Q & A corner

Answers to queries related to trusts and investment options for children and NRIs.

I work as a computer scientist in the University of Jammu. I would like to invest some money (approximately Rs 50,000) in my daughter's name for her when she comes of age. Kindly suggest different investment options.

Vikram Sahi

There is no need to invest the money specifically in the child's name. It can be invested in your own name and specially earmarked for use for your child's future needs. There are many institutions which attract deposits specifically for this.

Normally such schemes don't bestow any particular advantage and on the contrary make you lock up your savings for a long time.

Therefore, rule out any child care policy. Bank FDs are a sub-optimal investment. PPF is good. An 8 per cent tax-free rate on a capital assured product is as good as it gets. Similarly GPF. You may also look at debt based schemes of MFs for investing for the long-term.

While it is true that in the near term, these schemes will yield flat returns, in the long-run these are good investments where you can use the power of compound interest to grow your money. However, the longer you hold these, the better is their utility.

I am a junior executive in a public sector undertaking. Since May 2003, I have been seconded in an African country by my parent organisation in a joint venture in which the foreign subsidiary of a subsidiary of my parent company holds interest.

I work in the foreign joint ventrue for 70 days and for 20 days I am on leave and I come to India. I have worked outside India for more than 250 days (excluding stay in India) during FY 2003-04.

For the foreign assignment, my parent company has agreed to pay me $2,000 per month consolidated, plus it pays me HRA and bonuses in India which are credited to my bank account in India.

Out of this $2,000 per month, around Rs 20,000 is paid in Indian rupees and balance is paid in hard currency outside India. The remaining balance amount is paid to me in pounds (approximately £ 700 per month) through a bank draft in the African country where I work. This is paid to me by the Europe-based subsidiary of my parent company. I deposit this pound sterling draft in my NRE account with a bank in Delhi through my friends or colleagues.

I want to mention that the joint venture in which I am seconded is a joint venture of many nations and it pays a substantial amount for my services to foreign subsidiary of my company as secondment fee.

Please clarify the following:

1. Kindly clarify whether I will have NRI status for FY 2003-04 as I have been out of India for more than 250 days.
2. Whether my entire earnings of $2,000 per month will be tax free in India
3. Whether the portion of my salary which is being paid to me in India will be taxable in India
4. Whether out of total package £700 p.m. I receive outside India from the foreign subsidiary of my parent company which I deposit in NRE account in India will be tax exempted in India, as there is no tax payable in the country where I work as a special agreement with joint venture. Please throw light on the above issues. Also indicate tax provisions.

G K Valecha

A deputy does not leave India in any year for the purpose of employment since he is already employed in India. Therefore, he gets the status of an NRI if his stay in India during the FY is less than 60 days.

Moreover, if the source of his salary is an Indian company, the income is taxable in India, even if he is an NRI and even if the salary is received abroad.

On the other hand, if the income is paid by an independent body separately incorporated abroad distinct from the Indian company and the Indian company does not reimburse the foreign entity for the emoluments paid, then such income is foreign income and not taxable in the hands of an NRI.

If a person is taxed in India as well as his host country, there is no need to worry. The Double Taxation Avoidance Agreement between the two countries will protect him.

The situation changes considerably if there is an employer-employee relationship between you and the foreign subsidiary of your parent company.

I happen to be a trustee in some trusts. As per rules at least 85 per cent of income of a trust in a given year should be expended on charity during the same year.

My query: Interest warrants on some investments on half yearly/annual basis are dated March 31, which even if deposited with bank on same day cannot be utilised.

Supposing total interest income of that trust accrued in a given year is Rs 50,000, warrants for which Rs 12,000 is received on the last day is March 31. 85 per cent of Rs 50,000 needs to be spent on or before March 31, that is Rs 42,500 whereas actual interest credited in bank (excepting Rs 12,000) would be Rs 38,000 (Rs 50,000 accrued-Rs 12,000 credited on March 31).

As such annual disbursement will fall short by Rs 4,500 (Rs 42,500 - Rs 38,000). How should I fulfil the regulation of spending 85 per cent of income during the same financial year?

Shantilal Vora

You have the privilege to go by the date of clearance of the cheques for the purpose of computing income for the year. Normally, it is difficult for a trust, to spend 85 per cent of its income earned during the accounting year during the same year, for several reasons. The unspent amount is not automatically brought under the tax net. There are several facilities offered to protect this income.

The shortfall can be applied before filing the returns for the year or the last date for filing the returns, whichever is earlier. In addition, when the default occurs for any other reason, it may be applied during the immediate subsequent year.

Moreover, the excess application of income in earlier years can be treated as application of income, out of the income of succeeding years and hence, deficit of earlier years has to be allowed as setoff out of income of succeeding years.

The author may be contacted at anshanbhag@yahoo.com