Bank deposit rates for Non Resident Indians (NRIs) have turned attractive after recent changes to interest rates. But NRIs may need to keep the following factors in mind while making investment decisions in India.
CHANGES IN THE DTC
It now appears unlikely that the new direct tax code (DTC) will come into effect in April 2012. But as and when it takes effect, it may result in changes to the method by which a person is determined to be an NRI.
The current tax law states that an Indian citizen who stays abroad for employment or is carrying on business for an uncertain duration is a non-resident. However, an NRI becomes a ‘resident' of India in any financial year, if he stays in India for 182 days or more. The added stipulation is that a person will be deemed as resident if he has also visited in India for 365 days or more in the preceding four financial years.
In the new DTC, the 182-day requirement has been reduced to 60 days. This change could impact the residential status for select NRIs, say tax experts.
“Under the Direct Tax Code, NRIs who have historically been spending significant time in India stand to become residents the moment their stay in India exceeds 60 days in the financial year” says Amitabh Singh, Partner, Tax & Regulatory Services, Ernst and Young.
A resident becomes ‘ordinarily resident' under the Income Tax Act if he was resident in India in nine out of the ten previous years and has been in India for 730 days or more during the seven years preceding that year. In such cases, even global income of these NRIs could be added to the Indian income.
“NRIs may have to go through a tie-breaker test if they become tax resident in India and are also tax resident in the overseas country. The tie-breaker test will help decide which country has the taxing rights and which country will give a tax credit” says Singh.
TAX IN THE HOME COUNTRY
A second factor that may have a bearing on NRIs is the tax incidence in their home country.
“Tax-free bonds or tax-free fixed deposits are beneficial only to NRIs who do not have to pay tax in the foreign country. NRIs should look at the post-tax yield taking their global tax liability into consideration and then decide. For example, an NRI who is a US tax resident will benefit more from a 12 per cent taxable bond than a 8 per cent tax-free bond because he will have to pay taxes in the US on his Indian sourced income” says Amitabh Singh. Effectively, NRIs need to compare post-tax returns, based on their tax rates at the foreign country.
In the case of countries with which India has a Double Taxation Avoidance Agreement, NRIs may be allowed to set off tax paid in India against taxes due in such countries. The effective tax rate will be at the higher rate, between the two countries.
RUPEE SWINGS
In addition to the tax effect, NRIs will also have to take a call on the rupee's direction while making Indian investments. Even if the interest rates happen to be high, an adverse currency movement can offset this at the time of maturity of the deposit. This is especially if the NRI plans to repatriate funds back home.
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