and deficits.

So what should be the value of a more muscular rupee? The Economist’s latest Big Mac Index shows that the rupee is undervalued vis-A -vis the US dollar by 61% while the yuan is undervalued by 41%. While The Economist’s Big Mac Index has, over the years, been a surprisingly accurate indicator of exchange rate trends, discounting The Economist’s index for India’s low-cost economy, the rupee is probably currently undervalued against the dollar by about 25%. A fair value of the rupee would, therefore, be just under 40 to a dollar. Our former finance minister, now prime minister, who 20 years ago said 25 to a dollar was fair value for the rupee in pre-reform India, might well agree.

How NRIs are benefiting from investing in Indian real estate

With real estate prices around the world sinking, investing in Indian real estate is ringing. This is the reality of the situation. Non know this better than the Non-Resident Indians (NRIs).

However, before venturing into investment in real estate in India, the Non-Resident Indians in particular should take care of the provisions contained in the Foreign Exchange Management Act as well as the Income-tax Act.

A fair knowledge of these two enactments will help the Non-Resident Indians to take a wise decision of investment in real estate keeping in view the provisions of law affecting such real estate investment.

As per the said Foreign Exchange Management Act an Indian citizen who resides outside India is permitted to acquire any immovable property in India other then agricultural/plantation property or a farm house. Thus, it is very clear that Non-Resident Indians enjoy almost all the privileges which are enjoyed by a resident Indian with reference to purchase of immovable property in India.

As per the said Foreign Exchange Management Act an Indian citizen who is a resident outside India popularly known as Non-Resident Indian has the permission for the following activities with reference to acquisition and transfer of immovable property in India :-

1. acquire immovable property other than agricultural land/plantation property or a farm house by way of purchase subject to the conditions regarding RBI rules mentioned in clause (a) of the Regulation;

2. acquire any immovable property other than agricultural land / plantation property / farm house by way of gift from an Indian citizen resident outside India or from a PIO;

3. acquire property by inheritance;

4. transfer by way of sale any immovable property other than agricultural / plantation property of a farm house by way of sale to a person resident in India;

5. transfer agricultural land / farm house or plantation property way of gift or sale to an Indian citizen resident in India;

6. transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India.

Before making any investment in real estate the Non-Resident Indian should very carefully prepare the basic objective or the purpose of making investment in real estate sector in India.  Is it for investment in real estate or acquiring a residential property for self use.

 

Purchase of Property by NRI for Self Use

The Non-Resident Indian can make investment in a residential property for his own use.  This property can be in the form of ownership flat or it could be in the form of buying a piece of land and constructing a house thereon.  In both the situations it is of advantage for a Non-Resident Indian to make investment in a residential self-occupied property by taking a loan.

The Non-Resident Indian would be very happy to note that if he takes loan for a self-occupied house property, then he would enjoy a deduction from his Indian income in respect of interest paid on loan taken for such self-occupied residential property. This loan can be taken either from the bank or financial institution so also the loan can be taken from any member of the family or friend or relative. The maximum deduction in respect of interest on loan that is allowed for self occupied house property is Rs. 1,50,000.

Similarly, as per the provisions contained in section 80C of the Income-tax Act, 1961 within the overall deduction of Rs. 1 lakh the Non-Resident Indian just like a Resident Indian would also enjoy deduction in respect of repayment of the housing loan for self occupied property. However, the deduction for repayment of the loan would be permissible only in respect of loan taken from bank, financial institution etc., etc. Hence, whenever the Non-Resident Indian is contemplating to purchase a residential house property for self use, then surely the best investment strategy would be to take loan and make investment in your lovely self occupied house property.

Real Estate Investment for Rental Income

The Non-Resident Indian can make investment in a residential property or in a commercial property with the objective of receiving a regular flow of rental income. The provisions of taxing rental income are simple, easy and investor friendly.  Broadly speaking, from the rental income derived by a Non-Resident Indian deduction is available in respect of actual payment of house tax as also a special 30 per cent deduction is available towards repairs, maintenance and collection charges of the property.

This special deduction is permissible irrespective of the fact whether you spend on the repairs or you do not spend on repairs.  Thus, this is a big deduction available from rental income which is instrumental in cutting down the tax payment by a a Non-Resident Indian on rental income.

Another important feature of taxation relates to complete deduction without any upper limit of the interest paid by the Non-Resident Indian for purchase of property which is given on rent.  Thus, the entire interest payment for purchase of property which is given on rent is allowed as a deduction from the rental income.  This is a great big advantage.  Hence, it is worthwhile for the Non-Resident Indian to make investment in real estate specially the real estate acquired for receiving a fixed flow of rental income by taking a loan for such purchase.

