Month: January 2020

How NRI’s can claim tax benefit under DTAA?

Posted on by Team Jagoinvestor

The taxation becomes more complicated when you moved out of one country to another for earning. A lot of times, an NRI will be earning in India as well as abroad, and pay the income tax in India and abroad both at the same time, because of many country levy tax on global income. This leads to double taxation for NRI’s.

We will talk about Double Taxation Avoidance Agreement (DTAA) today and understand how NRI’s can take benefit from it while they are planning their investments

Many NRIs earn various types of income from India eg. rental income, interest on FD or NRE/NRO savings account or even capital gain on sale of asset, etc. However, due to DTAA (Double taxation avoidance act), An NRI can save himself from getting taxed twice.

What is DTAA?

DTAA is a tax treaty signed between India and various other countries because of which investors does not have to pay taxes twice in both the countries. Hence DTAA mainly have following benefits

  • Helps NRI’s in lowering their taxes
  • Helps NRI’s in avoiding paying dual taxation
  • Makes a country attractive for NRI’s because of such a treaty
  • Helps in curbing the tax evasion by NRI’s

The benefit of DTAA is extended every year to NRI. Which means that NRI’s who want to keep availing the DTAA benefits have to furnish the required documents at the start of every financial year to the tax authorities.

Here is an example

An NRI can avail tax benefits with the help of DTAA, as his earnings in India are taxed as per the rates decided in agreement. This prevents the NRI from paying 30.9% as TDS (Tax Deduction at Source), instead, he could pay tax at 10-25% rate depending upon the country he currently resides in.

Example of DTAA with USA

There is a DTAA between India and USA also, and the TDS rate is only 10%, which means that an NRI who has income in India and who falls in 30% tax bracket will only be paying a TDS of 10%, and not 30% if he does all the documentation. Note that there are different tax rates for various kinds of income like interest, dividends, royalty etc.

Following are the types of income’s which fall under DTAA

  • Salary that is received in India
  • Income from services that are provided in India
  • Fixed deposits & saving bank account held in India
  • House property situated in India
  • Capital gains arising out of transfer of assets in India

I think it will also be applicable on NRI’s investments in Mutual funds investments in India

DTAA with 89 countries

Right now, India has double tax avoidance treaties (DTAA) with more than 89 countries around the world, whose details can be accessed here and a simple tabular list can be found here

Below is a TDS rate list with all 89 countries (out of which some 85 are in force)

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Sr. No Country with whom India has TDAA treaty TDS Rate
1 Albania 15.0%
2 Armenia 10.0%
3 Australia 10.0%
4 Austria 10.0%
5 Bangladesh 15.0%
6 Belarus 10.0%
7 Belgium 10.0%
8 Bhutan 15.0%
9 Botswana 15.0%
10 Brazil 15.0%
11 Bulgaria 10.0%
12 Canada 10.0%
13 China 10.0%
14 Columbia 10.0%
15 Croatia 10.0%
16 Cyprus 15.0%
17 Czech Republic 10.0%
18 Denmark 10.0%
19 Estonia 10.0%
20 Ethiopia 10.0%
21 Finland 10.0%
22 Fiji 10.0%
23 France 10.0%
24 Georgia 10.0%
25 Germany 10.0%
26 Hongkong 10.0%
27 Hungary 10.0%
28 Indonesia 10.0%
29 Iceland 10.0%
30 Ireland 15.0%
31 Israel 10.0%
32 Italy 10.0%
33 Japan 10.0%
34 Jordan 10.0%
35 Kazakhstan 10.0%
36 Kenya 10.0%
37 Korea 10.0%
38 Kuwait 10.0%
39 Kyrgyz Republic 10.0%
40 Latvia 10.0%
41 Lithuania 10.0%
42 Luxembourg 10.0%
43 Malaysia 15.0%
44 Malta 7.5%
45 Mongolia 10.0%
46 Mauritius 10.0%
47 Montenegro 10.0%
48 Myanmar 10.0%
49 Morocco 10.0%
50 Mozambique 10.0%
51 Macedonia 10.0%
52 Namibia 10.0%
53 Nepal 10.0%
54 Netherlands 10.0%
55 New Zealand 10.0%
56 Norway 15.0%
57 Oman 10.0%
58 Philippines 10.0%
59 Poland 10.0%
60 Portuguese Republic 10.0%
61 Qatar 10.0%
62 Romania 10.0%
63 Russian Federation 10.0%
64 Saudi Arabia 15.0%
65 Serbia 10.0%
66 Singapore 10.0%
67 Slovenia 15.0%
68 South Africa 10.0%
69 Spain 10.0%
70 Sri Lanka 10.0%
71 Sudan 10.0%
72 Sweden 10.0%
73 Swiss 10.0%
74 Syrian Arab Republic 10.0%
75 Tajikistan 10.0%
76 Tanzania 10.0%
77 Thailand 15.0%
78 Trinidad and Tobago 10.0%
79 Turkey 10.0%
80 Turkmenistan 12.5%
81 Uganda 10.0%
82 Ukraine 15.0%
83 United Mexican States 15.0%
84 United Kingdom 10.0%
85 United States (USA) 10.0%
86 Uruguay 10.0%
87 Uzbekistan 10.0%
88 Vietnam 10.0%
89 Zambia 10.0%

