Should NRIs file income tax returns in India?

July 31st is the last date for filing your Indian incometax returns for the financial year 2010-2011. If you are a Non Resident Indian (NRI) and are looking at the best way to file your tax returns, here is a quick guide on various options, including e-filing. This guide will also help you understand if you need to file a return in the first place.

( For Full coverage on what's buzzing in the NRI community click on our special coverage on NRIs )

Who should file returns?

If you are an NRI, you would have to file yourincome tax returns for 2010-2011 if you fulfill either of these conditions:

> Your taxable income in India during the year 2010-2011 was above the basic exemption limit of Rs 1.6 lakh OR

> You have earned short-term or long-term capital gains from sale of any investments or assets, even if the gains are less than the basic exemption limit.

Note: The enhanced exemption limit for senior citizens and women is applicable only to residents and not to non-residents.

Are there any exceptions?

Yes, there are two exceptions:

> If your taxable income consisted only of investment income (interest) and/or capital gains income and if tax has been deducted at source from such income, you do not have to file your tax returns.

> If you earned long term capital gains from the sale of equity shares or equity mutual funds, you do not have to pay any tax and therefore you do not have to include that in your tax return

Tip: You may also file a tax return if you have to claim a refund. This may happen where the tax deducted at source is more than the actual tax liability. Suppose your taxable income for the year was below Rs 1.6 lakh but the bank deducted tax at source on your interest amount, you can claim a refund by filing your tax return.

Another instance is when you have a capital loss that can be set-off against capital gains. Tax may have been deducted at source on the capital gains, but you can set-off (or carry forward) capital loss against the gain and lower your actual tax liability. In such cases, you would need to file a tax return.

By when to file returns?

The last date to file returns for the financial year 2010-2011 is July 31st 2011. However, remember the following:

> If you do not have any tax payable (that is all your tax has been deducted at source), you can still file your tax return by 31st March 2012 without any penalties

> If you do have tax payable, you can still file your returns by 31st March 2012 but you will be charged an interest of 1% per month for every month of delay starting from 31st July 2011 till the time you file your tax returns

> If you do not file your tax returns even by the 31st of March 2010, you may be charged a penalty of Rs 5,000 for every year of delay.

What's the best way to file returns?

Traditionally, you could file your return either by giving a power of attorney to someone in India or by sending your form and documents to a tax expert in India who would then file returns on your behalf.

But nowadays, the easiest option for NRIs to file their Indian tax returns is by using the online platform. There are several options to file online.

Option 1: Income tax website

The income tax website allows you to efile your return. But the process maybe a bit cumbersome. You would need to download a software, fill in your details and upload an XML file. You would then need to print and send a copy of the acknowledgement (known as ITR-V) to the tax office in Bangalore within 30 days. You can do this for free. 


Option 2: End-to-end online

Some online service providers offer a more user friendly experience, for a fee of course.

Taxsmile.com for instance has preferred partners in various countries including US, UK and Australia. Explains Bala Balaguru, President of Athreya Inc, taxsmile.com's preferred partner for North America, "For a fee of USD 69, an individual tax payer will be able to file his tax return completely online. This fee includes a digital signature of 1 year validity. You would need to send a notarized copy of your address proof and photo ID to Athreya's office and we will create your account within 3 days. "

( For Full coverage on what's buzzing in the NRI community click on our special coverage on NRIs )

In addition to Income tax return preparation, the package also allows you to resolve up to 10 tax related queries as well as get the prepared return reviewed by taxsmile's tax professionals. Athreya also offers a package without the digital signature in which case you would need to sign the ITR-V and courier it to the income tax office in Bangalore. This package however does not come with any support from tax professionals.

Another website elagaan.com also offers a similar service for NRIs. Says Naveen Kumar, Co-founder of elagaan.com, "Elagaan.com offers an end to end solution with digital signature being optional. If you choose not to take the digital signature, you would need to send a signed copy of the ITR-V to our office and elagaan would send it to the income tax office in Bangalore. Here we suggest our users to send 3-4 copies of their signed ITR-V, so that if a copy gets missed/ lost in the process, elagaan sends another copy without any additional charges."

Elagaan.com offers services across 38 countries but has physical offices in the US and India only. It charges Rs 749 for filing your returns without a digital signature. If you want to opt for the digital signature, it comes with a price tag of Rs 899 for a year's validity.

