Saturday, March 19, 2011

Global Funds


Global funds are schemes that invest at least 65% of their corpus in foreign stocks or overseas mutual funds. These funds invest in various markets, allowing investors to gain from the rise in other emerging and developed markets. Another advantage of going global is that the investor gets to buy a wider range of assets through his fund portfolio. Global funds give you access to asset classes that are not even available in India.

Before you invest in global funds, keep in mind that the risks involved in overseas investments are far more complex than those in domestic markets. These include the country-specific risk, policy risk, as well as the exchange rate risks.


Tax Implications:

Though foreign exchange regulations permit resident individuals to invest up to 90 lakh INR abroad in a financial year, they are not entitled to any tax-free luxuries on such investments. These individuals are likely to incur tax liabilities both in India and abroad, resulting in complex implications.

Under the Income Tax Act, 1961, a resident and ordinarily resident of India has to pay tax on his worldwide income. If the transaction involves sale of shares or other assets outside India, the income from these will be taxable as capital gains. The definition of capital gains is the same -- if an asset is held for more that 12 months in the case of shares or units, or 36 months in any other case, the profit on sale of the asset is a long-term capital gain. The profits from any assets held for less than the prescribed limit of 12-36 months is treated as a short-term capital gain.

Capital gains are calculated as the difference between the sale consideration and the cost of acquisition. However, for long-term capital assets, the actual cost is adjusted based on the Cost Inflation Index (CII) between the years of purchase and sale.While the long-term capital gains arising from overseas assets are taxable at the rate of 20.6%, short-term capital gains are taxable at the applicable slab rates prescribed for individuals and range from 10.3 - 30.9%. Besides, any dividend or interest income earned by a resident individual on an overseas investment will be taxable as "income from other sources".

If the investment is made in a property outside India, the rent will be taxable as "income from house property" on an annual basis. As much as 30% of the rent, municipal tax actually paid interest paid on housing loan are allowed as deduction from the gross rent to compute the taxable rent.

These tax provisions in India are in for a big change after the Direct Taxes Code comes into effect from 1 April 2010. Such investment income may also be taxable overseas, that is, in the country where the income has arisen, depending on the tax laws of the country. In case of double taxation, one can resort to the beneficial provisions under the Double Taxation Avoidance Agreement (DTAA) entered into between India and such countries.  However, this will vary depending on the nature of income, tax laws in the country and the provisions of DTAA.

While the rising personal income and consequential increase in wealth, which is supplemented by relaxed foreign exchange regulations, may make it lucrative for individuals to invest overseas, the resultant tax implications should not be overlooked. The overseas income results in a tax implication and an outflow. So, it is advisable to examine the tax implications before you invest abroad.

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