MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

I presently live in the US and have my investments in India. Could you share information about how non-resident Indians get taxed in India?

- Amit Prajapati

If we talk about taxation on mutual funds for non-resident Indians (NRIs), they are taxed in a way similar to resident Indians. From the taxation viewpoint, there are two factors based on which an individual gets taxed. One is the type of investment i.e. equity or non-equity and the other is the holding period of investments i.e. long-term and short-term. For equity investments anything above one year is deemed as long-term and below one year as short-term and for non-equity investments anything above three years is deemed to be long-term and anything below three years as short-term.

The table above clearly shows that for resident Indians the tax implication on long-term equity is 10 per cent on gains exceeding Rs 1 lakh and 15 per cent on short-term capital gains. The same also holds true in the case of NRIs. However, when it comes to tax implications on long-term gains from non-equity investments, things are somewhat different. In case of resident Indians, 20 per cent tax is levied on the gains after accounting for indexation but in case of NRIs the tax implications further depend on investments made in listed non-equity securities or unlisted non-equity securities. If investments are made in listed non-equity securities, 20 per cent tax is levied on the gains after accounting for indexation.

However, if investments are made in unlisted non-equity securities, 10 per cent tax is levied without any indexation benefit. When it comes to mutual funds, not all of them are listed. TDS is applicable for NRIs. Further, there are chances of double taxation for those people staying in countries where India has signed the Double Taxation Avoidance Treaty (DTAA). However, this won’t be applicable for you as you are presently staying in the US. More details can be obtained from the person you may have delegated the power of attorney. If you have not assigned any power of attorney, we recommend you to have one. In fact, you can also appoint a financial planner with the power of attorney so as to make your investments and taxation more effective.

I have a PPF account and it will be completing its extended period of five years soon. I am a retired individual and am holding the PPF account in order to use the amount as additional income. So, should I extend it for another block of five years without contributing anything and withdraw the required amount annually or should I close my PPF account and invest in debt funds?

- Rishikesh Ahuja

We recommend you not to close your PPF account and you should also consider extending it for another block of five years wherein you are also allowed to withdraw once a year. Interestingly, PPF is currently yielding a return of 7.1 per cent per annum, which is quite good looking at the current interest rate scenario in the banking sector. Moreover, these returns are completely tax-free. It is one of those avenues which enjoy the exempt-exempt-exempt (EEE) status. On the credit risk front, as this is backed by the Government of India it carries sovereign rating and is free from any credit risk. Thus, PPF offers safety along with reasonable liquidity in its extension period.

Considering you are a retired individual, we would suggest you to stick with your PPF investment and keep drawing from it annually. That said, despite being a retiree we would suggest you to have some allocation to equity as you might end up surrendering to inflation. Hence, investing in equity would help you to beat inflation in the long term and help sustain your retirement corpus for longer. Moreover, in equity you can purely stick to index funds as this will help you earn market returns. A proper retirement plan is advisable. This will help you in understanding you cash flows and also help plan for your financial goals systematically.