Option 3: Combination of online and offline

Several websites offer a mix of online and offline service and each works differently. Taxyogi.com has such an offering that NRIs could use. After entering your income details, the website generates an XML format of your return. You would then have to upload the XML form into the Income Tax website and complete the process there. You would need to print the ITR-V, sign it and send it to the Income Tax Department in Bangalore. This is a free version.

Taxspanner.com also offers a 'Foreign Income solution' package. Priced at Rs 1999, the return is prepared on the basis of information and documents provided by the user. This package includes consultation to a limited extent. In case of websites like taxmunshi.com, you would have to scan and email your documents to them.

They would file the return on your behalf. Once the return is filed, the ITR-V will be emailed to you. You would need to print a copy, sign it and send it to the office of taxmunshi.com and they would send it to the income tax office in Bangalore. The website charges US based NRIs around Rs 799 for a simple income tax return.

In all these cases, the user is required to specify the preferred mode of Refund ie ECS or cheque. In case of ECS, the user needs to provide the MICR code of Bank Branch where the account is held.

Remember that whatever option you choose, you must have a Permanent Account Number (PAN) in order to file your returns. Once you have it, pick from the above options the one most suitable to your needs, but do it fast. It's only a few days to the 31st July deadline.

Like the long hand of law, the taxman has an extended reach too. You would know this, especially if you are a non-resident Indian (NRI). For every income that you earn in India after becoming an NRI, tax will most certainly get charged and furthermore, it would be deducted at source. And the rates for tax deducted at source (TDS) are widely different from the rates applicable to resident Indians. In this column, we will look at the various incomes that an NRI could earn in India and whatTDS rate would apply.

Before we begin, it is important to clarify that tax will be deducted only on incomes that are liable to tax in India. If the income is tax free in India like long term capital gains from equity shares, there would be no TDS. Another important thing to remember is that you should be an NRI at the time of receiving the income. For instance, you may have purchased a long term debenture of a company while you were a resident Indian. But any interest that you receive during the period after becoming an NRI will be subject to TDS.

Interest on bank deposits

Interest earned on Non Resident External (NRE) accounts and Foreign Currency Non Resident (FCNR) accounts are tax free in India. Hence, there would be no TDS.

However, interest earned on the Non Resident Ordinary Account (NRO) is taxable and will be subject to a TDS of 30 per cent. There is no basic exemption limit. For example, interest earned by resident Indians from bank deposits is subject to TDS only over and above a limit of Rs 10000. No such limit applies for NRIs.

Interest on all other investments

Interest earned on all other investments like corporate deposits and bonds will be subject to TDS at 20 per cent. In all these cases, the company or party making the payment will deduct this tax.

Dividends

Dividends from equity shares, equity mutual funds and debt mutual funds are exempt in the hands of the share or unit holder.

Capital gains on securities

- Equity shares and equity mutual funds (mutual funds with more than 50 per cent in equities)

Long term capital gains, that is profits made on sale after 1 year from date of purchase, on
equity shares and equity mutual funds are exempt from tax. There will be no TDS applicable.

Short term capital gains, that is, profits on sale within one year of date of purchase, will be
subject to a TDS of 15 per cent.

- Debt mutual funds, corporate debentures

Long term capital gains from debt mutual funds and corporate debentures (when sold in the secondary market) will be subject to TDS at 10 per cent.

Short term capital gains will be subject to a TDS of 30 per cent.

Capital gains on other assets like house property, gold

Long term capital gains will be subject to a TDS of 20 per cent.

Short term capital gains will be subject to a TDS of 30 per cent.

Now in case of sale of assets like gold and house property, the question arises as to who will deduct the tax at source. If the property is sold to an individual, does the individual need to deduct tax at source and deposit the same with the Government? Will the individual then issue a TDS certificate to the NRI?

 

Sandeep Shanbhag, Director of Wonderland Investments explains, "Yes, the payer of the sale proceeds, even if he is an individual will be responsible for deducting tax at source and paying it to the Government. He must get a Tax Deduction Account number (TAN) and issue a TDS certificate for the same."

What if the individual does not go through this process and fails to deduct tax? "The onus of deducting tax is on the payer. So in case the individual does not deduct tax and the NRI too fails to declare the income and pay the tax, the income tax authorities can hold the payer responsible," Shanbhag says.

