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What NRIs got from the Indian budget 2006-07

"What did NRIs get from India's budget? Nothing!" complained Patel. "Not really," said his friend picking up the gauntlet.

india Updated: Mar 05, 2006 23:13 IST

"What did NRIs get from India's budget? Nothing!" complained Manilal Patel. "Not really," said his friend picking up the gauntlet. Of course, there were no 'big bang' announcements, as the budget has become a routine exercise without any shocks and surprises so that India can grow at a steady pace. But if an NRI is investing in Indian stocks and mutual funds and looks at the fine print, there is good news.

First, the need for greater investor protection has been taken care of. An Investor Protection Fund will ensure greater transparency and more reforms have been introduced in e-governance of the stock exchanges.

Most NRIs invest in mutual funds (MFs) as they take the 'managed' instead of the 'direct' route. As its name implies, the managed route is the MF route where qualified and experienced fund managers track the markets and invest the money they get from their MFs while the direct route is an individual investing directly in stocks and shares.

In MF investments, NRIs were at a big disadvantage up to this budget. If they sold their MFs before one year, they had to pay a 30 per cent tax that was deduced at source. If the NRI later filed income tax returns in India, he could claim a refund of 20 per cent of this tax paid but if he did not file an income tax return - as is the case with most NRIs - then this 20 per cent was gone.

However, an Indian investor in MF could claim this 20 per cent in his income tax return since only a 10 percent tax is payable by all investors - both Indians and NRIs. Now both the NRIs and the Indians have to pay just 10 per cent. This brings NRIs at par with the Indian investor and removes an unfair practice.

Now NRIs can get better returns for their MF investments but with a higher risk. Up to now, equity-oriented funds had to invest more than 50 per cent of their funds in stocks. Now this level has been increased to 65 percent. This means that the MF is exposed to more risk with stocks but the returns could also be higher.

Previously, Indian MFs were not allowed to invest overseas in stocks except in the case of quoted companies that had at least 10 per cent equity holding in Indian companies. This meant that hardly 40 or 50 global corporations (like Lever Brothers) qualified for MF investment from India, thus reducing investment options.

The latest budget has removed this rule and now Indian MFs can invest in any listed company on a foreign exchange anywhere in the world. So technically, an Indian MF can invest in Microsoft or Toyota or any listed company on any exchange.

Before the budget, Indian MFs were allowed to invest up to $1 billion abroad. Now this limit has been doubled to $2 billion without any restrictions. Now MFs can spread their risk by investing more abroad and reducing their stake in Indian companies, if they so wish. This access to global markets reduces your risk; for instance' if Indian markets plummet, the overseas markets can hedge your risk and reduce your losses.

Previously, you had to pay dividend tax on your investment in close-ended schemes or schemes you can encash only at their maturity. Now this tax has been removed. In the first two months of this year, many attractive such schemes have been launched (a healthy sign in any market!) and this provision makes them all the more attractive, thus tempting investors for a long-term stake.

All this comes at a small price for the securities transfer tax that was 0.2 per cent before the budget has been increased by 25 per cent. Since MFs also invest in stocks, they will bear this higher rate as well. This marginal increase will affect returns - but by a wafer.

True, many NRIs want all foreign exchange restrictions removed on the Indian rupee. This is a good time to make the currency fully convertible as India has foreign exchange reserves of $140 billion and with this cushion, any immediate outflow can be taken care of.

India has enough foreign-exchange reserves to cover 13 months of imports, more than the developing-country average of eight months. The reserves are more than double the $59 billion level in July 2002, foreign investment is up and NRI remittances are at $21.7 billion, so if you are not going to remove these restrictions now, when?

Not yet, as the Indian team of crack economists at the helm - Manmohan Singh, P Chidambaram and Montek Singh Ahluwalia - is playing it safe. Meanwhile, NRIs can benefit from the sops on investment in India that this budget has provided.

First Published: Mar 05, 2006 22:56 IST