Can Indians Invest Abroad Without RBI Approval?

One of the American company is offering me some shares under ESOP. This company is not listed in India. It is listed New York Stock Exchange.My worry is how this transaction will took Place? If I want to sale these shares how I will Sale It. ? Please reply at the earliest.Parag

You have nothing to worry about. RBI had already allowed purchase of shares of foreign companies listed abroad under ESOP without any kind of restriction. The remittance of foreign exchange required for purchase of these shares by employees of the company which was issuing shares under ESOP was without any limit.

But the real good news for all Indian residents has come recently when the RBI under Liberalized Remittance Scheme allowed all resident Indians to invest abroad in whatever things like except prohibited items upto US Dollar 2,00,000 (increased from 1lakh Dollar to 2 Lakh Dollar recently ) in one financial year. So now an Indian resident can approach its bank for remitting US Dollar 2,00,000 for following types of investments

• Bank account abroad.
• Immovable property
• Shares ,Bonds and other financial instruments.
• Paintings and all other types of assets.
  

These Liberalised Remittance Scheme has been told in FAQ manner by Reserve Bank Of India on its site . The FAQ consist of 16 questions which has lucidly been explained by RBI are given as under :

Q1. Provide an illustrative list of capital account transactions permitted under the scheme?

The remittance under the Scheme is available to the resident individuals for any permitted current or capital account transactions or a combination of both. Under the Scheme, resident individuals can acquire and hold immovable property or shares or debt instruments or any other assets outside India, without prior approval of the Reserve Bank. Individuals can also open, maintain and hold foreign currency accounts with banks outside India. However, it was clarified that remittance from India for margins or margin calls to overseas exchanges / overseas counter party are not allowed under the Scheme.
The remittance facility under the Scheme is also not available for the following:

i) Remittance for any purpose specifically prohibited under Schedule-I (like purchase of lottery/sweep stakes, tickets proscribed magazines etc) or any item restricted under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.

ii) Remittances made directly or indirectly to Bhutan, Nepal, Mauritius or Pakistan.

iii) Remittances made directly or indirectly to countries identified by the Financial Action Task Force (FATF) as “non co-operative countries and territories” from time to time.

iv) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.

Q2. Whether this facility is in addition to existing facilities detailed in Schedule III under remittances?

The facility under the Scheme is in addition to those already available for private travel, business travel, studies, medical treatment, etc as described in Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000. The Scheme can be also be used for these purposes. However, gift and donation remittances cannot be made separately and have to be made under the Scheme only. Accordingly, resident individuals can remit gifts and donations up to USD 100,000 per financial year under the Scheme. [Taxworry adds : read 1 lakh as 2 lakh now ]

Q3. Whether resident individuals under this Scheme have to repatriate the accrued yield on deposits/investments abroad, over and above the principal amount?

The investor can retain and reinvest the income earned on investments made under the Scheme. Currently, the residents are not required to repatriate the funds or income generated out of investments made under the Scheme.

Q4. Whether remittance under the Scheme is on gross basis or net basis (net of repatriation from abroad)?

Remittance under this scheme is on a gross basis.

Q5. Whether minors can also avail of the remittance facility?

The facility is available to all the resident individuals including minors.

Q6. Whether remittances under the facility can be consolidated in respect of family members?

Remittances under the facility can be consolidated in respect of family members subject to the individual family members complying with the terms and conditions of the Scheme.

Q7. Whether the Scheme can be used for purchase of objects of art (paintings etc) either directly or through auction house?

Remittances under the Scheme can be used for purchasing objects of art subject to the provisions of other applicable laws such as the extant Foreign Trade Policy of the Government of India.

Q8. Whether small value remittance of USD 5000/- (gifts, donation etc) is in addition to LRS of US $ 100,000/-?

Remittance against gifts and donations cannot be made separately and have to be made under the Scheme only and therefore no separate limits for gift and donation are available.