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What sections under IT Act provide relief from paying double tax?

Section 90, Section 90A and Section 91 of the Income Tax Act, 1961, provides for DTAA relief.

Section 90 – Reads as “Agreement with foreign countries or specified territories”. It applies to the cases where India has a bilateral agreement with another nation like Canada, UK, Singapore, etc.

Section 90A – When a specified association in India enters into an agreement with a specified association abroad, the Central Government, may by notification adopt such agreement and provide relief under section 90A of the Income Tax Act, 1961.

Section 91 – Applies to cases where India does not have any bilateral agreement, rather it has unilateral agreement. It states how tax relief can be availed in case of “Countries with which no agreement exists.”

How to claim DTAA benefits?

To benefits from the provisions laid under DTAA, an NRI individual will have to provide the following documents in a timely fashion to the concerned deductor eg. bank in case of tax on interest income earned.

  • Self-declaration cum indemnity format
  • Self-attested PAN card copy
  • Self-attested visa and passport copy
  • PIO proof copy (if applicable)
  • Tax Residency Certificate (TRC)

According to the Finance Act 2013, an individual will not be entitled to claim any benefit of relief under the Double Taxation Avoidance Agreement unless he or she provides a Tax Residency Certificate to the deductor.

To receive a Tax Residency Certificate, an application has to be made in Form 10FA (Application for Certificate of residence for the purposes of an agreement under section 90 and 90A of the Income-tax Act, 1961) to the income tax authorities of country of residence. Once the application is successfully processed, the certificate will be issued in Form 10FB.

DTAA methods

There are two ways NRI’s can claim the DTAA benefits, and let’s discuss it here

Tax Credit Method

This is the most popular method of taking DTAA benefits. Under tax credit method, the person first has to take into consideration all his income into consideration (foreign country + home country income) and calculate the taxes applicable. Then they will calculate the taxes as per home country and take that much credit while paying for taxes.

For example, if someone has a bank interest in India for 20 lacs and the tax rates applicable to them is 30%, and if in the foreign country they live right now taxes is at 40%, then the person will be able to take back the credit of 30% and only pay additional 10% taxes. This method makes sure that there are almost no way a person pays dual taxes.

Exemption Method

This is another way, in which you don’t have to consider your home country income at all and just have to pay the taxes on the income which you have earned in the foreign country. So it does not matter what are the tax rates in different countries. As per the DTAA treaty, you just skip the home country income altogether, so you just end up paying taxes in home country only.

Take Professional Help with it comes to DTAA

Once you have become an NRI, and you have multiple income sources in different countries and when you also have spent different times in India and abroad, it becomes quite complicated to take benefit of DTAA rules. You also have a chance of making a mistake and pay less tax (or to pay more) if you try to do it yourself.