Rent

There is no separate rate prescribed for TDS on rent paid to NRIs. Therefore, this would fall under the category of other income and be subject to a TDS of 30 per cent.

Again, just like in the case of capital gains on assets, the payer of the rent is responsible for deducting the tax at source. The same process of getting aTAN and issuing a TDS certificate applies in this case too.

Professional services and royalty

If you are an NRI and are receiving a payment from a company in India for providing professional services, your income would be subject to TDS. The rates are slightly complicated.

If your agreement is dated between 1st June 1997 and 30th May 2005, you would be subject to a TDS rate of 20 per cent.

If your agreement is dated on or after 1st June 2005, you would be subject to a TDS rate of 10 per cent.

The same applies to royalty. For definitions of professional service and royalty, please refer to section 115 of the Income Tax Act.

All other income

All other income that you earn as an NRI and which are liable for tax as per Indian laws, will be subject to a TDS of 30 per cent.

All the above incomes would also be subject to surcharge and education cess. If the income exceeds Rs 10 lakh, a surcharge of 10 per cent would be applicable on the TDS. Further, an education cess of 3 per cent would apply to all TDS.

Waiver of TDS, possible?

Yes, in some cases. When you are an NRI, you are obviously a resident of another country for tax purposes. And all countries tax residents on their global income. So it may happen that as per provisions

of the Indian Income Tax laws, tax will be deducted at source on a certain income earned in India. But at the same time, that income will be subject to tax in your country of residence. In such cases, we need to refer to the DoubleTaxationAvoidance Agreements (DTAA) that India has entered into with various countries. TheDTAA overrides the provisions of the Indian Income Tax Act. The DTAA provides certain further concessional rates of TDS. You can even get a TDS waiver if your total income is less than the basic exemption limit.

It will be our ongoing attempt through these columns to bring you clarity on all these issues. So watch this space for more!

How NRIs can buy property in India

Buying aproperty undeniably ranks as one of the greatest Indian dreams. So it does not matter which part of the world you live in; a home inIndia is simply a must. And the Indian laws, over the years, have made this a fairly easy job. The Reserve Bank of India governs such transactions and they fall under the purview of the Foreign Exchange Management Act (FEMA).

In this column, we give you a lowdown on all that you need to know if you are anNRI wanting to buy a property in India. To begin with, we need to understand the definition of non-resident Indian. Since property purchases are governed by FEMA, we need to go by the definition of NRI as stated in FEMA. According to FEMA, an NRI is a citizen of India who is resident outside India.

Now letus understand the rules and implications:

Can an NRI buy property in India?

Yes, a non-resident Indian can buy either a residential property or a commercial property in India. Further, there is no limit on the number of residential or commercial properties that an NRI can purchase in India.

Exception: An NRI however cannot buy agricultural land, plantation land or a farm house in India. He cannot even acquire such property as a gift.

There is however, no bar on inheriting such property.

Do you need RBI permission?

No. RBI permission is not required to buy residential or commercial property.

How to fund the purchase?

Payment for the purchase of property can be made either by way of funds remitted to India from abroad through regular banking channels or through the balance in theNRE, NRO or FCNR Account.

What income taxes are applicable on house properties in India?

According to the Indian Income Tax Act, if a person (resident or NRI) owns more than one house property, only one of them will be deemed as self-occupied. There will be no income tax on a self-occupied property. The other one, whether you rent it out or not, will be deemed to be given on rent. If you have not given the second property on rent, you will have to calculate deemed rental income on the second property (based on certain valuations prescribed by the income tax rules) and pay the tax thereof.

Now, the Income Tax Act does not specify if either or both these properties must be situated only in India. Vikas Vasal, Executive Director of KPMG India explains, "At the time of drafting the Income Tax Act, one did not envisage a situation where an Indian would own properties overseas. But now, more and more Indians are settling abroad. So from the reading of the Act, the rule of 'more than one property' will apply to global properties."

What this means is that if you are an NRI and own only one property globally and that property is in India, you would not have to pay any income tax on it in India.

However, let us say you are an NRI resident in USA. You own and live in a house in USA. You also own a house property in India. Even if you do not give the property in India on rent, you would have to pay income tax on deemed rent in India. The deemed rent is determined by certain valuation rules prescribed in the Income Tax Act.

Remember that even if you have inherited a property in India and that is not your only property, you would have to pay tax on deemed income.

