x Abu Dhabi, UAEThursday 18 January 2018

India budget is all in the details

Union Budget proposals have relevance only for one year. On the other hand wealth we wish to create is for generations.

Women visiting from India, shop for jewelry at a store in Dubai. The budget has increased allowances for NRIs bringing gold into India. Gabriela Marj/Bloomberg
Women visiting from India, shop for jewelry at a store in Dubai. The budget has increased allowances for NRIs bringing gold into India. Gabriela Marj/Bloomberg

India's annual Union Budget, announced late last month, naturally will have relevance for just one year, soplanning for the longterm based on a federal government's short-term proposals might not seem so well advised.

That said, the federal budget has over the years provided initiatives that can help investors to make far-reaching decisions on their finances. It is thus useful to study the budget carefully for such measures.

On the surface, this year's budget does not elicit much excitement. Nevertheless, there are a few direct benefits that should be of interest to non-resident Indians (NRIs).

From a personal finance perspective, the distribution tax on dividends declared by a mutual fund under an infrastructure debt scheme has been reduced to 5 per cent.

Similarly, if an NRI deposits foreign currency in a designated bank and the funds are used to subscribe to long-term infrastructure bonds, then the withholding tax on it is 5 per cent.

Gold is dear to every Indian, and more so to NRIs returning home from the Arabian Gulf. The finance minister has increased the limit of the amount of gold that can be brought into the country.

An Indian residing abroad for more than a year can bring in gold (jewellery) worth 50,000 rupees (Dh3,366) in the case of a male and 100,000 rupees in the case of a female.

Apart from these benefits, another tax-related announcement that will affect NRIs is an increase in the dividend distribution tax (DDT) on mutual fund schemes. A number of NRIs have investments in debt-based mutual funds and monthly income plans.

Often, dividends from these schemes were used to support families back home. With an increase in DDT, net dividends received by investors will be reduced. However, NRIs can opt for a growth option while investing, and after a year request a Systematic Withdrawal Plan - thereby reducing the overall tax impact.

Next, the Securities Transaction Tax on equity-oriented funds has been reduced to 0.001 per cent. This will ensure a higher payout of sale proceeds from such funds upon redemption or liquidation.

Last, investors can expect some more tax-free bond issues in which an NRI can invest. Since DDT on a debt mutual fund and monthly income plans of mutual funds has been enhanced, investors may want to consider investing in tax-free bonds for generating regular income.

There are a few announcements in the budget that will ease the way investors make transactions in the future.

"Know your customer" regulations at banks will help in buying life insurance. This will save the hassle of cumbersome documentation requirements. It is hoped that a similar benefit will be extended to mutual fund investments.

Mutual fund distributors will be allowed to become members of stock exchanges and to help their clients invest. In the future, a distributor will be able to facilitate investment online and let clients hold units in dematerialised form.

There has never been a shortage of investment avenues for NRIs, whether related to the budget or otherwise. The problems usually start with a lack of administration of wealth that has already been created. This can often result in unanticipated losses.

Take this example of an expatriate Indian investor in Qatar. While he had substantial wealth, in most instances he had not informed financial institutions about a change in his status to NRI. Most of his mutual funds had his status as a resident Indian. Similarly, there were fixed deposits in which he had not informed the bank about his change in status.

This is a breach of India's Foreign Exchange Management Act (Fema) and is detrimental to the investor. Fema allows NRIs to repatriate certain categories of returns generated from investments, even if they were initially made from resident accounts, provided the account is subsequently designated a non-resident ordinary account.

But if neither the bank nor financial institution is informed about a change in status, then this facility cannot be used.

Finally, investors might want to heed the lesson from an Indian couple who moved to the Arabian Gulf a decade ago. For the first six or seven yearsthey lived in Dubai, then they moved to Oman. But they had not taken the trouble of informing their financial institutions about their change of address.

While they were conducting their transactions online, the mismatch in address proved to be a handicap.

These details can mean everything. Just like the details in this year's budget can offer unsought opprtunities in the short-term. Wealth creation is important, but what is more important is to conduct it in a manner in which its benefits can be used when needed.