Hence I strongly suggest that you hire a professional CA who has expertise in DTAA matters and pay the fees to them to do the calculations and tax filing.

I hope this article was able to help you understand various rules related to DTAA.

If you are an NRI, we also invite you to explore our NRI financial planning services

Surrender v/s Paid-up – which is better option for your old insurance policies?

Posted on by Anuradha Singh

Do you want to get rid of your old money back insurance plans, but are confused if you should “surrender” or make it “paid up”?

Today I will explain which one is the best option amongst the two.

Surrender vs Paid-up option in Insurance policies

All those assured insurance plans which your parents made you buy from your friendly neighbourhood uncle is nothing less than a high premium low return policies with not more than 1-5% CAGR return.

These policies don’t provide enough life insurance cover neither they create enough wealth for you for your long term goals like children education, child marriage or retirement and on top of that, these policies have pathetic returns value if you want to close them before maturity and take back your money.

Mainly there are two ways to discontinue these insurance policies which are –

  1. Paid-up Policy
  2. Surrender Policy

What is “paid up” option?

Under this option, if a policy holder does not close the policy, but stops paying any further premium. However, note that this option is generally applicable only after one has paid for at least 3 yrs. (however, check your policy wordings for exact years)

The amount which you will receive at maturity will be reduced, in proportion to the premiums paid. This sum assured is called the paid up value. It is calculated using the following formula:

Paid up value = Original sum assured x (No. of premiums paid / No. of premiums payable)

Example – A traditional insurance policy with sum assured of Rs. 10 Lakhs for 20 years with a premium of Rs. 30,000 p.a. paid for 8 years. Let’s find out what will be its paid up value if one wants to stop paying further premiums.

Paid up value = 10,00,000 * 8/20 = 4,00,000

At a high level, the numbers don’t look back. You will get 4 lacs, but you paid just 2.8 lacs overall, however, remember that you will get this 4 lacs after so many years and you will lose the purchasing power because of inflation.

You can simply say that real worth of Rs. 4 lac received after 12 years is Rs. 1,58,000 today, taking inflation at 8%.

Therefore, if you are choosing policy paid up option, keep in mind that converting the policy into a paid-up policy will lock your money for the remaining term of the policy and also, actual worth of the amount, which you will receive in later years will be very less if the maturity of the policy is very far from now.

What is “surrender policy” option?

Under this option, you close the policy completely and take back your money. The money you get will be some percentage of your premiums paid minus the first year premium. And this percentage increases depending on how many years the policy premium has been paid.

A policy generally acquires any surrender value only after 3 yrs of premium payment, which means that if you choose to surrender your insurance policy before 3 yrs, you lose all your money and don’t get back anything.

Note that the surrender value starts with 30% and goes up depending on the number of years you have paid the premium.

Following is an indicative table which shows the surrender value as a percentage of premiums paid

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Time of Surrender % of premium paid – first year premium
After 3 years 30% of premium paid
After 5 years up to 8 years 50% of premium paid
After 8 years 65% of premium paid
Last 2 years to policy maturity 90% of premium paid

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This percentage can change from company to company and depends on factors such as the type of policy. Every policy brochure mentions details about surrender value but, it is not compulsory that all the companies mention this percentage which is also called the surrender value factor in their brochures.

Example of surrender policy

Mr Pratik has bought a traditional insurance plan of 20 years with a sum assured of 6 Lakhs premium amount is Rs. 20,000 per year. After paying the premium of 6 years, he wants to surrender the policy.

Surrender Value = 50% of (premium paid – first year premium)

= 50% of (120000 – 20000)

= 50% of 1,00,000

= Rs. 50,000

You can see that he will just get Rs 40,000 from surrendering the policy even if he paid Rs 1,20,000

flow chart for surrender vs paid up insurance policy

 

When to choose “Surrender” and “Paid up” option?

