Month: July 2024

When it comes to tax-efficient investment instruments, ELSS and ULIP are two of the popular options. Both Equity-Linked Saving Schemes and Unit-Linked Insurance Plans offer dual benefits of investment and tax deductions.

However, both products cater to different financial goals. Let’s break down the key features of ELSS and ULIP to help you choose the right tax-saving instrument.

ELSS vs ULIP: Detailed Comparison

What is ELSS?

Equity-Linked Saving Scheme (ELSS) is a type of mutual fund that invests at least 80% of the total assets in equity or equity-related instruments. With 3 years of lock-in period. These funds offer tax deductions of up to INR. 1,50,000 under section 80C of the IT Act.

What is ULIP?

Unit-Linked Insurance Plan (ULIP) is a combination of investment and insurance. Part of your premium goes towards investment and the other part towards insurance. ULIP investments can be either equity-oriented, debt-oriented, or both (balanced funds). You can choose the ULIP investment type based on your financial preferences and risk appetite. With a 5-year lock-in period, the ULIP premium also offers a tax deduction of up to INR. 1,50,000 under section 80C of the Income Tax Act.

Key Differences Between ELSS and ULIP

1. Investment Objective

ULIP offers life insurance along with an opportunity to grow your money in the market. ELSS, on the other hand, does not offer insurance benefits. ELSS funds and the investment portion of ULIPs are market-linked. Therefore, you get to invest and grow your money in a fund of your choice for the long term.

2. Lock-In Period

ELSS mutual funds only have a 3-year lock-in period. It is the shortest among all the tax-saving instruments eligible under section 80C of the IT Act. Please note that if you’re investing in ELSS via SIP, each installment will carry its own lock-in period. You can withdraw the installments that have completed the lock-in.

ULIP, on the other hand, has a 5-year lock-in period, making it less liquid than ELSS.

3. Flexibility to Switch Funds

ULIP allows you to change your investment strategy by switching between ULIP funds. That way, you can realign your investment strategy with your current financial goals.

Since ELSS is a mutual fund, switching strategy is not an option. However, you can redeem the funds after 3 years and invest in a different ELSS fund as per your preferences.

4. Return on Investment

Being equity-oriented, returns on ELSS funds often outperform returns on other tax-saving instruments. These funds are subject to market fluctuations, however, you can expect decent growth in three years of the lock-in period.

In the case of ULIP, part of your investment goes towards life insurance. Therefore, you only get returns on the remaining amount invested in the market. The associated risk depends upon the scheme strategy that you choose.

The overall returns on ELSS and ULIP depend upon the performance of the underlying assets.

5. Charges

ELSS, like any other fund, has charges such as exit load, and expense ratio. Charges on ELSS funds are lower compared to ULIP.

ULIP schemes involve charges such as premium allocation charges, policy administration charges, mortality charges, fund management charges, and surrender charges.

While ELSS charges are always written in the factsheet, ULIP charges may not be as transparent. It is always advised to review the charges behind any investment instrument to understand the cost of investment and how it’ll affect overall returns.

6. Tax Benefits

Both schemes offer tax deductions of up to INR. 1,50,000 under section 80C of the IT Act. ULIP additionally offers tax exemption on the return under section 10(10D) of the IT Act.

Redeeming ELSS mutual funds after 3 years of lock-in period attracts Long-term capital gain tax of 12.5% above INR 1.25 lakhs.

ELSS vs ULIP: Quick Snapshot of Key Features

ELSS vs ULIP: Which Product Should You Choose?

ELSS mutual funds are ideal for investors seeking tax deductions and have moderate to high-risk appetite. These funds invest predominantly in equity instruments. Therefore, the risk could be comparatively higher, but the returns would be superior.

ULIP is ideal for investors who, apart from tax deductions and wealth creation, also want life cover. ULIP scheme divides your investment into life insurance and market investments. You need to factor in the various costs associated with the ULIP before investing

Ultimately, the choice is yours based on your financial goals.

You can always reach out to experts at VNN Wealth for more information. Book your appointment today!

Navigating through the ITR process might seem overwhelming, especially for NRIs earning income both in and outside India. As per SBNRI’s survey, 73% of NRIs from the USA, UK, and Canada are trying to file ITR. Filing ITR for NRIs includes managing your tax liabilities in your current country of residence and India. Don’t worry, this step-by-step guide will simplify the process for you. Sit back and go through each point carefully to fulfill your tax obligations.