Is deemed income from house property taxed in foreign country?

You would need to look at the tax code in your country of residence. In the case of NRIs in theUnited States, the US tax code does not tax deemed income. However, Ganga Mukkavilli, aNew York City based CPA whose firm, CPAs, Taxes & Associates PC, specialises in international accounting, taxes and small businesses says that you would still have to show the property if it is an investment property in your tax return in the US (even though you do not have any rental income ). 
 "If you do not show this investment property, the problem will arise at the time of sale of property. Suppose you sell a property on which you had no rental income for US tax purposes but had deemed income as per India Tax code, then the amount spent on the maintenance, repairs and renovations and depreciation on this property which may be eligible for deduction or addition to your cost basis while calculating capital gains would become difficult to establish. However, if you have not declared the property in your tax returns, the US tax code may challenge the cost basis (purchase + improvements + suspended losses)to claim a tax deduction at the time of sale," he explains.

"Of course, any investment properties with rental income and related expenses must be reported on Form Schedule E in the US tax returns and rental activities by nature are always treated as 'passive' investments with restrictions on deductibility of the net rental losses. Always consult a tax expert as passive activity rules are quite cumbersome," he adds.

Home loans, an option?

Most definitely. The RBI allows NRIs to take home loans for buying property in India. You can also take a loan for repairs and renovations of your home.

You can pay the EMIs in any one of the following ways:

i. By remitting the money from your foreign bank account through regular banking channels
ii. By issuing post dated cheques or Electronic Clearance Service (ECS) from your NRE, NRO or FCNR Account
iii. Out of the rental income that this property earns
iv. Cheques issued from your local relative's bank account

What tax benefits are available on home loans repayments?

Under section 24 of the Income Tax Act, the interest on home loan is deductible from the income from house property to the extent of Rs 1.5 lakh per annum. Further, up to Rs 1 lakh of principle repayment can be deducted under section 80C (subject to an overall limit of Rs 1 lakh of that section).

This interest can be deducted from rental income. In case of self-occupied property discussed earlier, your rental income will be zero but you can still claim a deduction of interest of up to Rs 1.5 lakh. In such a case, you would have a loss from house property.

The loss can be set off against income from other sources like interest income, capital gains etc. If the loss is not completely exhausted in a particular year, it can be carried forward for 8 years. That is, you can show the loss in your tax returns for the next 8 years and off-set it against other income. But once carried forward, the loss can be set off only against income from house property.

Can an NRI give power of attorney for property purchase transactions?

Yes, in fact experts recommend that you give a PoA to a person resident in India so that he or she may complete formalities such as registration, possession, execution of agreement of sale etc. A PoA can be given to execute all contracts, deeds, mortgages, lease, sell and all matters relating to managing the property. However, at any given time, it would be better to give a specific power of attorney to any person, restricted only to a single action such as only purchase or only for lease. The power of attorney should be executed on a stamp paper or as per the requirement of the country where the PoA is executed. You must then get the PoA attested by any authorized official of the Indian Embassy/Consulate/Trade commissioner in that country.

Many times, when NRIs purchase properties, developers demand a PoA in their favour. You may choose not to give this PoA but it would lead to delays since all documents would have to be mailed to your foreign address. Giving a specific PoA would be a better option.

Having purchased a property, you will face several other challenges with respect to renting, managing or selling your property. We will explore all these in the next few columns.

Owning a property makes more sense than staying on rent

Whether to buy aproperty or rent one is an age-old debate and it is unlikely to be settled in a hurry. One can do very sophisticated calculations to show that renting is a smart option. Some equally valid and complicated calculations will show that buying makes more sense. A lot of calculators are available that will assist you in taking this decision.

The more sophisticated among them will take into account the possible appreciation in the property if you buy it, maintenance costs, the potential increase in rent if you rent it out, etc.

Unfortunately, the decision is rarely so straight forward. Firstly, most calculators don't tell you that this is rarely a one-time decision and it is only as good as the assumptions made. If the assumptions change, your decision should change, too. Unfortunately, while you may put in a lot of research and effort in doing the calculations the first time around, most people are unable to devote the same amount of time on a regular basis to check if their initial assumptions still hold true. More importantly, what most calculators also miss are the intangible benefits of owning your own house.

In a house of your own, you can make personalised changes. Then owning your own house (even with a loan on it) imparts a sense of security to the household. Whilst it is difficult to put a dollar value to such intangible benefits, these are clearly significant.