Surrendering a policy is suggested when

  • You are not able to pay the premiums
  • You need money for some reason
  • When remaining number of years in policy is more than 8-10 yrs

This option is suggested because you still have many years left and you can pay the same premium amount in a better product which will do wealth creation for you.

Making a policy paid up is suggested when

  • You don’t need money but don’t want to pay further premiums
  • When you don’t want to pay premiums, but still want the policy to run
  • When your policy maturity is very near (2-4 yrs)

Making a policy paid up is generally not suggested, but a lot of times, investors are not able to take the pain of getting the reduced amount from their policy and feel like “they will get something in future”, however considering “time value of money“, it’s not a great option.

How to deal with the emotional part “I am facing so much loss”?

In both the options, there will be a loss for sure. Money back insurance plans are designed to give low yields and penalize you if you quit in between.

I think dealing with closure of insurance policies is more of a psychological battle You know you have got a wrong product and its bad for your future, but people can’t deal with the fact that they are facing so much of loss – “I paid 8 lacs, and I will get back only 4 lacs, I will lose 4 lacs”

Note that if you consider TIME VALUE, things will be easier to decide.

If your friend borrows Rs 100 from you and returns you Rs 110 after 10 yrs, you are not in profit, you are actually in LOSS. Because you could have created Rs 250 with an alternate investment and now you just have Rs 110, that’s Rs 140 loss.

Just looking at it from absolute numbers point does not make sense.

For example, imagine a sum assured of Rs 10 lacs with a yearly premium of approx. Rs 53000 per year. Now if a person has already paid 5 premiums and wants to surrender the policy, they will just get back around Rs 85000 (assuming 40% of 4 premiums, as one premium is deducted). The immediate loss of mind is for Rs 1.8 lacs (paid 2.65 lacs and getting back 85,000)

This is a tough situation for the mind and very tough to handle. A person feels why to take a loss when one is not recovering the amount paid also and just continues the policy till the end. The person will get back anything between 15-18 lacs, depending on the bonus amount declared.

This translates to only 5.69% and this the best case (it will get better if you die early after taking the policy, but I am sure you would not like it)

Now if the same person reinvests the same 85,000 along with Rs 53,000 premiums yearly into some equity-based products like equity mutual funds or index funds, even if assume a modest 12% returns which have happened in past, the wealth one will have will be 24.5 lacs and the IRR will be approx. 7.4% of the whole scenario. This second option also gives you better liquidity and exit option whenever you wish to get money.

Arogya Sanjeevani Policy – A uniform health insurance plan (REVIEW)

Posted on by Jagoinvestor

IRDA has recently announced the launch of health insurance policy called “Arogya Sanjeevani Policy” (official link) which will have standard features which are required by a common man for his health insurance requirement.

IRDA thought of a standard policy which will be exactly same across insurers with similar features. In this review, I plan to give you details of this policy.

Arogya sanjeevani health insurance policy review

What is Arogya Sanjeevani Policy?

It’s a standard health insurance policy for a common man with standard features. It will be offered by all health insurance companies in India starting from 1st April, 2020 onwards. The name of the policy will be ‘Arogya Sanjeevani Policy – Insurance company name’. The premium, however, may be set by the insurers on their own.

The existing health insurance policies in market are quite complex at times with fancy features and differ from each other so much that a normal investor finds it very tough to choose a suitable policy. Hence IRDA came with this policy.

Who can buy the policy and for whom?

Any person whose age is between 18 and 65 yrs can take this policy. Either the person can buy an individual policy or buy the family floater option if one wants to cover other family members.

“Family” here means

  • Spouse
  • Parents
  • Parents-In-Law
  • Dependent children between 3 months to 25 years (natural or adopted)

Note that any children who are above 18 yrs and financially independent will not be eligible for family floater.