Let’s get started…

An 8-Step Guide to Filing ITR for NRIs

NRIs/PIOs/OCIs must file an ITR in India if their total annual income is more than 2.5 lakhs as per the old tax regime or 3 lakhs as per the new tax regime. Here’s everything you need to know before filing an ITR.

Step 1: Understand Your Residential Status

The primary step is to confirm your residential status. As per the Income Tax Act 1961 guidelines, you are an NRI if:

1. You have stayed in India for less than 182 days during the financial year.
2. Or, You have stayed in India for less than 365 days during the preceding four years and less than 60 days in the relevant financial year.
If you visit India during the year, the 60-day rule mentioned in point 2 will be replaced by 182 days. The same is applicable if you leave India as a crew member or for employment.
Finance Act 2020 Updates:
The 60-day rule mentioned in point 2 changes to 120 days for Indian citizens or people of Indian origin with an income of 15 lakh excluding foreign income. It also states that if an Indian citizen earns more than ₹15 lakh (excluding foreign income) and is not taxed in any other country, they will be considered a Resident in India.

Step 2: Form 26AS to Reconcile Taxes and Income

Form 26AS is an annual tax credit statement that holds information such as tax deducted at the source, tax collected at the source, etc. You can easily view/download Form 26AS on the income tax portal to analyze your financial activities.

Step 3: Calculate Your Tax Liability

In this step, you have to determine your tax liability on your income earned in India. The income includes salary, interest from FDs and bank accounts, rental income.

NRIs will have to pay tax in India for capital gains earned from stocks, mutual funds, etc. The tax rate depends on the type of instrument and the duration of the investment.

While filing your taxable income, you can also opt for various deductions with your tax-saving instruments. For example, you can claim a deduction of up to 1.5 lakhs under section 80C of the IT act against ELSS mutual funds, Tax Saver FD, Public Provident Fund account, etc. You can invest in various tax-saving instruments to reduce your taxable income in a current financial year.

Step 4: Claim Double Taxation Relief

This is a very crucial step while filing ITR for NRIs. Depending on your residential status, you are obliged to pay tax in India on global income. Fortunately, India has signed a treaty with more than 85 countries to help NRIs avoid paying double taxation.

The Double Taxation Avoidance Agreement (DTAA) offers three methods:

1. Get tax credit against the tax paid in the resident country and claim it in India while filing ITR.
2. Certain types of income are eligible for exemptions. You can obtain a Tax Residence Certificate to qualify for the exemption.
3. You can also opt for the deduction method which allows you to deduct taxes paid in the foreign country.

Step 5: Select the Accurate ITR Form to Fill

Individuals with NRI status must fill out either an ITR-2 or ITR-3 form.

ITR-2 is applicable for residents or NRIs not having income under the head Profits and Gains of Business or Profession.

ITR-3 is applicable for residents or NRIs who have income under the headings of profits and gains of business or profession.

Make sure you fill out accurate details of your income and exemptions. Refer to the in-detail manual of filing ITR provided by the income tax portal.

Step 6: Provide Your Bank Details

You must provide a bank account to receive a tax refund (if any). You can either provide an Indian bank account or a foreign bank account as per your situation.

Step 7: Provide Your Asset and Liability Details

You are required to declare all your assets (movable and immovable) and liabilities if your total earnings exceed INR. 50 lakhs. In this step of ITR filing for NRIs, you must report all your assets and liabilities.

Step 8: Verification of Your ITR

After a roller coaster of filing ITR, you can upload your NRI income tax return. Cross-check all the information before submitting the form. Make sure to verify the form within 120 days. Please note that your ITR will be marked as invalid if you fail to verify it within 120 days.

Important Documents to Keep in Handy While Filing ITR for NRIs

1. Passport to prove the duration of your stay in and outside India.
2. Overseas employment contract (if any).
3. All your financial statements, including your investments.
4. Form 26AS for annual tax statements.
5. TDS certificates.

Conclusion

Filing ITR for NRIs isn’t as confusing as it appears. By following the above-mentioned steps, you can easily fill out the ITR form. Keeping your documents in handy will ease the process. Make sure you fill in accurate details. With the help of the Double Taxation Avoidance Agreement, it has become easier for NRIs to invest in Indian markets.