Take this quick test. Conduct a straw poll in your office or among your friends or your family circle. You are unlikely to find many people who regret having bought a home.

I am sure you will definitely find a few who will talk wistfully of the opportunities missed to buy their own home when it was still affordable and within their reach. In fact, I know of some extremely smart and publicly well-regarded professionals who passed on an opportunity to buy homes being sold by their own employer (after doing some very fancy calculations on paper since it was the pre-computer era). Their other less gifted colleagues did not have the ability to do such calculations and, hence, bought the houses and within just 5-7 years their decision was proven right.

The point I am making is that it is not advisable to do a lot of complicated calculations to decide whether to buy or rent your home. As long as you have made a reasonably long-term commitment (at least 5 years) to the city you reside in and have the necessary down payment amount and your income can afford the EMIs, you should go ahead and buy your home. But before I am accused of being an agent for thereal estate industry (disclosure: most largehome loan lenders advertise on Apnapaisa as also some large realtors, and both together constitute a significant portion of our income), let me quickly add some caveats. 

 First, this whole logic applies only if you are buying a property to stay since the intangible benefits only accrue if you stay in your home. In other words, you need to do a more thorough analysis if you are buying to rent out a property or use it as a business asset. Secondly, if it were me, I would put in a little more effort and hunt around to buy a ready-to-move-in home rather than take the risk of buying an under-construction property, which come with attendant risks of delays, hidden costs and quality issues.

Thirdly, you need to watch out for artificially inflated real estate prices. If the real estate rates look artificially inflated, maybe you can wait for the market to cool before you go ahead and buy.

But how do you judge whether the real estate prices are artificially inflated?

A rough and ready measure is the rent-to-value ratio. Check around in the area where you are looking to buy a property. In these days of high interest rates, if the annual rent of a house similar to the one you intend to buy is less than 3% of the cost you will need to pay, the prices are clearly inflated. The rental market is telling you that the capital prices may not stick. By this measure, most properties in Mumbai (as also in most parts of Delhi) are clearly overpriced.

This does not mean you shouldn't buy a property. It only means you have to wait a little to see if the property prices correct.

And if you think you don't have the resources to either keep track of the movements in rental or property prices, then it is better to buy (even at the "inflated" prices) rather than be sorry later.

Sebi rules: Mutual Fund investors to pay Rs 100-150 fee to invest

MUMBAI: First timemutual fund investors will now have to pay an additional 150 as transaction charges according to new rules approved by securities market regulatorSebi which are aimed at widening the reach of mutual funds.

Existing investors inmutual funds will have to pay an additional 100 as transaction charge. According to a member of an advisory committee of Sebi on mutual funds, the extra 50, which will be charged for new investors, will help meet Know Your Customer, or KYC, and other incidental expenses.

"The whole idea of this step is to make good the transportation and incidental expenses incurred by the distributor while collecting the application forms from the investor," the person said.

Sebi chairman UK Sinha said that distributors will be allowed to charge 100 as transaction charges for each subscriber to help mutual funds penetrate into the retail segment in smaller towns.

The regulator has made it clear that these charges will only be applicable on fund investments exceeding 10,000. No charges will be levied on transactions other than new fund purchases. Sebi has exempted direct fund transactions from this levy. Transaction charges - of 150 for new investors and 100 for existing investors - will be charged to the fund in three to four instalments. Transaction charges are in addition to the existing eligible commissions permissible to the distributors, Sinha said.

"It'll definitely help distributors servicing retail investors. Transaction charges will cover running costs of smaller distributors," said Rajiv Bajaj, managing director, Bajaj Capital, a national distributor, adding, "it would be nice if the regulator also built-in distributor commission to the application."

Senior Sebi officials said the decision to introduce transaction charges has been taken against the backdrop of a shrinking mutual fund investor base. As a first step towards regulating distribution services, AMCs have been told to conduct due diligence while availing the services of large-sized distributors.

Fund houses will also have to disclose the aggregate amount of commissions paid to distributors besides greater disclosures in terms of performance benchmarks and break-up of assets -- equity and debt-- to provide a more realistic picture.

