Personal Finance
The NRI Returns
How does a non-resident Indian invest in the land of his birth without having to worry about the tax-man? BT dips into the Money Minder's mailbag to answer the FAQs with the facts.

By Larissa Fernand

Dear Money Minder,

I will soon be going abroad to take up a job. I have been given to understand that my status as a non-resident Indian (NRI) depends on a variety of factors. What are they?

Prospective NRI

Dear Prospective NRI,

There is still a lot of ambiguity regarding the status of a NRI since it is defined in different ways under the Income-Tax (IT) Act and the Foreign Exchange Regulation Act (FERA). While the first definition is for taxation purposes, and based on the number of days an individual stays in India, the fera interpretation--for foreign exchange and banking purposes--is based on the intention of your stay abroad. Under fera, you can open a Non-Resident External (NRE) bank account, or repatriate funds, only if the Act recognises you as an Indian citizen who has gone abroad for employment purposes.

Dear Money Minder,

You say the number of days of my stay in India will determine my NRI status under the IT Act, but the purpose of my trip abroad will determine my status under the FERA. Could you give me a detailed explanation?

Meticulous NRI

Dear Meticulous NRI,

You have to fulfil the following criteria to become a NRI: if you are going abroad for employment purposes, or to join a ship as its crew, then the minimum time that you have to stay abroad, within a year, is 181 days. The limit is the same if you are visiting India. However, if you have stayed in India for 60 days, or more, in the last one year--and 365 days, or more, during the preceding four years--then you are a resident of India.

Dear Money Minder,

That is complex enough. To add to that, I am told that there is an adjunct to my NRI status: a subsequent RNOR status. Could you tell me what that is?

Confused NRI

Dear Confused NRI,

The status referred to as Resident But Not Ordinarily Resident (RNOR)--a.k.a. NOR--can be best explained like this. Once you are a non-resident for one financial year, your status for the next financial year has to be decided all over again. This is again determined by the number of days you've stayed in the country. For example, if you have stayed in India for 181 days in the second financial year, irrespective of whether you have been employed or not, you will remain a non-resident Indian. If your stay exceeds 181 days, you will become a resident. Now, once you have already been a NRI for two consecutive financial years, and then spend 181 days in India in the third financial year, you remain a NRI. But, if you spend a day more in the country, you automatically become a rnor for the next nine financial years.

Dear Money Minder,

You speak of each financial year. What if I am returning to India for good, and am doing so in the current financial year, which causes my stay in the country to be longer than the minimum stipulation? Will I lose whatever tax-benefits I am entitled to?

Worried NRI

Dear Worried NRI,

You will. In fact, in the very first year that you are leaving the country, do so before the completion of 181 days from April 1--or else you will lose your NRI status. This, in effect, means that your total income for the year, including your foreign income, will be taxed. In the consecutive years, even if you have exceeded the staying limit, you can still escape the tax-net if you qualify for rnor status. Now, there is a loophole you can exploit: check if your stay in India during the preceding four years has not exceeded 364 days. Which will allow you to stretch the limit to 181 days. Or make sure that you qualify for rnor status.

Dear Money Minder,

I would like to open a bank account which will give me the facility of repatriation whenever I want. What do you think are my options?

Curious NRI

Dear Curious NRI,

There are three types of accounts that you can choose from: the NRE rupee account, the Non-Resident Non-Repatriable rupee deposit account (NRNR), and the Foreign Currency Non-Resident (FCNR) deposit account. Since you want the flexibility of repatriation, your choice is limited to the FCNR or the NRE accounts. The principal difference between these two accounts lies in who will bear the exchange rate fluctuation risks.

In the NRE account, once the foreign exchange is credited to your account, it is converted into rupees. But in the FCNR account, the money can be held only in a specific foreign currency. You can convert this into rupees if, and when, you wish to. In a NRE account, the exchange risk is borne by the depositor--not by the bank. But in the case of a FCNR account, since the freedom of conversion lies with you, the risk is borne by the bank. So, if the rupee is strong when the money is remitted to your account, you will lose as you get fewer rupees per dollar. Thus, in a FCNR account, you can hold on to your foreign exchange, and convert it only when the rupee depreciates.

Even if you do opt for a NRE account, avoid keeping your money in a savings account as the interest is only 4.50 per cent per annum. Go in for deposits of maturity periods ranging between six months and three years, where the upper limit is 12 per cent per annum for two years' maturity. For deposits beyond this maturity, the banks have total flexibility in determining the interest rate. As for the FCNR accounts, which also have maturity periods between six months and three years, the banks again have the flexibility of fixing the interest rate.

Normally, the interest rate depends on the foreign currency in which the money is held, with the US dollar, the Japanese yen, the German mark, and the pound sterling being the options available to you. The maximum that you will get for deposits above six months and upto one year is 4.50 per cent for the US dollar, 5.25 per cent for the pound sterling, 2.75 per cent for the German mark, and 0.50 per cent for the Japanese yen. For one year-and-one-day deposits, the interest rates are 5.75 per cent, 6.25 per cent, 3.50 per cent, and 0.75 per cent, respectively.

Dear Money Minder,

Different currencies earn different interest rates in a FCNR account. But do any of them offer as good an interest rate as a NRE account does?