Explore the top 5 investment avenues in India for NRIs.

Paying tax in one country is daunting in itself, let alone in two. This is one of the primary concerns for NRIs every year while navigating finances in their country of residence and India. Thankfully, India has a Double Taxation Avoidance Agreement with 85+ countries. Non-resident Indians residing in these countries can avoid paying double taxes on their income.

In this article, we will delve into the Double Taxation Avoidance Agreement and how NRIs can benefit from it.

What is a Double Taxation Avoidance Agreement?

Double taxation occurs when an individual has to pay tax on their income in two countries- the country of residence and the home country. For example, a person working abroad also earns income in India via rent, interest on FDs, etc. In that case, he/she has to pay tax on that income twice, in both countries.

To offer double tax relief for Indians living abroad, India has signed a tax treaty with 85+ countries called the ‘Double Taxation Avoidance Agreement.’ With the help of DTAA NRIs, PIOs, and OCIs can seek exemption for tax they already paid in India while filing an ITR in their resident country.

Methods of Double Taxation Avoidance Agreement for NRIs

DTAA helps NRIs lower their tax liability using three methods:

1. Tax Credit

Non-resident Indians are eligible to utilize tax credits in their country of residence if they’ve paid tax on their income in India. Or, they can claim foreign tax credits to lower their tax liability in India. Let’s say you’re living in the US and have earned $100,000 in salary. You’ll have to pay 22% i.e. $22,000 tax in the US. You’ve also earned INR 5,00,000 as rental income in India. As per the tax slabs in India, let’s assume you owe INR. 1,50,000 in tax. Assuming the currency exchange rate of INR. 85 per dollar, your combined global income will be: INR. 85,00,000 (US income) + INR. 5,00,000 (Rental income in India)= INR. 90,00,000. Your tax liability in India will be approximately INR. 27,00,000. However, you’ve already paid a tax worth INR. 18,70,000 in the US. Therefore, while paying tax in India, you can use foreign tax credits worth INR. 18,70,000 to avoid double taxation on foreign income.

2. Exemption

In the exemption method, you only have to pay tax in the country where you are working on certain types of income. You can obtain a Tax Residence Certificate which allows you to get tax exemption in India on incomes eligible under this method.

3. Deduction Method

This method allows you to claim taxes paid to the foreign government as a deduction.

Documents Required to Claim DTAA Benefits

1. Tax Residency Certificate (TRC): TRC is a crucial document issued by the tax authorities of your country of residence. This document verifies your residential status in the foreign country while filing ITR as NRI in India.

2. Form 10F: TRC may not offer all the information required to claim DTAA. In that case, you can fill the Form 10F online. It’s a self-declaration form to provide the additional information that the TRC lacks.

3. Form 67: NRIs can claim foreign tax credits by filling out Form 67. While paying the tax in India, NRIs can pay tax on global income using foreign tax credits. For example, you’ve received dividend income in the US and already paid tax on it. You can use those tax credits to pay tax on the same income in India.

4. You may also need additional documents such as a PAN card, Passport copy, and Visa copy to claim DTAA.

Note: The process to get relief on double taxation may vary based on your current country of residence. The tax rates and the exemption methods may also vary accordingly.

What Type of Income Comes Under DTAA?

As per the double taxation avoidance agreement, NRIs do not have to pay double tax on the following type of income:

1. Services provided in India.
2. Salary received in India.
3. House property located in India.
4. Capital gains on transfer of assets in India.
5. Fixed deposits in India.
6. Savings bank account in India.

Countries That Have Double Taxation Avoidance Agreement with India

India has DTAA with 85+ countries. The TDS rates for the few are mentioned below.

Conclusion

The aim behind signing the Double Taxation Avoidance Agreement (DTAA) was to provide double tax relief to NRIs/PIOs/OCIs. India has signed the DTAA with more than 85 countries, allowing NRIs to pay a fair tax on their income in two different countries. Non-resident Indians can claim tax exemptions using the combination of methods mentioned above. That way, they do not have to pay taxes twice on the same income.

DTAA has also made it easy for NRIs to invest in Indian markets without having to worry about taxes. NRIs can invest in mutual funds and various other avenues to build wealth in India.

If you’re an NRI seeking investment opportunities in India, contact VNN Wealth. Our experts will provide detailed insights into your investment portfolio. You may like to read a step-by-step guide to filing an ITR as an NRI.