Investing Your Money

People receiving gifts, in cash or kind, will have to pay tax, if the value exceeds Rs 50,000. Until now, income tax was levied only on cash gifts above this amount. However, a notification issued by the Central Board of Direct Taxes (CBDT) said the revised norms will come into effect from October 1, 2009. "Any such person who receives a gift of any such property on or after October 1, 2009, must pay income tax due on the value of the gift and disclose the taxable value of such property in the return of income for assessment year 2010-11 and subsequent years," said the CBDT statement.

It is important to know the details of this tax liability to make sure that you are not caught on the wrong side of the law. Individuals receiving shares, gadgets, automobiles, jewelry, valuable artifacts or even property valued at over Rs 50,000 as gifts from non-relatives, will have to start paying tax from October 1, 2009.

It means that if you receive high value gifts then the value of these gifts will be added to your total income and the corresponding Income Tax will be deducted. These types of gifts will be considered as income from other sources from assessment year 2010-11 onwards. For example, if you received a car for a Rs. 6,00,000 from a friend, you will have to pay up to Rs. 1,80,000, if your income falls in the highest tax bracket of 30 per cent. In case a property has been sold at a nominal rate as a gift, the receiver will have to pay taxes on the difference between state government notified rate and the purchase price.

These changes were brought in to plug the loophole in section 56 according to which only cash gifts of more than Rs. 50,000 from non-relatives were taxed. You could have received gifts as shares or any other non-cash instrument and avoided paying tax. From October 1, 2009 this will not be possible. However, gifts to relatives and gifts for a wedding are not taxed.

Here are some tax exempt categories to utilize gift tax provisions in your favor:

1. Any gift from relatives of any amount during the financial year is completely exempt from tax. For Income Tax department a relative means the following: (also depicted in the picture below)

a. Your spouse;
b. Your brothers and sisters and their spouses;
c. Your spouse's brothers and sisters and their spouses;
d. Brother and sister of your parents and their spouses;
e. Any lineal ascendant (parents, grandparents, children, grandchildren) or descendants (children, grandchildren);
f. Any lineal ascendant (parents, grandparents, children, grandchildren) or descendant of your spouse (children, grandchildren)

2. The provision is applicable only to individuals and HUF (Hindu Undivided families) but if a gift is received by a trust or a society then it is tax exempt.

3. Gifts received from anybody for weddings are tax exempt.

4. Following other kinds of gifts are also exempt from the tax axe:

* Gift received under a Will or by way of inheritance;
* Gift received due to of death of the donor;
* Gift from any local authority;
* Gift from any fund or foundation or university or other educational institution or hospital or any trust or any institution referred to in Section 10(23C); and
* Gift from any trust or institution, which is registered as a public charitable trust or institution under Section 12AA.

Be careful while accepting expensive gifts this festive season. It may turn out to be expensive!

Learn how the fall of dollar impacts your finances and investments. With the correct analysis you will be able to plan better and take preventive measures.

In March '09 the American dollar index touched 52.1850, its highest point this year. Since then, however, it has been a steady downward drift for the greenback. Come December 09, the dollar index had slipped to 46.5547 (15 day average), its lowest point in more than a year.

Earlier the economic risk of the Indian rupee was typically one-way: downwards. Undoubtedly, the Rupee was expected to weaken against the Dollar. Thus, most NRIs preferred leaving their money in foreign currency or FCNR deposits - the low yield on these deposits would be more than made up by a continually falling Rupee, thereby making the Rupee wealth of NRIs grow with time.

Now, however, the situation has changed. The Indian economy is sitting on large foreign exchange reserves (> $250 billion). Given that India is now more globally linked than at any other time in its recent history, the impact on the value of its currency is that it is buffeted by international trends.

Whatever might be expected to happen in the short term (1-3 months timeframe) with USD/INR movement, over the next 1 year it seems that the Rupee is headed for a moderate strengthening against the Dollar from its current levels? This would be based on current fundamentals of asset market as well as pure demand and supply driven.

On the fundamentals side, India is expecting a rate hike by March 2010, which now appears a near certainty and given the Fed's stance on continuance of easy policy in 2010, rate differentials in Asia pacific and the west should widen and put further pressure on the US dollar. This coupled with sustained growth signal from the RBI and its comfort of clocking GDP growth upwards of 6% in fiscal 2010 and possibly higher growth in fiscal 2011 puts the demand supply situation of the USD/INR market in favour of the latter.

The last point which makes the case for a weaker dollar from an Indian context is also the fact the should there be a correction in the equities market, valuations would look compelling in medium term thereby making way for more dollars coming into lending strength.

How does it affect you?

NRIs investing back in the US will have major set backs. For example, last year you could buy Rs. 4.5 lakhs worth of property in just $10,000 now it requires $11,500, an increase in the dollar spend. Similarly if an NRI is sending money back home an average $1000 yielded Rs. 43,000 but now only yield Rs. 39,000. On average there is an 8% decrease in the yield.

Interest rates in India are close to 8% for fixed deposits (9% for senior citizens). Interest rates in the US are also around 5% and further going down. The debt portion of the NRI investment portfolio (earning 4%-5% in the US) if held in dollars will not keep pace with the increasing inflation in India (which is a lot higher).

Steady erosion in the US Dollar will severely impact the NRIs. Most of them hold dollar assets - (their future earnings held mostly in dollars) which on purchasing power parity basis will also diminish. While they enjoyed the ride when the rupee slipped to Rs 52, they will have to unwillingly give away a fair proportion of these notional gains. In rupee terms, they would steadily lose a certain portion of their net accumulated wealth each year.

The depreciating dollar will also increase the cost of living in the US as most of the items of general consumption are imported from developing countries (India, China, South East Asian nations etc). The comforting factor is that for Non Resident Indians who have no plans of returning to India- the dollar rupee equation may not hold much relevance.

However, if NRIs intend to return to India/ have returned and hold assets abroad should re-look at their financial goals and evaluate what their country wise allocation should be; i.e. If 70% of their goals are in India, they should systematically start moving funds to India accordingly.