IMDs: How residents can benefit

Suresh Krishnamurthy

AN INSTRUMENT that offers 8.5 per cent in dollar terms which, in the light of the annual rupee depreciation, offers around 14 per cent with no tax payable in India, sounds exciting.

And for Indians who thought the tax-free 11 per cent offered by provident funds great, the terms of the India Millennium Deposits must be unbelievable and frustrating as they cannot invest in it. Ditto Indians living in the US.

However, indirectly, resident Indians and those living in the US can get around this by this modus operandi. . They can gift money to a relative resident in India, preferably the parents of a non-resident Indian living anywhere outside the US, say Dubai. This Dubai NRI can, in turn, gift the India Millennium Deposits to the resident Indian or a resident Indian relative of the Indian who is located in the US. For example, A lives in India. B is the father of C who lives in Dubai. A gifts money to B while C gifts IMDs to A. In this example, A can also be assumed to be living in US. Thus, A ensures his participation in the IMD scheme.

While residents in the US can take advantage of this method, there is, however, a catch for resident Indians. The Foreign Exchange Management Act (FEMA) prohibits the creation of an asset or liability involving a resident outside India without the permission of the Reserve Bank of India. The substance of the transaction outlined above may be violative of FEMA for a resident Indian. This is also one of the methods by which hawala or money laundering is done. However, legally, when a gift is made, no asset or liability is created in favour of a person residing outside India.

Besides, this transaction does not have any intention of defrauding any person or institution. It is just an indirect way of investing in SBI's debt schemes. It is unfair that merely because of being in India, an investor should be denied an opportunity to make some money. And as long as the transaction passes the test of legality, it need not condemned.