Novice NRI

Dear Novice NRI,

Sure, the interest rate is much higher in a NRE account. But that does not mean that you are better off with a NRE account. In a FCNR account, you earn the interest in foreign exchange but, in the case of a NRE account, it is in rupees. If one dollar costs Rs 35, and assuming that you are getting 8 per cent on a one-year NRE deposit, your interest earnings on a Rs 35,000-deposit will be Rs 2,800 a year.

Assume that you deposit $1,000 in a FCNR account with a fixed rate of interest of 4.50 per cent. You will earn $45 as interest which, upon conversion, equals Rs 1,575. Thus, the amount in your NRE account will be Rs 37,800 while it will be Rs 36,575 in your FCNR account. However, you may lose a little while converting the rupee deposit in your NRE account into foreign exchange when you want to repatriate a part of the deposit.

Dear Money Minder,

Despite living, and working, abroad, I will still be earning some income in India since I plan to rent out my apartment, and also earn some interest on my investments. Where can I place this money?

Probing NRI

Dear Probing NRI,

You will have to pay income-tax on your earnings in India. And that includes the rentals, which will have to be deposited in the Non-Resident Ordinary (NRO) account. At the end of a financial year, a NRI can fill in the RC1 form, which will then have to be submitted to the regional offices of the Reserve Bank of India (RBI). Once the RBI approves your case, the designated bank branch will arrange for the remittance. But only the interest is remitted. So, your rental earnings will remain in the country.

You can earn interest on this, and after paying tax at source--at the rate of 30 per cent--the net interest income can be repatriated. When you open a NRO account, once again, avoid a savings account where the rate of interest is 4.50 per cent per annum, and opt for the term deposit, which will give you the identical interest rates that local deposits offer. This income, and the interest, is repatriable. But you can only repatriate the interest after paying a tax, which amounts to 30 per cent of the amount, at source.

Dear Money Minder,

I am going to be abroad only for a couple of years, and am not sure if I will be able to make frequent trips back home. Since I will be supporting my family in India, am I permitted to open a joint account with one of my family members? What will happen to the account when I finally return to settle down here?

Burdened NRI

Dear Burdened NRI,

As for a joint account, there are some limitations. If you open a NRE account, you cannot open it jointly with a resident. It can be jointly opened only with another NRI. Ditto for the FCNR account. What you can do is give a power of attorney to one of your family members so that he can operate the account. This is one area where the nrnr account scores over the other two. You can jointly hold it with a resident.

Once you come back to the country for good, you will have to transfer all your money from your NRE and FCNR accounts into an account known as the Resident Foreign Currency (RFC) deposit. The money in this account can be freely utilised by the account holder for making any remittances outside India. But this account is only meant for persons who will be going back. They can open this account for the same tenure as the last deposit account. Therefore, if you have a FCNR deposit for one year, you can keep the rfc for another year. After this period, the account will be automatically converted to a domestic account.

Dear Money Minder,

Real estate prices are at an all-time low right now. As a NRI, I would really like to invest my money in property. What happens if I want to sell my property when prices shoot up?

Calculating NRI

Dear Calculating NRI,

A wise move. But before you think of making a killing on this investment, let's get the basics right. Yes, as a NRI, you can buy property. And there is no limit as to how much real estate you can invest in. If you want to sell it, you are free to do that too. But if you want to repatriate the money you have realised from the sale, a problem arises. Only if you sell the property three years after you acquired it can you repatriate the money. Second, no profits from the sale can be taken out of the country.

Dear Money Minder,

I have heard that even if I invest in equity, there could be a problem since the company may not accept my offer as there are restrictions on how much a NRI can invest in any one company. Is that true?

Speculative NRI

Dear Speculative NRI,

There are certain limits to NRI investments in companies. As far as primary issues of shares and convertible debentures are concerned--which bring with them the benefit of repatriation of capital and income earned--the aggregate issue to NRIs for repatriation should not exceed 40 per cent of the size of the issue. However, the cap does goes up to 100 per cent if it is a priority industry.

As far as the secondary market is concerned, the purchase of shares in any one company by a single NRI should not exceed one per cent of the paid-up equity capital of the company. For all NRIs together, the overall ceiling for investment is five per cent, but this could go upto 24 per cent if the company so decides through a general body resolution.

Dear Money Minder,

Yes, but after all this huffing and puffing on the Indian bourses, can I repatriate any of the profits that I book? What is the tax liability? I am sure that I will be taxed on the income that I earn from these investments.

Prudent NRI

Dear Prudent NRI,

Sure you have the option of repatriation even if you invest in equity and debentures. You can either opt for the direct subscription route, which means that you can directly subscribe to public issues of companies. You do not have to bother about informing the RBI as the company is required to look into this aspect. Or you can designate a bank to handle all this for you. Even if the purchase and sale transactions are arranged by a stockbroker, all the transactions must be routed through a bank branch.

You have to pay taxes. NRIs have to pay an income-tax on dividend income (in the case of equity), interest income (in the case of fixed deposits or debentures), or long-term capital gains on the sale of shares. But they have the option to pay it at a flat rate of 20 per cent, or the tax paid by resident Indians--whichever is more beneficial.

So, if your income in India is likely to exceed the tax-exemption limit, and you cross the 20 per cent tax slab, then you might as well select the 20 per cent option. However, these investments should have been made either from fresh remittances from abroad, or out of the NRE or FCNR accounts. If you do avail of this 20 per cent option, your income-tax will be calculated separately for other taxable incomes. Incidentally, such investments are totally exempt from wealth tax as well as gift tax if you do decide to gift them. Welcome back home.