FAQs about NRI- Non Resident Indian Accounts

Who is an NRI? 

There are two definitions of an NRI:

·         A NRI definition under Foreign Exchange Management Act -FEMA is given as “Person Residing outside India is the term used for an NRI, being a person who has gone out of India or who stays outside India for the purpose of employment or carrying on business or vocation outside India or any other circumstances which indicate his intention to stay outside India for an uncertain period.” NRI permanently settled and residing outside India will continue to be treated as an NRI under FEMA irrespective of the number of days of his stay in India or otherwise. This definition is applicable for all matters concerning all his bank accounts and investments in movable and immovable properties in India.

·       As per IT Act, 1961, an NRI is any individual who during any Financial Year doesn’t stay in India for more than 181 days. The stay does not need to be continuous and it should include day of arrival and departure.             

What are the different types of accounts maintained by NRIs?

The three basic types of accounts of NRIs are as follows:

·      NRO – Non Resident – (Ordinary) Account

a.      A Non Resident (Ordinary) Account can be opened and maintained by any person residing outside India i.e. an NRI or a foreigner.

b.      The accounts are not convertible / non repatriable and are maintained in Indian Rupees in the form of savings, current, recurring or fixed deposit accounts. It can be repatriated only after permission from RBI.

c.      The interest rates are charged at tax rate of 30.90%

·   NRE - Non Resident- (External) Account

a.    NRE Account refers to funds deposited with a bank or any other institution that allows for the efficient conversion and transfer of Indian and foreign currency both within and outside of India.

b.    An NRE Account allows transfer in foreign currency, and the amount in this type of account can be freely repatriated to India. Also, the account holder can easily send funds out of India.

c.    The interest earned on this savings is exempt from tax.

·   Foreign Currency Non Resident (FCNR)

a.    These accounts are usually deposits denominated in foreign currency. The same can be opened and continued by a Non-Resident Indian who may be an Indian citizen or a Foreign citizen of Indian Origin residing outside India.

b.    The accounts are convertible and are maintained in foreign currency in the form of fixed deposits.

Going forward, we would discuss the investment allowable by NRIs in our future blogs. For understanding more about these bank accounts you can contact us at saarthifp@gmail.com

Please note - we have shared the definitions from the RBI and FEMA webpage

Defined Contribution v/s Defined Benefit

The two popular routes adopted by employers to provide retirement corpus to its employees is defined by the following ways: 

·         Defined Contribution Plan

·         Defined Benefit Plan

What is a Defined Contribution Plan?

A Defined Contribution Plan is where the employee contributes a set amount of money each pay period, and upon retirement the amount contributed and any interest or profits made on those contributions becomes available the employee. E.g. Provident Fund or 401(k)

In this type of plan, the risk lies with the employee. The contribution is fixed and in long run, the employee might not get the desired rate of return on his investment. Also if he lives longer, he might not even be able to survive the collected income. During the contribution phase, the entire amount is invested as per the pre- designed avenues. The amount on retirement is tax efficient.  

The employer is on the safer side with this kind of plan as the contribution is fixed and to be in parts during the service of the employee and not make delayed payments on retirement.   

What is a Defined Benefit Plan?

In a Defined Benefit plan an employee is guaranteed of a per-determined payment at the time of retirement based upon the tenure of his service with an employer prior to retirement. E.g. Pension or Gratuity.

In this type of plan, the risk lies with the employer. The payment on retirement depends on the length of service and last drawn salary. In order to qualify for the benefit employee needs to complete minimum years of service. The employer needs to make provision for the payment assuming the employee going to work for him till he retires. If the employee leaves immediately after qualifying for benefits, the employers needs to be ready to make lump sum payments. Although, the formula of benefit amount is pre-defined, in case if the funds fall short the employer needs to fill the gap.    

Globally companies are moving towards Defined Contribution Plans as it reduces the risk on employers to make provision for future retirement benefits.

Gratuity - your Retirement Trump Card

Gratuity receipt is one of the important components of retirement corpus. It is a right of every employee, who renders long years of hard work, sincerity and dedication towards the organization.   

