I wish to return to India on transfer of residence in the near future. Before stepping onto Indian soil, I have the following queries:

* Out of my sizeable assets earned abroad, I wish to reserve about 15-20 per cent for future expenses like children's higher education, gifts, insurance premiums, holidaying abroad, etc. In India, I'm allowed to have only RFC accounts, but I have the right to keep my funds in a foreign bank at higher returns. This way, my money earns more and I bypass devaluation risks. There's no tax on income earned abroad for a period of nine years after my return to India. Do you approve of this plan? Are there other avenues that allow me to do so and which give similar, if not higher, returns?

* The remaining funds have to cater to my day-to-day expenses. Can you suggest some optimal strategy available to ex-NRIs, which provides the highest returns without eroding the base capital by inflation?

--Tony Monteiro, Dhahran

Yes, it's a good idea to keep some funds abroad for special purposes such as children's education, holidays and medical treatment. Forget gifts and insurance. Give as many gifts as you desire to whomsoever before arriving in India. The insurance premiums can be paid in Indian rupees if the insurance is with LIC or GIC. Possibly this is the right time for you to ask yourself whether you need to continue the insurance and pay the cost thereon. If, after your demise, the funds available to your family members are not sufficient to maintain the lifestyle they are used to, then and only then do you require life insurance.

Please realise that the returns on your investible funds in India are so much higher than what you can earn abroad that, in spite of the exchange risk, it would be prudent for you to bring as much of your funds to India as possible. Assess the minimum amount you would like to keep abroad and this should not be on the basis of a percentage.

To give you an idea of the kind of money you can have for your day-to-day expenses, I would like to assure you that under the present scenario, it's possible for you to have over Rs 6 lakh per annum tax-free, on a base capital of Rs 50 lakh.

In your article on Konkan Railway bonds, I was surprised to find that you have taken credit for Rs 8,000 as standard deduction against the LIC annuity of Rs 24,000. I retired from Tisco in 1990. LIC pays me an annuity of Rs 22,388 towards pension under the Group Insurance Scheme. My tax consultant has never claimed this deduction. I'm sure he is right and you are wrong.

--N T Darasha, Pune

Yes, your consultant is right, but so am I. You've possibly confused him by using a wrong phrase-Group Insurance Scheme. You should have told him that LIC is paying you an annuity (or pension) from your superannuation fund. Group insurance is an entirely different thing. Section 16(i) prescribes the standard deduction on income earned under the head `salaries'. Section 17 defines salary to include wages, annuity or pension, gratuity, etc.

Therefore, the superannuation linked LIC annuity, which has its nexus with the salary earned while you were in service, is eligible for deduction u/s 16(i). The trustees of the fund are required to deduct tax at source.

In May 1994, I sold some shares, acquired in 1968 for about Rs 80,000, for a consideration of Rs 7,75,000. I earned a whopping capital gain of Rs 3.25 lakh. To save the tax, I deposited Rs 7.25 lakh in a CGAS savings bank account in November 1993, within six months of the sale. I desired to purchase a residential house within two years since I was staying in a rented house belonging to a friendly landlord. He desires to have the house for the use of his son and I cannot say no to him.

Unfortunately, I was busy finishing the construction of a residential house, which had commenced some 10 years ago. The house is now ready and I don't need another house. Can I withdraw this amount from CGAS? Does this come under the category of not utilising the amount deposited in the CGAS? What will be the penalty? Will I have to pay the tax as per the cost index of the financial year 1994-95 or 1997-98?

--K N Singh, Shimla

At the outset, let me tell you that it is a general misconception that the sale proceeds must be invested in CGAS within six months. This was the requirement u/s 54E for the purchase of capital bonds of UTI, IDBI, NHB, etc. And this is the requirement of the new Sections 54EA and 54EB. As far as CGAS is concerned, Section 139(1) stipulates that the deposit has to be made before filing the tax returns or before the due date of filing the returns for the year, whichever is earlier.

It appears that you have kept such a large sum of money for such a large period, earning the low savings bank rate. I feel that the bank staff have not guided you properly.

The necessary and sufficient condition for acquiring the benefit of Section 54F is that the purchase of the residential house must be completed within one year before or two years after the date on which you earned the long-term capital gains. Alternatively, you may construct a residential house within three years after the date.

There's no stipulation that the construction should necessarily begin after you have incurred the capital gains. The purchase should be within one year before, but there's no restriction on when the construction had commenced. Therefore, you are entitled to claim the exemption. But there's a hitch. Since you have not utilised the funds from CGAS for construction, the ITO may not grant you the desired concession.

Suppose you had not constructed another house and you could not purchase a residential house within the stipulated time, what is the position? The Act states: ``The amount not so utilised shall be charged as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires and the assessee shall be entitled to withdraw such amount in accordance with the scheme.''

Even if you desire to purchase a house, you are given the privilege of waiting for three years since it is possible that you may end up constructing a house.

This is indeed extremely good. You get 100 per cent exemption in the year of deposit. The capital amount is charged to tax in the year of withdrawal. Is this not parallel to NSS-87? It's always beneficial to postpone the tax liability to a future date and earn interest not only on your capital, but so on the amount that really belongs to the exchequer.

I'm not sure if you can use the index of 1997-98. The Act requires the unutilised amount to be charged as the income of the previous year in which the period of three years expires.

How can you be faulted if you use the tax provisions as existing during 1997-98 and take cognisance of all the amendments, if any, which have taken place during the period? I go a step further. How can you be faulted if you use Section 54EA or EB to save tax in 1997-98?

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.