What fares better? MF+Term Plan Or Ulip

The combination of mutual fund/s and a term plan leaves you with a corpus higher than that of the Ulip by around Rs 1 lakh.
You keep hearing about a combination of mutual fund/s and a term plan being a better option than unit-linked insurance policies (Ulips). The former, as financial planners say, works out cheaper as the charges involved are only those for fund management and mortality. In an Ulip, however, there are charges on allocation, policy administration, mortality and fund management.
However, have you ever done a little calculation to check the veracity of such assumptions? To do a reality check if the suggestion still holds water after the new Ulip regulations, we decided to do some mathematics. For our calculation we have made the following assumptions:
Since insurers pitch Ulips as long-term investment options and they claim that one can reap real benefits only if he keeps investing for 15-20 years, we have based our calculations over 20 years.
As mortality charges are agespecific and depend on the sum assured, for sake of convenience, we have taken into consideration charges for insuring a 30-year old healthy male with a Rs 50 lakh cover. For the 30-35 age group, mortality charges are close to Rs 1.5 for every Rs 1000 sum assured.
Allocation charges in this case have been 4% for the first 7 years and 1% for the rest of the tenure (20 years).
Policy administration charge (PAC) is 3% on the first year with a subsequent 5% rise every year till it reaches 4.8% every year.
Fund management charges (FMC) have been taken at 1.35% (the highest permissible rate) every year in case of Ulips and 2% in case of mutual funds. While actively managed equity mutual funds charge up to 2.5% FMC, index funds charge up to 1.5% for fund management. Therefore, we have taken an average 2% FMC for mutual funds.
We have taken the annual premium for the term plan for a Rs 50 lakh cover as Rs 4,436, which is the cheapest option available in the market right now.
The annual premium in case of the Ulip and the initial investment for the combination of mutual fund/s and a term plan is Rs 1 lakh. We have further assumed an annual growth of 10% for the investment corpus in both scenarios.

THE RESULTS
Our calculations show that the combination of mutual funds and term plans works slightly better under the conditions assumed by us. For the first 10 years, the combination of mutual funds and a term plan leaves you with a corpus of Rs 14,78,277 against Rs 13,96,359 corpus in the Ulip during the period.
After the full term of 20 years, the total corpus built through the mutual fund/s and term plan combination is Rs 46,11,155 against Rs 45,15,553 through the Ulip. In all the above instances, the combination of mutual fund/s and the term leaves you with a corpus higher than that of the Ulip by around Rs 1 lakh.

WHAT IF ANALYSIS...
Mutual fund FMC is 2.25%: Keeping everything else same, if the mutual fund FMC is raised to 2.25%, the total corpus through MF+term plan combination drops from Rs 46.11 lakh in 20 years to Rs 44.62 lakh, lower than the Ulip corpus of Rs 45.15 lakh.
The combination of mutual fund/s and a term plan leaves you with a corpus higher than that of the Ulip by around Rs 1 lakh.
Mutual fund FMC at 1.75%: The total expenses come down from Rs 8.50 lakh under the original set of conditions to Rs 7.69 lakh. As a result the corpus built through the MF+term plan combination at the end of 20 years rises from Rs 46.11 lakh to Rs 47.65 lakh compared to Rs 45.15 lakh in case of the Ulip.
Ulip FMC decreases to 1%: Keeping everything else same, the corpus built through Ulips over the 20 years increases to Rs 47.30 compared with Rs 46.11 lakh in the MF+term plan combination.
Opt for offline term plans: The cheapest offline option available in this category is a plan with a yearly premium of Rs 6,149. In this case, the MF+term combination leaves a corpus after 20 years is Rs 45.36 lakh compared to Rs 45.15 lakh through the Ulip.
Even as our calculations show a MF+term plan combination scores over a Ulip in the long-term, the dice is delicately loaded in favour of the former. Any slight change in charges can shift the balance in favour of Ulip.

How to invest your 1 lakh rupees in bank fixed deposit

March 2011
This is the season of post recession. Economic condition is in inclined phase, curves are growing in Y axis. And so your interest in bank fixed deposits. This is the season of above 9% interest rate in FDs.

Banks are offering 9.25% interest in bank FDs.
ICICI bank is offereing 9.25% on 590, 790 or 990 days.
Country's biggest bank SBI is also offering 9.25% to general category of investors for 555 and 1000 days.

Now, thing is where to invest.
In banking terms: SBI country's largest bank is more stable compared to ICICI, country's largest private sector bank. Check "sidekick 1" for more details for whether to invest in SBI or ICICI.