[ Note for readers by taxworry: You should read US $ 100,000 now as it has been increased to 2,00,000 recently .Click here.]

Q9. Whether the AD is required to check permissibility of remittances based on nature of transaction or allow the same based on remitters declaration?

AD will be guided by the nature of transaction as declared by the remitter and will certify that the remittance is in conformity with the instructions issued by Reserve Bank.

Q10.Whether under this scheme a customer can remit funds for acquisition of ESOPs?

The Scheme can also be used for remittance of funds for acquisition of ESOPs.

Q11. Whether the scheme is in addition to acquisition of ESOPs linked to ADR/GDR (i.e USD 50,000/- for a block of 5 calendar years)?

The remittance under the Scheme is in addition to acquisition of ESOPs linked to ADR/GDR.

Q12. Whether the Scheme is in addition to acquisition of qualification shares (i.e USD 20,000/- as 1% of paid up capital of overseas company whichever is lower)?

The remittance under the Scheme is in addition to acquisition of qualification shares.

Q13. Whether a resident individual can invest in units of Mutual Funds, Venture Funds, unrated debt securities, promissory notes etc under this scheme?

A resident individual can invest in units of Mutual Funds, Venture Funds, unrated debt securities, promissory notes, etc under this Scheme. Further, the resident can invest in such securities out of the bank account opened abroad under the Scheme.

Q14. Whether an individual, who has availed of a loan abroad while a non-resident can repay the same on return to India, under this Scheme as a resident?

This is permissible.

Q15. Whether it is mandatory for resident individuals to have PAN number for sending outward remittances under the Scheme?

It is mandatory to have PAN number to make remittances under the Scheme.

Q16. In case a resident individual requests for an outward remittance by way of issuance of a demand draft (either in his own name or in the name of the beneficiary with whom he intends putting through the permissible transactions) at the time of his private visit abroad, whether against self declaration of the remitter such an outward remittance can be effected?

Such outward remittance in the form of a DD can be effected against the declaration by the resident individual in the format prescribed under the Scheme.

Therefore, you visit your banks foreign desk and ask for help.There is no problems whatsoever.

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Are Capital Gains On Sale Of ESOP Shares Listed Abroad Exempt?

I am an Indian resident, and had some ESOPs which I had exercised and paid in January 2004. These were paid in USD and money on sale will also come in USD, the company went public in October 2006. What is the capital gains tax rate that will apply to me on sale of shares (listed on NYSE), if I sell after October 2007 or before October 2007? Virender Puri

Shares whether quoted or unquoted become long term asset after being held for more than one year. You exercised your option in January 2004, therefore after January 2005, shares became long term asset in your hand. Its sale will give rise to long term gains.

Since you are resident and the shares are listed outside India , the tax rate applied in this case will be 20% as per section 112 of the I T Act . The NIL tax rate for long term gains is for shares which are sold through stock exchanges registered in India.However, you can claim indexation on the cost of the share. For more on indexation , read here.

For computation of capital gains, you will have to convert the foreign exchange in Indian currency . The Rule 115A of the Income Tax Rule prescribes as under:

The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date.

As per Rule 26 , "telegraphic transfer buying rate" means the rate (or rates) of exchange adopted by the State Bank of India for buying such currency.

And for"Capital gains", "specified date" means the last day of the month immediately preceding the month in which the capital asset is transferred.

So, when you sale the foreign listed shares,take following steps:

1. Convert purchase and sale price in Rupees by taking the TT rate of SBI (Ask any SBI official ).
2. Compute indexed cost.
3. Reduce Indexed cost from Sale price
4. Compute tax @20 % of (3)

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Rules regarding valuation of foreign exchange !

I am non resident. My earnings are in Euro. Will the earning be converted in Indian Rupee and then gains or income will be computed? Please guide me.