Gratuity is best described as payment made by employer as gratitude to their employees for their services to the organization. However, now this payment is no more voluntary but mandated by law. Gratuity is governed by law of Payment of Gratuity Act 1972. 

Where is the law of Gratuity applicable?

This law is applicable to all shop or establishment which has 10 or more people working in it throughout India except in Jammu & Kashmir. The other important criterion for its applicability is continuous service requirement of five years of the employee. It is paid to an employee when he retires, leaves the company or on his death.  In case of death, it is not necessary for employee to complete five continuous years in the company. 

How is gratuity calculated?

The simple way to calculate Gratuity is multiply no of years of service with 15 days of basic pay including dearness allowance (calculate for 26 working days in a month) 

i.e. No of Years x 15/26 *Last drawn Salary

Taxation of gratuity 

The gratuity proceeds received by any Government employee are exempt from tax. In case of any other employee the tax exempt is subject to minimum of the following:

a) Maximum of Rs 10 lakhs

b) Actual Gratuity received or

c) 15 days salary x every completed year   

How does the employer pay gratuity to his employees? 

An employer usually purchases any group gratuity product made available by Insurance Company. The company pays an annual premium to the insurer for the gratuity funds. The amount keeps on fluctuating depending upon the addition and deletion in work force. Today, all leading insurance companies have group insurance products for gratuity and pension.

More about Perquisites Taxation - Part II

Today we would conclude our series of write ups on taxability of perquisites. It is important to understand that perquisites benefits are enjoyed on a large scale mostly by people of higher ranking. Some of these benefits may be high on value and may not be utilised by employee to its fullest. 

Details of sub section under Sec 17	Details of perquisites	Taxable value of perquisites
2 (viii)	Gift Voucher or Coupon	Gift in cash or convertible in money is fully taxable Gifts in kind up to Rs 5000 are tax exempt, beyond which they are taxable
2 (viii)	Credit Card	Expenditure incurred by employer on credit card. Expenses incurred beyond official work is taxable
2 (viii)	Free Recreation / Club Facilities	Annual membership fees are taxable Expenses on Club facilities are exempt from tax If any facility is provided across to all employees uniformly is exempt of tax.
2 (viii)	Use of movable assets	Taxable value of perquisites a) Use of Laptops and Computers: Nil b) Movable asset other than Laptops, computers and Motor Car: 10% of original cost of the asset (if asset is owned by the employer) or actual higher charges incurred by the employer (if asset is taken on rent) less amount recovered from employee.
2 (viii)	Transfer of movable assets	Taxable value of perquisites a) Computers, Laptop and Electronics items: Actual cost of asset less depreciation at 50% for each completed year of usage by employer less amount recovered from the employee b) Motor Car: Actual cost of asset less depreciation at 20% for each completed year of usage by employer less amount recovered from the employee c) Other movable assets: Actual cost of asset less depreciation at 10% (on SLM basis) for each completed year of usage by employer less amount recovered from the employee.
10 (5)	Leave Travel Concession or Assistance (LTC/LTA), extended to an employee for going anywhere in India along with his family* *Family includes spouse, children and dependent brother/sister/parents. However, family doesn’t include more than 2 children of an Individual born on or after 01-10-1998.	The exemption shall be limited to fare for going anywhere in India along with family twice in a block of four years: i. Air fare of economy class in the National Carrier by the shortest route or the amount spent, whichever is less ii. Air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less
2	Medical facilities India	Expense incurred or reimbursed by the employer for the medical treatment of the employee or his family (as above) in any of the following hospital is not chargeable to tax in the hands of the employee: a)  Hospital maintained by the employer. b)  Hospital maintained by the Government or Local Authority or any other hospital approved by Central Government
2	Medical Facilities outside India	Any expenditure incurred or reimbursed by the employer for medical treatment of the employee or his family member outside India is exempt to the extent of following (subject to certain condition): a) Expenses on medical treatment - exempt to the extent permitted by RBI. b) Expenses on stay abroad for patient and one attendant - exempt to the extent permitted by RBI. c) Cost on travel of the employee or any family or one attendant - exempt, if Gross Total Income (before including the travel expenditure) of the employee, does not exceed Rs.2,00,000.