Sunday, October 26, 2014

NRI’s Read This – Service Tax on Money Sent to India

Are you an NRI or know a friend or family member who sends money to his/her family every month? Easily 80% or more of NRIs send money regularly to their families and the amount of money that was received by India last year was about 65 billion USD. Yes, 65 billion USD. Anyways, recently there is some speculation that the indian government could bring this remittance of funds from abroad into the list of services that attract service tax. The purpose of this article is to clarify the situation and smash a huge misconception that people may have about this recent development..

How Much Service Tax should I Pay?


Yes, 12.36%. But, before you get scared, this service tax is to be paid on the “Service Charge” or “Fee” that your bank/money transfer agency charges you.

Let me explain…

Every month when I send money, a local bank in Singapore charges me SG$ 5 as service charge. So, whatever money I send, 5 Singapore dollars’ worth rupees will get deducted. For ex: If I send 1000$ today, I should get around Rs. 48,000/- as per today’s exchange rate. But, the bank deducts the fee of $5 which works out to Rs. 240/- from the amount that is credited into my NRE Bank account.

After the introduction of this new service tax rule, an additional Rs. 29.6/- will be deducted by the bank to cover for the service tax. So, in all, Rs. 269.60 will be deducted from the money I am sending and only the remaining gets credited to my NRE Account.

When is this new rule coming into force?

Actually, this part is yet to be cleared by the governmental authorities. In fact, back in 2012, the erstwhile Manmohan Singh led Congress government wanted to introduce this service tax but later retracted. So, in all probabilities, this may get retracted by the current government too…

My Friend was saying 12.36% of the money I send will be taxed. Is it True?

Absolutely NOT.

There are a lot of people who are being scared by people who haven’t understood this new ruling. Yes, when someone says 12.36% service tax, it is natural that we get carried away but this tax is only on the service charge. Almost all banks and remittance services charge a small fee of about 100 rupees or so. This service tax will ONLY be charged on this service fee and not your entire amount. So, as I explained in the calculation above, the impact will be about a few rupees on the amount that eventually gets credited to your account.

No One can charge service tax on the whole amount being sent because India does not have DOUBLE TAXATION. If the money you are sending has been taxed in the country of origin, India WILL NOT ask you to pay Income Tax on it.

Is this Service Tax a Good Idea?

I am not an ardent supporter of such service taxes because a big majority of our NRI population is still working as daily-wage laborers in many foreign countries esp. Gulf. So, even a 50 rupee deduction on the money the send would impact them. I definitely wouldn’t mind paying this 50 bucks as service tax but can the others afford it – I don’t think so.

But, on the flip side, if the government sets any upper/lower threshold for this taxation, we all know what will happen; people who can actually afford to pay this 50 bucks service tax will split up their transfers and try to take advantage of the loop-hole. Sadly we are our worst enemies…

Some Last Words

Though I don’t support such taxes that affect the hard working NRI working class of India, this isn’t as bad as what people project it to be. I checked out a few news websites and even they haven’t clearly explained the impact and there are dozens and dozens of worried people with comments asking how much would be deducted on the amount they send each month. Our politicians and biased media is tweaking this news and creating further confusion.

So, it is my humble request to you. If you are an NRI or have friends/family members who may be impacted by this new service tax ruling, please share this article with them.

Thank you.


Saturday, October 11, 2014

Does My Portfolio Need Equity Investments?

This is a question that every investor has in his/her mind. Many of us stay away from the equity markets because of fear that we might lose money or just because we don’t have the time or the know-how to do so. So, invariably most of us end up investing only in “Safe” investments like PPF or Fixed Deposits. A couple of months back, I even penned down a book titled “Safe Investment Havens of India” which covers all the good safe investment options. Though safe investments offer us the 100% guarantee on our principal and give us decent returns, the burning question is – is it enough?

The purpose of this article is to help you get an Answer to this question..

