No tax exemption on capital gains from sale of land

A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answer your questions on NRI investment.

A Rediff India Abroad feature:

I am working in the United States. Meanwhile, I have received my Provident Fund from my previous company where I worked for 20 months in Delhi. This was credited to my NRO account by the EPFO. Currently my India earnings are at 30% tax and I received this credit in February 2009. Will the amount I received be taxed at the same rate? If I do not live or work in India in 2009-2010, can I pay the tax on the Provident Fund amount in the next financial year wherein the tax rate might be only 10%. Is this possible?

-- P T Joshi

The encashment of Provident Fund is tax-free only if the employee has rendered continuous service with the employer for five years. Else the receipt is taxable.

Since you have received the credit in February 2009, it will be taxable for the financial year 2008-09. You do not have the option of paying tax on this income in financial year 2009-10.

I purchased residential land in 2003 in Delhi and paid for this through my NRE account. Now I have sold this land. As it is more than 5 years old, the money got is classified under long-term capital gain. My family has deposited some of this money in my NRO account and plan to deposit the rest also in the NRO account later on. As I am going to reinvest this money in another land, as per Reserve Bank of India regulation I will get exemption on capital gain tax. Do I have to fill any form/declaration while depositing the money (capital gain) in my NRO account?

-- Grover

There is no exemption available on the capital gains arising out of sale of a residential land by purchasing another residential land.

You can claim the exemption under section 54EC, of the Income Tax Act, by parking the amount of capital gains arrived at after indexation into capital gains tax-saving bonds of REC or NHAI within six months from the date of sale of the land.

Note that there is a limit of Rs 50 lakh (Rs 5 million) per financial year for investing in the bonds.

You can also claim the exemption under section 54F by purchasing a residential house within two years or constructing it within three years by investing the entire sale proceeds.

Investment of lesser amount will earn proportional exemption.

I am an NRI living in New York and very recently bought an apartment in Mumbai. I took a loan from LIC Housing Finance Ltd and pay the EMI (equated monthly instalment) through an NRE account in India. I am still an Indian citizen and hold an Indian passport. If I rent out my apartment can the rent be deposited back into the NRE account as the finance of the flat is through NRE account only?

-- Srinivas Moghe

The rent cannot be credited to your NRE account but most certainly may be credited to your NRO account. Note that such rent would be subject to Indian income tax.

Income tax return needs to be filed if your Indian income including the rent is more than Rs 160,000.

I am a Canadian citizen and live in Canada. I have recently applied for the Overseas Citizens of India card. After I get it, I may like to invest some amounts in NRO fixed deposit accounts as the rates appear attractive.

Income from this interest will be my only income in India and it will be much lower than the latest exemption limit of Rs 160,000. I am, however, put off by the compulsory deduction of tax at source at 33 percent by the bank because I am certain that I shall never be able to get a refund of this amount, sitting so far away! My effective rate of return will be much lower and not attractive enough. I have three questions on this background:

1. What is the source or authority for this rate of 33%?  I had a look at the Finance Bill presented on July 6, 2009.  Part II Paragraph (1)(b) of the First Schedule, dealing with deduction of tax at source from persons who are not residents in India, does not give this rate nor does it speak of deduction of tax at source on bank interest. The type of income described in the case of residents as 'income by the way of interest other than interest on securities' is not mentioned at all in the case of Non-Residents. Why so? (Ditto for earlier years' budgets too!)

2. Will it be reasonable to treat NRO fixed deposit interest as 'investment income' attracting TDS (tax deduction at source) of 20% instead of 33%?  300 ITR 62 (AAR) supports this view.

3. Can I submit Form 15G to the bank, claiming exemption from TDS on the basis that my income in India is below taxable limit?

-- Kolhatkar

The source is the Finance Bill itself. The rate is taken from Part II Paragraph (1)(b)(i)(K) which specifies a rate of 30% on the whole of other income (other than the incomes specified in other clauses). The reason why such income is not split up into 'income by way of interest on securities' and 'income by way of interest other than interest on securities' could be because the law requires NRIs to pay a rate of 30% on their entire interest income regardless of the source thereof.

Regarding the AAR (Authority for Advance Rulings) order, the fact is that an AAR ruling is applicable to that particular assessee only and for that particular case. It is not the law and the bank cannot act based on an AAR ruling.

The law requires tax to be deducted at 30.9%. Earlier, if the interest was above Rs 10 lakh (Rs 1 million), TDS would have to be @33.99%. However, now that surcharge has been dropped, all interest will be subject to 30.9% tax. This is as per the provisions of Sec. 195 of the Income Tax Act read with Part II of the First Schedule to the Finance Act.

Unless the same is amended, the bank has no discretion in the matter and has to deduct the tax as specified under the law.

Form 15-G (for non-seniors) or 15-H (for senior citizens), requesting for non-application of TDS is also not available for NRIs.