NRIs, PIOs cannot open PPF accounts

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

A Rediff India Abroad feature:

I have been a non-resident Indian for the last 21 years working in Africa. My income in India comes from various sources: Interest on Non Resident Ordinary account deposits, short-term capital gains and long-term capital gains on sale of shares through demat account and on mutual funds. All these investments started three to four years ago. As you may be aware, the gains are taxed at source and the balance is paid as net of WHT. During the last couple of years, I suffered -- like everybody -- substantial losses both on shares and mutual funds. I have not yet submitted my income tax return in India but am quite keen to do so in order to take advantage of the provision in the IT Act concerning setting off losses and/or carrying forward the same for some years. Is it possible to obtain the necessary information to submit my IT return using any of the regulatory authorities electronically, since I have a Permanent Account Number card?

-- Dr Y G Rao

In India, the fiscal year ranges from April to March, the income tax return for which has to be filed by July 31. Therefore, for FY 2009-2010, you will have to file the return by July 31, 2010. Short-term capital losses may be set off against short-term or taxable long-term capital gain.

Any long-term loss on sale of shares or mutual funds cannot be set-off since any long-term gain from those sources is tax-free. You may file your return electronically if you so desire. The detailed procedure for the same can be found on https://incometaxindiaefiling.gov.in/portal/index.jsp

My father, 83, is an NRI and also an Overseas Citizen of India under the provisions of section 7A of Citizenship Act, 1955. He has recently sold some Indian agricultural land which was given to him by his father. What would be his tax implications? Can he purchase with the same sale amount any other Indian housing or agricultural property in his own name or in the name of his wife who is Indian national or in the names of his NRI children? If yes, what are the limits? Can he, being an OCI, operate resident bank accounts in India, if he spends 182 days or more in India during a fiscal year?

-- Anil Kumar

1. Any agricultural land would be treated as a capital asset if it is situated within the jurisdiction of a municipality -- whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name -- or a cantonment board and which has a population of not less than 10,000 according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

Further, the scope for this purpose is extended to lands situated within 8 km from the local limits of these municipalities or cantonment boards and the federal government has notified such extended areas. Consequently, sales made of such agricultural lands would attract tax as capital gains. [CIT versus Shubhlata & Others 13TCR91 (1998)].

2. If he is exigible to the tax, he can make it exempt under Section 54F by purchasing a residential house in his own name. It is he who has earned the capital gains and not his wife or his NRI children. If the cost of the house is equal to or more than the sale proceeds of the agricultural land, then the entire tax will be exempt. If the cost is less, he can claim proportional benefit.

The tax on all long-term capital gains which are chargeable to tax can be saved by investing within 6 months the amount of capital gains in infrastructure-related bonds of the National Highways Authority of India or REC 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 per fiscal year.

3. There is a possibility that he can also earn exemption under Section 54B by buying another agricultural land. An NRI is not allowed to purchase any agricultural property in India. An OCI too is ultimately a Person of Indian Origin and hence not eligible to purchase agricultural land. However, the law is not clearly worded in this regard.

4. If he stays in India for 182 days or more he becomes a resident, and he will have to re-designate his NRI-related accounts into resident accounts.

My son had opened a Public Provident Fund account which is maturing next year. Last year he got his British passport. Can his PPF account be extended for the first block of 5 years? Can I deposit money in this account?

-- Santo

GSR 592(E) states that all NRIs -- including PIO like your son -- are not eligible to open PPF accounts.

The accounts opened prior to all these dates are allowed to run up to their maturity but no extension or renewal can be made.

As and when the irregularity comes to the notice of the authorities, the money will be returned to you without any interest.