 

Taxation on NRI accounts

There are different types of bank accounts that are used by Non Resident Indians (NRI) and the two most common ones are the Non Resident Ordinary (NRO) and the Non Resident External (NRE) bank account.
There are different ways in which the money can be handled in these accounts in terms of the repatriation of the amounts and there is also a tax angle that will have to be considered for the individual non resident when they earn income from these account. With several changes recently with respect to these accounts it is important to take a close look at the position.

Nature of account
The NRO savings bank account is a rupee account usually consisting of money earned in India before or after becoming a NRI. A specified amount is repatriable abroad from this account for specific purposes. This is the reason why most of the income that is earned in India can be put here. On the other hand the NRE savings bank account is meant for fund that would be repatriated and hence the amount of the contribution to the bank account also comes from outside earnings in foreign exchange.
The principal as well as interest on the account is repatriable. This account is also present in rupees so there is a currency risk that is present at the time of transfer of money. There are two types of accounts where the amounts can be invested and the first one is the savings account mentioned above. Further the investor can also ensure that there are fixed deposits that can be put with the bank so these will offer an additional investment opportunity for the individual Non Resident Indian.

Interest rate changes
One of the major changes that have been witnessed in the account in recent times is that the interest rate on the NRE fixed deposits has been decontrolled. This means that the banks are free to price the deposits as they deem fit and the immediate impact of this has been that the rates have shot up to over 9% in most cases. This is a significant rise for the investor and they will be able to ensure that there is a good return that they are getting on their investment. While there is this kind of benefit that is present a need is also present to take a careful look at how the taxation will work out.

Tax free
What will come as a bonanza for the non resident investors is the fact that the income earned in the form of interest from the NRE accounts are tax free in their hands. There is no taxation on the interest that is earned here and for this reason there will also not be any Tax Deducted at Source (TDS) on the income earned here. This is a good thing because the individual will be free to ensure that they are investing what they want into the deposits and there is no tax element that they have to worry about.
This reduces the situation of having to claim back amounts from the government as refunds after filing the tax return. The interest earned on the savings bank NRE account as well as the fixed deposit NRE account will be tax free for the investor.
On the other hand when it comes to the NRO account the amount that is earned here is taxable. So the first thing that the NRI has to plan for is the fact that any income from such accounts will have to be included in the tax working. In many cases the fact that the income is taxable might not be such a major point because the total income earned by the NRI and taxable in India might not be very high so they might not have to pay tax.

However there will be a TDS that is done on the account and hence there could be a situation where the NRI will have to go and get a refund of the amount that they have faced as a deduction from the government. This will be done only when they file a return with the necessary details and the amount will be refunded back to them.

Interest Rate Arbitrage

Arbitrage, within the context of financial markets, refers to the practice of trading on, and profiting from, a current or expected inconsistency in the pricing of an asset or group of assets. It is, in precise terms, leveraging on the difference between the price or the value of a security in two markets.

Considering the continuous rise of the US $ as compared to INR, Interest Rate Arbitrage is becoming one of the most potent tools used by HNIs, FIIs and NRIs to milk the interest rate difference between the US emerging markets like India

The rising dollar rate versus the rupee has created a lot of arbitraging opportunities. NRIs remit more to earn extra buck for their hard earned money. The basic fundamental here is to borrow money in dollars and lend the same in Indian rupees to gain from the difference in interest rates. The larger the difference, the possibility of earning may be higher.

The FCNR rate for NRI deposits has increased by 125 basis points (Libor+125 basis points) effective from November 23, 2011, thus encouraging NRIs to open deposits in India.

With domestic interest rates hardening even as fixed income returns fall globally , there is a sudden spurt in remittances from non-resident Indians (NRIs) seeking to arbitrage between local and international rates. Indians are borrowing overseas at low rates and are remitting funds in India for investments. As on June 30, total NRI deposits on various banks was pegged at $53 billion. With the rupee depreciating over 18% in the last six months, non-residents are getting more for the dollar than ever before

Banks to offer higher returns on NRI deposits to lure dollars

A runaway currency has pushed the Reserve Bank of India to make interest rates more tempting for NRIs to bring in dollars. As the rupee closed at a new low on Wednesday,RBI allowed banks to offer higher return on dollar as well rupee deposits parked by NRIs. Banks can now give 125 basis points over London Inter-bank Offered Rate, or Libor the benchmark rate in international money markets on foreign currency non-resident accounts against a mark-up of 100 basis points permitted till now.

On non-resident (external) or rupee deposits, the interest rate cap has been raised to 275 basis points over Libor, from 175 bps. “It will help to improve sentiment,” said Parthasarathi Mukherjee, president (treasury and international Banking) at Axis Bank. The six-month Libor is at 0.71%.

