NRIs can donate to political parties via bonds

Photo used for representative purpose only

Q: Some NRIs wish to make donations to certain political parties in India. Last year, the government announced special bonds for making donations. Can NRIs donate money to a political party through these bonds? How does the mechanism work to ensure confidentiality?

A: Any citizen of India can subscribe to these electoral bonds which are issued by the State Bank of India. Non-resident Indians who are citizens of India can also do so. The bonds can be purchased for any value in multiples of Rs1,000, Rs10,000, Rs100,000, Rs10 million and Rs10 million. These bonds will be bearer bonds and the identity of the subscriber will not be shown. The bonds can be given as a donation to any political party registered with the Election Commission which had secured not less than one per cent of the votes polled in the last parliamentary election or state legislative assembly election.

The bonds which have a validity of only 15 days can be encashed by any eligible political party through a designated bank account with an authorised bank.  Every political party has to submit details of one designated bank account to the Election Commission and the proceeds of the bonds can only be credited to such bank account. The bonds under the scheme will be eligible for purchase for a period of 10 days each in the months of January, April, July and October.

Q: A foreign company has Indian subsidiaries. To enable the subsidiaries to avail of credit facilities from Indian banks, the foreign parent company gives a corporate guarantee. The Indian subsidiary pays a guarantee commission to its foreign parent company. Will this be taxable in India in the hands of such parent company?

A: There has been some litigation on this issue because foreign companies have taken the stand that such guarantee commission should not be taxed in India. However, courts have held that the parent company has to pay tax in India because the guarantee commission accrues in India as it pertains to credit facilities granted to the Indian subsidiary based on such corporate guarantee. Once the guarantee commission accrues in India, it is liable to tax under section 5(2) of the Income-tax Act, 1961.

Such guarantee commission cannot be treated as interest. Further, such commission earned cannot be treated as business income if the person providing the guarantee is a manufacturer or trader and is not engaged in the business of giving loans and advances. Therefore, such guarantee commission earned by the foreign company would be treated as income from other sources which would be taxable in India on accrual basis where the guarantee pertains to a loan granted in India by an Indian bank to an Indian company.

Q: My son who is in India has taken a loan to buy a house. The annual interest payable by him would be around Rs300,000. Can he claim such interest as a deduction against his salary income?

A: If the house he purchased is occupied for his own residence, the annual value would be deemed to be nil and no tax would be payable under the head 'Income from House Property'. However, he is permitted to set off the interest up to a maximum of Rs200,000 against his other income. In other words, an amount of Rs200,000 will be treated as a loss under the head 'Income from House Property'. Such loss can be set off against income taxable under any other head, including 'Salaries'. To that extent, the tax on his salary will be reduced.

Companies are also permitted to allow such loss against the salary paid to an employee while deducting tax at source every month. This is subject to the company being furnished with relevant documents proving the amount of loan taken for buying the house and the actual interest payable during the financial year in terms of the loan agreement.

The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policies.