This article written by Personalfn will be carried by 'India Abroad', the largest newspaper of Indian origin in the US. 'India Abroad' is a Rediff Publication.
The message from the Finance Minister is clear. India is no longer desperate for NRI monies to shore up its foreign currency reserves. So, out go the tax benefits on risk-free deposits. If NRIs wish to earn a return, they need to take more risk (read invest in stock markets, mutual funds etc.). The Finance Minister has delivered a significant blow to NRIs.
For NRIs who have deposits with domestic banks, there is an urgent need to re-evaluate the rationale for staying invested. Henceforth, interest earned on such deposits will be taxed at the marginal rate of income tax (exact details are still awaited). The effective interest rate, therefore, will reduce by as high as 30%! So if you were earning 4% rate of return, the post-tax return, in case you were in the highest income bracket, would be only 2.8%. Of course, if you are more concerned about safety than returns, this is probably still a good place to invest in. But in case you were looking at clocking a reasonable return, it may be a good time to consider other investment opportunities.
For NRIs who are considering investing in such deposits, it may be a good idea to consider other investment options, even if they entail taking on higher risk. Especially if the investment is to be made in a rupee-denominated deposit. Low returns coupled with likely depreciation of the rupee could really hurt returns.
As is evident, the 'risk-free' investment options for NRIs are no longer attractive. But even as the Finance Minister dealt a blow, he has made welcome changes to the capital gains tax regime. Currently, long term capital gains tax for NRIs is 10% or 20% depending on whether indexation benefits are availed of or not. Short term capital gains tax on the other hand is levied at the rate of 30%. The Budget 2004-05 has proposed that long term capital gains tax on shares be reduced to nil, while short term capital gains tax be reduced to a flat rate of 10% of the gain! This will significantly benefit NRIs who have investments in the stock markets (direct holding of shares).
And this is probably the subtle message the Finance Minister wishes to send out to NRIs - invest in equities. On a day when the markets fell by over 110 points (about 2.25%), well, this benefit carries little weight. But if you were to actually work out the numbers, savings from lower capital gains tax can, and will be very significant.
The Union Budget 2004-05 has introduced two other measures which have not gone down well with investors.
One, a turnover tax has been levied on all transactions in the stock market. The levy will be to the tune of 0.15% of the transaction value. This will surely inflate the transaction cost.
Two, the Gift Tax has found its way back. The Finance Minister has imposed certain conditions under which 'gifts' will continue to remain tax-free. In other cases there will be tax implications. Again, details are pending.
The Union Budget 2004-05 has drawn a mixed response. The stock markets have voted with their feet. NRIs are surely sour over the imposition on tax on interest earned on NRI deposits. But the domestic investor should not be dissatisfied with the way things have turned out.
Finally, it turned out to be an instance where expectations were very high, probably unrealistically so.