Now, reconsider with the rules and regulations imposed by Indian income tax law on investments.
Rule No 1: Whenever you invest more than 50,000 in bank FDs you are liable to pay tax.
Rule No 2: Whenever the interest in your interest income earned is more than 10,000 you have to pay income tax on this excess amount.
Rule No 3: If you have not supplied PAN card while doing the FD, bank will deduct 20% instead of 10% as income tax on the access amount earned above 10,000. This will be directly deducted from your interest by the bank.
Rule No 4: If you want the bank not to deduct TDS amount earned above 10,000 then you have to submit for 15G/15H to the bank (every year, since tax is calculated every year, and not just once at the time of opening the FD).

Considering rule No 3 is not applicable to you, so you have to pay 10% income tax on your earnings above 10,000.

I have 1 Lakh rupes to invest in FD, where to invest?
If I invest 1lakh rupees for 9.25% interest rate what happens to my investments?

Let's calculate:

Case 1000:
At the end of second year you have to pay income tax of Rs.492.81, no additional tax at the end of 1000 days. SO,total tax liability is Rs. 492.81/-. Hence your real income is 28451.26 - 492.81 = 27958.45

Case 990:
Total income earned = 28132.96 - 492.81 = 27640.15

Sidekick1:
Difference:
27958.45 - 27640.15 = 318.3 in 10 days.

So, we shall invest in SBI instead of ICICI to gain this extra weekend buffet lunch for one in 300 rupees if we can wait for 10 extra days.

Let's exploit the rules now:
1. Let's invest 50,000 and 50,000 in two separate branch of SBI.
The scene changes like this now:

This time we have earned a interest of 14225.63 x 2 = 28,451.26.




No, TDS will be deducted at the bank level since your interest for a single year is less than 10,000. But now the onus is on you to pay tax of 492.81 on this interest earned at the end of second year in your income tax details.
2. Please pay tax.
Sidekick 2:
3. If your total earning is less than 1,60,000 you no need to pay tax.

Go for PPF even if do not need it

Putting money in Fixed Deposit attracts income tax on withdrawal.

Let's assume that you want to invest 10Lakhs rupees in fixed deposit with the current 9% interest rates. At the end of the year, you will earn a massive 90 thousand as an interest on this 10Lakhs fixed deposit.

10Lakhs FD for 2yeaR 16 days will earn you 9% interest in HDFC Bank.
So, at the end of 1 year you will have 10L90K.

But, this interest is taxable. Only to a max 10K there is no tax on bank deposits. So, remaining 80K will attract income tax at 30% rate.

10% tax of 80K is around 8K. This is a big amount.
As per section 206AA introduced by Finance(No.2) Act.2009 effective April 01,2010,every person who receives income on which TDS is deductible shall furnish his PAN,failing which TDS shall be deducted at the rate of 20% in case of Domestic deposits and 30.90% in case of NRO deposits.

In that case, your overall earning will be 90-20% of 80 = 74K meaning 7.4% on your money.

Hence, what you earn at the end of it is 90-10% of 80K = 82K.
It also means, you are earning an interest of 8.2% only instead of 9% on your money. And in the worst case this will come down to 7.4% (lower than PPF 8% interest).

But, this is the case when you earn a bank interest rate of 9% on your money. But when bank interest rate on FD is 7% then your effective earning comes down to 70K -10% of 60K = 6.4% on your money.

Now, if you would have put your money in PPF then you would enjoy 8% interest rate with whatever happens to Indian Financial market or Global market or Economic recession.

Plus you will be free from all your worries about income tax.


That is why I advised you to put your money in PPF which can be opened in SBI or Post Office. Now a days, you can online deposit your money into SBI PPF a/c. And the interest you earn is less than 9% but 8%. The good part of this investment is that on withdrawal this is tax free. No need to pay any income tax on the entire amount you get once the PPF a/c matures.

So, go and open your PPF a/c today with minimum of Rs500/- per annum.
If you want to invest some lum-sum money into your PPF a/c after 5years then that money will be get locked only for 10years for you and not full 15 years.

And you will still enjoy a guaranteed return of 8%.

You might earn much more return if you invest your money in Mutual Fund, but there is no guarantee that your money will compound at the same rate. In case of recession your money will not perform, and will lead into losses.

Further this helps you diversify your investments.

--Kongkon