Features Arogya Sanjeevani Policy

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Feature

Explanation
Sum Assured The minimum sum assured is Rs 1 Lac and maximum sum assured is Rs 5 Lacs (in the multiple of 50,000)
Premium Payment Frequency Premiums can be paid on a monthly, quarterly, half-yearly and on a yearly basis. It will be a 1 yr policy renewable each year
Cashless Benefit Yes, there is cashless benefit under this policy
Maternity Benefit Not Available
Renewability Lifetime renewability is available in this policy.
Minimum & Maximum Age The minimum entry age for the principal insured is 18 years and the maximum entry age is 65 years.
Waiting Period 30 days of waiting period. Hence no claim will be paid in first 30 days after buying policy
Co-payment A fixed copay for 5% is applicable for all ages in this policy.
Portability Yes, the policy offers the portability option to other health insurance companies
Ambulance Charges Max Rs. 2000 per hospitalization
Pre & post Hospitalization 30 days Pre Hospitalization & 60 days Post Hospitalization expenses
Ayush Treatment Yes, it’s Available.

AYUSH means all treatments related to Ayurvedic, Yoga, and Naturopathy, Unani, Siddha, Homeopathy
Waiting Periods There are 2 types of waiting periods, 24 months and 48 months.

Most of the illness have only 24 months of waiting period, but two of them have 48 months of waiting period.
Sub Limits
  • For hospitalization expenses like room, boarding, nursing expenses up to 2% of Sum Assured or a maximum of Rs.5,000 per day.
  • ICU/ICCU expenses will also be provided up to 5% of sum assured or a maximum of Rs.10,000 per day.
  • Sub-limits of cataract surgery are equal to actual expenses i.e. 25% sum assured or Rs 4 lakhs, whichever is lower.
NCB (No Claim Bonus) NCB (No Claim Bonus) of 5% for each year up to 50% of the sum assured is covered.
Riders Not Available

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Policy Cancellation and Refunds

You can cancel the policy subject to following refund options

  • If you cancel within 30 days, you will get 75% premiums back
  • If you cancel from 31 to 90 days, then you get 50% premiums back
  • If you cancel between 3 months to 6 months, then you get 25% premiums back
  • After 6 months, you get NO refund

Is there any grace period in the policy?

Yes, For a yearly premium payment, 30 days grace period is allowed and for other modes of premium payment 15 days grace period is allowed.

Will the premium depend on my city or the zone?

No, it will be same across India. Note that some policies have zone-based premiums model

What are some exclusion of the policy.

The main exclusion is the maternity treatment expenses, but even treatments related to weight loss, change of gender, plastic surgery, hazardous adventure sports, breach of law or due to war, etc are excluded from the policy.

Good points of Arogya Sanjeevani Policy

  • All main features are available in the policy which is required by any investor
  • The policy has standard features, so no chance of getting confused when comparing the premiums of different companies
  • It’s my guess, but the premiums of this policy would not be very high as copay is there in this policy and no complicated features exist. Also there is a very large market for this policy hence all insurance companies will compete with each other to keep premiums down
  • Its a no brainer policy for someone who wants to buy a “decent policy”
  • You can buy multiple Arogya Sanjeevani Policy from different insurers

Should you buy Arogya Sanjeevani Policy?

At the end, let me answer this important question.

Health Insurance is a long term product, and if you can afford the permission, you should go for a base policy which is very strong overall. I suggest one to go for a 10-15 lacs of base cover and extend the cover using super top up policies beyond that.

Overall Arogya sanjeevani policy is decent for a common man who wants a good enough health insurance policy which works. It’s like the Jan Dhan account which has all the decent features. However there are few things which are the issues

  • 5% copay
  • Sub limits of room rent
  • Maximum Sum assured limit of Rs 5 lacs
  • 30 days of waiting period

Hence, I would suggest to explore other health insurance policies which give option to take a higher sum assured and may also not have copay limits.

We also need to wait for couple of more months to see how this policy launch turns out to be and what kind of premiums will be charged by various companies. Overall, it’s a very positive development in health insurance space and this policy will give an opportunity to people from lower sections of society to buy a good enough health insurance policy.