Mutual funds offer guaranteed monthly payouts

dubai - Units of the mutual fund scheme get reduced based on the net asset value

Q: I am planning to return to India. I want to know whether I can invest a lump sum and get a fixed monthly return. Is such a product available which can also give some benefit of appreciation?
- K.R. Mishra, Ruwi

A: Mutual funds have a systematic investment plan whereby a fixed amount is contributed monthly to the plan by an investor. Some mutual funds have come up with an innovative scheme whereby a lump sum amount is invested and the investor is paid 0.75 per cent every month. Therefore, assuming that a person invests Rs1 million, he can withdraw Rs7,500 every month. Under this scheme, investors can redeem up to 10 per cent of the initial amount invested within a year.

The redemption per month is fixed and the units of the mutual fund scheme get reduced based on the net asset value as of that date. If the NAV of the scheme goes up, investors will benefit from the appreciation. Presently, only debt schemes of certain mutual funds offer this facility. Some private insurance companies have also developed schemes which offer guaranteed monthly payouts until the maturity of the policy.

Q: I have been working in the United Kingdom for several years. I am currently on a temporary assignment in the Gulf. I propose to return to India next year. I wish to subscribe in lump sum to a UK-based pension fund. I want to know whether the pension I receive in India will be tax-free and whether I can use these funds freely in foreign exchange when I become resident in India.
- P.K. Thakkar, Doha

A: Indians who have been working in Britain and who have now retired have invested their funds in the qualified recognised overseas pension scheme.  Under this scheme, the UK government allows tax-free transfer of pensions to any other country. The scheme has been approved by Her Majesty's Revenues & Customs which collects and administers taxes in the UK. The transfer of pension has to be made to approved pension schemes in India.

The annuities can now be received under the scheme at any time after the annuitant completes 55 years. Annuities are generally taxable in India as income. Even after you become resident in India, you will be entitled to repatriate from India in foreign exchange amounts not exceeding USD250,000 as per rules prevailing today. The pension you receive in foreign exchange can be credited to a resident foreign currency (RFC) account in pound sterling, so that when you withdraw the money in the same currency, you will not suffer loss on exchange.

Q: An Indian company has set up joint venture companies in Dubai and Singapore. The joint venture companies render marketing services to the Indian company by promoting the sale of products manufactured in India. Would the commission payable be taxable in India as fees for technical services?
- T.S. Chakravarty, Dubai

A: In some cases, assessing officers have taken the view that fees or commission paid by an Indian company to foreign companies which provide marketing support services, are taxable in the hands of the foreign company as fees for technical services. However, appellate authorities have overruled such assessments and held that these fees for marketing support services do not qualify as fees for technical services defined under the double tax avoidance agreements.

Under these agreements, fees for technical services would cover consideration for providing technical knowledge, skill and experience to the Indian company. Marketing support services will not fall in this category of services. Therefore, Indian appellate authorities have held that no tax is to be deducted at source by the Indian company when it remits fees or commission to the foreign entities who provide the marketing support services. Further, such amount of fees or commission cannot be taxed as business income in the hands of the foreign companies if they do not have a permanent establishment in India as defined under the relevant double tax avoidance agreements.

Q: Some of my friends working in the Gulf have US passports or are US residents. I am also thinking of becoming a US resident. However, I am told that there are some stringent rules for reporting all overseas transactions and investments made by persons who are residents of the US. I need some information.
- K.B. Singh, Abu Dhabi

A: A law called the Foreign Account Tax Compliance Act has been passed in the United States which requires financial institutions around the world to report all holdings and investments of US citizens/residents to the Internal Revenue Service. In January 2013, the US government issued rules pertaining to this anti-tax avoidance measure. Under these rules, financial institutions which are in countries which have signed inter-government agreements with the US government are required to provide details of financial holdings belonging to their clients who are US residents or citizens. India is also one of the signatories to the IGA.

Based on the common reporting standard, all non-residents who have investments, including in mutual funds, in India will have to fill up a self-certified declaration form stating whether they are residents of the US or not and whether they are resident in any other country. All banks, financial institutions and mutual funds in India have already sent out letters to their non-resident customers asking for such information. It must be noted that a person who is a resident or citizen of the US is liable to pay tax on his world income and not only on income earned in the US. Therefore, even dividends from Indian companies/mutual funds which are exempt from tax in India will be liable to tax in the United States.

- The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policies.

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