Earlier in the day, the rupee fell to a low of Rs 52.37 to the dollar, but recovered to an intraday high of Rs 51.75 on suspected dollar sales by the Reserve Bank of India. But despite intervention and the central bank’s move to lift the $100-m cap on banks for swap, the local currency ended at 52.37.
Such swap transactions, where corporates enter into deals with banks to swap rupee loans to dollar, banks sell dollar in spot market and buy in forward. But the market did not feel that this will help to increase dollar supply. Global stock markets plunged to a six-week low on Wednesday after China’s manufacturing activity in November dropped to a 32-week low, contributing to existing worries about US economic growth and Europe’s debt worries.

Tracking the weakness across markets, India’s key indices hit a two-year low as foreign investors dumped shares, unnerved by the uncertainty in the rupee’s slide which closed at a record low of 52.37 against the dollar. The Sensex dropped 365.45 points, or 2.27%, to end at 15,699.97, but off the day’s low of 15,478.69.

The Nifty fell 105.90 points or 2.20% to close at 4706.45. Brokers said several foreign ETFs, which are facing redemptions at home, were selling aggressively.
Stop-loss triggers at many hedge funds and foreign banks set off after the Nifty fell below 4700 mid-way through the session, precipitating the decline. But for the short-covering later, indices would have ended much lower. Foreign investors sold shares worth Rs 1186.42 on Wednesday, according to provisional data.

“Investors in India are more worried about the domestic events than the issues in the US and Europe. There is a total chaos in the currency market, with no uncertainty about where the rupee is headed,” said Sandip Sabharwal, CEO-portfolio management services of broking firm Prabhudas Lilladher.
Finance minister Pranab Mukherjee on Wednesday attributed the stock market crash to withdrawal of funds by foreign investors and depreciation of the rupee.

“The rupee’s underlying fundamentals still appear weak to us, especially the absence of yield support at this important moment for the currency. Indeed, there is the outside chance of an onshore USD squeeze being the catalyst which propels USD/INR to the 54.8 technical objective,” said Stewart Newnham and Yee Wai Chong, analysts at Morgan Stanley.

The decline on Wednesday pushed the Nifty below the 200-week moving average of 4776, analysts said. “This is a sign of further weakness in the market as this is a long-term trend indicator,” said AK Prabhakar, senior VP, Anand Rathi Securities. The MSCI Asia Apex fell 2.5% after the indications of weakening in China, the world’s secondlargest economy, came a day after the US cut its Q3 growth figure.

China’s preliminary HSBC manufacturing Purchasing Managers Index fell sharply to 48.0 in November compared with a final reading of 51.0 in October. The euro fell 1% after Belgian newspaper De Standaard said that the planned rescue of Franco-Belgian bank Dexia is unworkable.

The report triggered worries that France’s AAA credit rating may be under threat. Report said the European crisis is making it tough for European banks to access dollar funding in money markets. Euro/dollar cross currency swaps, which measure the cost of swapping euros into dollars, are at the most expensive levels since 2008, according to reports.

Source:- Economic Times

Banks flush with NRI deposits

With the rupee trading above Rs 50 against the dollar, remittances from non-resident Indians are surging. In October, the local currency was trading at around Rs 45. Banks like Kotak Mahindra Bank is witnessing a 40-50% y-o-y growth in remittances, while other smaller banks are seeing their NRI deposits growing by 10-30%. The spike in remittances is also partially attributed to the financial crisis in Europe and political unrest in West Asia.

With the rupee breaching the 50-mark, deposits in dollar accounts such as foreign currency non resident account bank schemes (FCNR) (B) have earned an annualized 40% return. To make it sweeter, such accounts can now be held in freely convertible currency. Currently, currencies designated by the Reserve Bank include dollar, pound sterling, yen, euro, Canadian dollar and Australian dollar.

Kerala-based banks have been the biggest beneficiaries of the remittance windfall. Nearly 21% of the deposit base of Federal Bank is accounted by NRIs. For the second quarter, the bank has seen a 30% growth in NRE (non resident external rupee account) and FCNR accounts. “Nearly 7% of pan Indian remittances come through our bank and the rupee weakening has given a further boost,” says A Surendran, head, international banking, Federal Bank. The bank is expecting a 30% growth in its non resident business this fiscal.
Similarly, the non-resident deposit business of South Indian Bank has grown by 20% for the half year ended September 2011. To top that, many Indian banks had offered a 9% deposit schemes at the beginning of the year and with NRO (non resident ordinary rupee account) rates pegged to domestic rates, banks saw a heavy flows into such accounts. For instance, Tamil Nadu’s Karur Vysya Bank has seen a 12% growth in its NRO deposits quarter-on-quarter this fiscal. “NRIs are resorting to arbitrage on account of a weaker rupee and better interest rates on deposits in India when compared to banks abroad,” says N Venkataraman, managing director and chief executive officer, Karur Vysya Bank.

