Portfolio Investment Schemes for NRIs
My bank has informed me that as a resident Indian, I can
remit $100,000 abroad to a relative and additionally up to
$200,000 as a gift to any person. What is the:
1. Income tax liability of the person who remits $100,000
per financial year for maintenance of close relatives abroad.
2. Income tax liability of the donor who gifts $200,000 per
financial year to any person abroad and income tax liability of
recipient of fund (donee).
3. Definition/meaning of the term ‘close relative.’
An Indian resident can send up to $100,000 per financial
year (April-March) to close relatives abroad. Another
$200,000 per FY can be gifted (not necessarily to close relatives). There is no income tax liability that is attracted on the
donor. Obviously the donor needs to have acquired these
funds by legitimate means.
As far as income tax liability on the recipient is concerned,
it depends on the income tax laws of the country and tax
domicile that the recipient belongs to.
Close relatives means as defined under section 6 of the
Indian Companies Act. The section specifies an extensive list
of relations, which space constraints prevent us from reproducing. Suffice it to say that immediate family is covered.
I am a United States-based non-resident Indian. Four years
ago, I bought land. I plan to sell it and buy another plot. Do I
have to pay tax on the sale of the plot? The cost of the new plot
will be more than the sale price of the old plot.
Exemption from tax on long-term capital gains cannot be
claimed by reinvesting the sale proceeds of a plot of land in
another plot of land, unless both of these are agricultural
lands. In other words, the new asset cannot be a plot of land,
it has to be a residential house.
Such residential house has to be purchased either one year
before or within two years of the date of sale of the plot. You
may also claim exemption by constructing a residential
house within 3 years after the date.
You should not own more than one house (in India) on the
date of earning the capital gains. The new house has a lock-in of 3 years. If sold within the lock-in period, the corresponding capital gain is treated as taxable during the year of sale.
Tax can also be saved by investing within 6 months the
amount of capital gains in infrastructure-related bonds of
the National Highways Authority of India or Rural
Electrification Corporation under section 54EC. The lock-in
period is 3 years. The current interest rate is around 5.5 percent and this is fully taxable. The ceiling on this investment
is Rs 5 million ($94,000) per financial year.
My bank manager in India was promoting the bank’s
Portfolio Investment Scheme. I got a feeling he was not too
sure whether NRIs are allowed the same as an investment
and the tax aspect. The way I understood it, portfolio man-
agers undertake dealings in shares on behalf of clients result-
ing in short-term and long-term profits. Are these to be treat-
ed as capital gains?
Portfolio Management Fees are charged on basis of
increase in price of the shares, which is only notional. Can this
expense be treated as deduction from capital gains?
In a Portfolio Management Scheme, a person appoints a
portfolio manager to carry out his securities transactions for
which he pays specified fees to the portfolio manager. Unlike
a mutual fund, which has a specific exemption for its income
under section 10(23D), the Act has not conferred any such
tax benefit on a PMS. In such a situation, the PMS functions
merely as a pass through vehicle and the actual liability of tax
emanating from the securities transactions carried out by the
PMS is that of the individual owning the securities.
Normally, the gains from share transactions are treated as
capital gains. But in case of PMS, on account of the frequency and volume of transactions entered into on your behalf,
there could be a situation where the tax officer deems to tax
the same as business income (where the business is trading
in securities). There have been many cases where income
from PMS has been taxed not as capital gains but business
income — however, there is no set rule in this regard — each
case depends upon facts and circumstances.
As regards the PMS fees paid by you, you have a right to
deduct these from the PMS income. Unfortunately, it is a difficult exercise to allocate the fees to each transaction.
I am an NRI based out of the US (on a non-immigrant visa).
I plan to buy property in India. The property would cost about
Rs 6 million ($117,700). I would be paying Rs 4 million
($75,000) from my non-resident external/ non-resident ordi-
nary accounts and I plan to take the rest of money from my
family as a gift. Do I have to deposit this gift money in my
NRO account to pay the builder or can my family member
(who is giving me the gift) write a check to the builder? If I
have to deposit this gift money in my NRO account could
there be any kind of tax liability?
As per legal procedure, if the property is in your name, you
have to pay for it using funds from your bank account. If any
of your family members were to pay the builder directly, the
property, to the extent of the amount paid to the builder by
the family member, will belong to him/her. The correct procedure would be to receive the money from your family in
your NRO account and then issue a check to the builder.
As far as tax liability is concerned, the transaction would be
tax-free if the gift is received from a close relative. ‘Relative’
as per the Income Tax Act means
Brother or sister
Brother or sister of spouse
Brother or sister of either parents
Any lineal ascendant or descendant
Any lineal ascendant or descendant of the spouse.
Spouse of the persons referred in clauses (ii) to (vi).”
If you find that the family member(s) from whom the Rs 2
million ($37,500) is to be taken as a gift does not fall into any
of the above defined relations then it would be best to accept
the money as a loan instead of a gift.
Readers who wish to ask A N Shanbhag a question can
fill in the following details and mail the coupon to: The
Business Editor, India Abroad, 42 Broadway, 18th Floor,
New York, NY 10004
Or fax it to 212-727 9730
A N Shanbhag is an investment consultant and author of In the
Wonderland of Investment; How to Convert a Taxpayer into a
Taxsaver; NRI Investment Guide. This article does not constitute
tax or legal advice. Consult your tax or legal advisor before making
any tax- or legally-related investment decisions. The authors may
be contacted at firstname.lastname@example.org
Indian majors lead race for US drug ingredient market
As the battle for the generic market for off-patent drugs in the United States intensifies, Indian companies remain
at the top in filing drug master files with the
Food and Drug Administration.
Filing a DMF is necessary for third-party
sale of pharmaceutical ingredients in the US.
In 2012, drugs worth $35 billion went off-patent in the US, while the market size of
drugs which will see patent expiry in 2013
will halve to $17 billion.
As of the December quarter, 143 DMFs
have been filed with the FDA and the share
of Indian companies (70 DMFs) stands at 49
percent. The share of DMFs from India
touched a high of 51 percent in 2009, up
from 36 percent in 2005.
According to a report by Kotak Institut-
ional Equities Research, ‘Most of the filings
from Indian companies are targeted at rece-
nt or upcoming New Chemical Entity-1
DMF for NCE-1 can be filed at the end of
the fourth year from the date of approval.
Exclusivity for NCE is given for five years.
Among the Indian firms that have filed
DMFs in the last quarter, Biocon leads the
race with filing DMF for Rosuvastatin,
generic version of Crestor, one of the largest
selling anti-cholesterol drugs with annual
sales of $3 billion.
Dr Reddy’s is vying for the pie of Fingoli-mod, generic of Gilenya, a multiple sclerosis
drug with $750 million sales.
There have been additional filers for
upcoming NCE-1 opportunities — Alembic
(Febuxostat-$150 million), Cadila (Lacos-
amide-$300 million), Glenmark (Lacosam-
ide, Rufinamide), Lupin (Fesoterodine-$100
million), Ranbaxy (Lacosamide), Sun Pha-
rma (Fesoterodine, Febuxostat-$150 mil-
lion) and Wockhardt (Fesoterodine).