See under the Indian law, the rate of exchange to be adopted for valuation of the gains or income are clearly prescribed under Rule 115 of Income Tax Rule .It provides that any income arising or accruing in Foreign exchange should be converted in rupees by adopting rate of exchange adopted by State Bank of India for buying the currency.

Moreover , the date on which the foreign exchange should be converted for valuation in Indian Rupees are different for different types of income. These are :

1. Salary-last date of the month immediately preceding the month in which salary is due or payable or paid in arrear.


2. Interest on securities- last date of the month immediately preceding the month in which income is due or received.


3. Dividend- last date of the month immediately preceding the month in which it is declared.


4. Income from house property or profits and gains from business or profession or income from other sources (except dividend)- last day of the previous year followed by the tax payer.


5. Shipping business of Non Resident- last date of the month immediately preceding the month in which such income accrues or arise in India.


6. Capital Gains - last date of the month immediately preceding the month in which asset was transferred.

Point to note that for TDS purpose . as given in Rule 6 , the date of valuation of foreign currency is the date on which tax is required to be deducted

Its another matter that Bombay High Court in Chowgule Co Ltd vs CIT [1992] 195 ITR 810 ruled that the Rule 115(C) is ultra vires.

Can Non resident deduct the administrative expense incurred in connection with the earning of royalty or technical fees from the income?

Yes . Section 44DA of the I T Act is applicable for all agreement signed with Indian govt. or with Indian residents which states that if non resident maintains permanent establishment or performs professional services from a fixed place situated in India , then income of the non- resident shall be computed under "Profits or Gains of Business or Profession" which in other words mean that non-resident shall be charged tax on the real income from royalties or technical fees by deducting all expense incurred wholly and exclusively for earning such income.

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Long Term Capital gains of Non Resident Indians

Does Non Resident Indian get Indexation benefits from long term capital gains ?

No, long term gains of Non Resident Indians on sale of foreign exchange assets do not get the benfit of indexation as is applicable in case of Residents.Sub section 2(a) of Section 115D provides that

"(2) Where in the case of an assessee, being a non-resident Indian,-

(a) the gross total income consists only of investment income or income by way of long-term capital gains or both, no deduction shall be allowed to the assessee under Chapter VI-A and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head "Capital gains" ;

Tax rate is 20% .


IS there any tax saving scheme for Non Resident Indians against the capital gains on sale of foreign exchange assets?

Yes, section 115F of the I T Act provides that if Non Residents with in six months of the transfer of the Foreign Exchange Asset invest in Specified assets or national savings certificates as given in clause 4 of Section 10 of the I T Act,cpaital gain shall be comuted in following manner
Capital gain = Net Consideration received - invested amounts.
Net consideration means Sale consideration minus the expense incurred wholly for transfer of the foreign exchnage asset.

Important point to keep in mind is that the investment which was done for saving the cpital gain should not be TRANSFERRED or CONVERTED (other than transfer) into money within 3 years . If you do that , the capital gain which you saved will become the CAPITAL GAIN in the year in which sale or covesrion took place.

What are foreign exchange assetes?
As per Section 115C of the I T Act ,Foreign exchange assets means following assets purchased in foreign exchnage

(i) shares in an Indian company;

(ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

What about capital gains on sale of non-foreign exchange asset?

As per Section 115E (ii) such long term capital gains are chanrged to tax @ 10 %.

How is the Investment Income of Non Resident taxed ?

Investement income means income derived from a foreign exchnage assets.However, didvidend covered u/s 115-O of the I T Act. is not included in such income. No dedcution under chapter VIA is allowed. Investment income is taxed @ 20 %.

If a Non Resident Indian has only Investment income and long term capital gains, is he /she/it obliged to file the Return Income ?
No , if tax is dedcuted at source , no return is required to be filed as per section 115 G of the I T Act.

Okay! but who is Non-Resident Indian ?
Section 115C (e) defines Non Resident Indians as "non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident ".
Explanation.-A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India;

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