Importantly, the role of NRIs in the Indian banking system has widened. “They are looking at multiple benefits and not just windfalls from exchange rate fluctuations. This includes opportunities for investment in real estate and mutual funds,” says Praveen Kutty, head, retail and SME banking, Development Credit Bank. DCB has seen a growth of 20% in non-resident deposits q-o-q this fiscal and nearly 10% of the retail deposit base of the bank is accounted by Indians abroad. To cash in on such investment opportunities, South Indian Bank has launched portfolio management services for NRIs in association with Geojit BNP Paribas.

“Unlike the previous generation, many of the present generation living abroad are looking to return to India at some point. They are making investments in apartments and so nearly 50-60% of their savings gets channelized to India,” says N Kamakodi, chairman and managing director, City Union Bank.

It’s also profitable to have NRI customers as the average balance maintained by such customers in savings bank and term deposits is much higher than their domestic counterparts. While average balances in CASA of Indian account holders are Rs 35,000, NRIs tend to park over Rs 1 lakh in NRO and NRE savings accounts.

 
Source:The Times of India

Advantage for NRIs

The Reserve Bank on Wednesday said Indians who have non-resident accounts in the country can now hold them in any currency which is fully convertible.

The move is likely to help NRIs/Persons of India Origin as it will give them more options in the holding of accounts, and lessen the risk from fluctuations in major currencies.

Earlier, FCNR(B) account holders were allowed to hold accounts in only certain currencies such as the Pound Sterling, US dollar, Japanese yen, euro, Canadian dollar and Australian dollar.

“…it has been decided that Authorised Dealer banks in India may be permitted to accept Foreign Currency (Non-Resident) Account (Banks) deposits in any permitted currency.

It may be noted that ‘Permitted currency’ for this purpose would mean a foreign currency which is freely convertible,” RBI said in a notification.“The Committee to Review the Facilities for Individuals under Foreign Exchange Management Act, 1999 in its Report has recommended that FCNR(B) accounts may be permitted to be opened in any freely convertible currency,” RBI said.

RBI also said that any citizen who was earlier residing in a foreign country can own or transfer property or other assets in that nation if it was acquired during the time of his residence there.

“… a person resident in India is free to 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,” RBI said.In a clarification issued by it regarding repatriation of income and sale proceeds of assets held abroad by NRIs who have returned to India permanently, RBI said an investor can retain and reinvest the income earned on investments made under the Liberalised Remittance Scheme.The bank said that clarifications are as per relevant sections of the Foreign Exchange Management Act of 1999.

Source: The Hindu

Surge in remittance as rupee hits 2-year low

With the Indian rupee continuing to decline against a dollar-pegged dirham, money transfer companies in the UAE recorded brisk business, with remittance volume surging by 20 pc over the past two weeks. On Wednesday, the rupee ended weaker after dropping to its lowest level in over two years as investors reduced their exposure to risk ahead of the US Federal Reserve’s policy meeting, where it is expected to unveil steps to revive a flagging US economy.

The partially convertible rupee ended at 13.6 per dirham or 48.325/335 per dollar, 0.58 per cent weaker than Tuesday’s close of 48.05/06 and after touching 48.34 intraday — its weakest since September16, 2009. The rupee has declined almost 10 per cent since it recent peak on July 27 when it was trading at 44 per dollar.

On Wednesday, the rupee opened stronger at 47.99 per dollar and rose to 47.8375 driven primarily on expectation of robust dollar inflows, traders said.

A flagging euro and choppy domestic equities, which slipped 0.2 per cent in volatile trade, added to the rupee’s woes, and market analysts predict that if the eurozone financial issue persists, the Indian currency will cross the two-year low of 48.47 per dollar and head further south to hit 50 per dollar.

In 2010, remittances by the UAE-based migrant workers grew 11 per cent to $10.54 billion from $9.51 billion in 2009. Total expatriate workers’ remittances from the GCC rose to $63.75 billion in 2010 from $60.03 billion in the previous year, according the World Bank, reached $325 billion from $317.23 billion in 2009.

The International Monetary Fund predicted that outward remittances from the GCC, which has over 12 million expatriates, are estimated to reach $74.9 billion in 2011. India, the largest recipient country, in terms of both global and GCC remittances, accounts for roughly 50 per cent of money transferred from the Gulf, estimated to be between $25 and $30 billion in 2010.

Source: GulfNews