The Answer:
               For a change, I want to give you an answer to this question right away. Yes, your portfolio needs Equity Investments. You will learn the reason why in the next few paragraphs…

Important Note: Not everyone can afford to have the same % allocation toward equities. Youngsters can afford to have a much higher allocation toward equities than their parents who are on the verge of retirement. I had explained a concept called “Lifestage based Investments” and “Optimal Portfolio Allocation” that outlines how much exposure one should have toward equities based on their age in my book titled “Your Complete Guide to IndianIncome Tax & Retiring as a Crorepati”. You can read a free preview of the book here: “Free Preview

Reason 1: Tax Implications

Income from debt instruments such as fixed deposits has to be added to your taxable income and is taxed as per your tax bracket. If you fall in the 30% bracket, the return earned on your fixed deposit gets lowered by that much.
So, lets say you are in the 30% tax slab, 30% of the interest you earn is effectively paid as income tax. So, a 10% return earning FD is actually giving you only 7% after tax.

Reason 2: Inflation

Before you invest in any instrument it is necessary to consider the 'real returns' generated by the Investment. 'Real returns' is nothing but the rate of returns over and above the inflation.

For example, if your investments generate 6% returns (after taxes) and the rate of inflation is 5%, your real returns would be 1%.

So, in a country like India where Inflation is around the 7% or 8% range most of the time, your fixed deposit (or any other safe investment) usually would generate only 1% or even lower real returns…

Why Inflation is Very Important!!!

You may be wondering why Inflation Rate is so important. If the annual inflation rate is about 6%, anything that costs 100 rupees this year will be costing 106 rupees next year. So, if your investment is not worth at least 106 rupees or more at the end of the year, your investment is effectively eroding in value. It won’t be sufficient to buy the same item that you could’ve purchased this year.
Get the picture?

Some Last Words:

This article is actually outlining the negatives of safe investments. So, does this mean – I should stay away from Safe Investments?

No, definitely Not. The purpose of this article is not to scare you away from safe investments. Safe Investments like Fixed Deposits or PPF should be a part of every investors portfolio. The purpose of this article is to highlight the fact that, by just focusing on safe investments, our returns/profits may not even beat the inflation rate. By including an appropriate % of Equities in your investment, your total portfolio can actually grow at an overall rate that is higher than inflation.

Lastly, you may be wondering, are equity investments tax free? Actually – YES. If you stay invested for at least 1 year or more and transact through a registered stock exchange after paying the Securities Transaction Tax (STT) the profits from equities is fully tax free. Only those profits you earned from shares you sell within 1 year will need to be considered for tax calculations. Same is the case for Equity Mutual Funds.

Happy Investing!!!

Saturday, October 4, 2014

Finally Some Relief for the Indian Tax Payer

Over the past many years as a blogger, there haven’t been many articles that actually made me smile wide while writing. Well, for this one, am smiling from ear to ear because this is great news and a much needed relief to the Indian Tax Payer who is almost always unsure of what is happening..

Did this arouse your curiosity??

The purpose of this article is to help you understand a recent development that would work out as a great boon to every Indian tax payer. Read on to find out more…

So, what is this great news?

A New and Enhanced Tax Website

Yes, you read it right. The Income Tax Department of India has revamped and launched a revamped or should I say an Enhanced version of the Income Tax Website.

Dint We Have a Indian Income Tax Website?

Ha ha, that is a great question. 

Yes, we did have a website but sadly the website was more like a site where you can find info about what is indian income tax, how to calculate taxes and so on. Not much info was available for a tax payer. For ex: If I filed my taxes this month and want to check if the processing is complete, I would have to visit my prayer room and pray hard because only GOD knows the status…

So, what are the features/functions a Tax Payer can do – On this Website?

Most of the online tax related activites can be performed using this new website. They include:
  1. Filing Tax Returns
  2. Review Status of your Tax Return Filing
  3. Apply for a PAN Card
  4. And MORE!!!

The website will also send out notifications, circulars and even intimations to the tax payer. Doesn’t this sound cool?

So, what is this website?

Some Last Words

Dear Friends – This website is newly revamped and is still very very new. So, it might take a few months or even years until the website is fully usable and beneficial to the tax payers. But, personally I feel that this is a good start and a step in the right direction. As an NRI who works in Singapore, the Singapore Tax Portal is exceptional and I cannot explain how useful such a website is. But, honestly speaking the website is more than a decade old and during its initial stages it was definitely not as useful as it is now.

So, this is a good start and lets hope this is a sign of great things to come!!!
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