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The bank has told me that they will levy a penalty for prepayment of the loan. Can they legally do so?

H. P. Ranina / 2 July 2012

I had taken a home loan from a rural bank in India, which had charged me a high rate of interest. I now want to repay this loan before the expiry of its tenure. The bank has told me that they will levy a penalty for prepayment of the loan. Can they legally do so?

- T. Seshadri, Abu Dhabi

Some banks have voluntarily discontinued prepayment penalties. However, other banks are charging them. The RBI, therefore, appointed an expert committee on customer service by banks to suggest some measures in favour of bank customers. The committee recommended that foreclosure charges levied by banks on prepayment of home loans is a restrictive practice because it prevents borrowers from switching over to other sources of finance, which are cheaper.

The RBI has now accepted this recommendation and issued a circular directing banks, especially regional rural banks, to remove and abolish foreclosure charges or any other form of penalty at the time of prepayment of home loans, which are on floating interest rate basis. According to the RBI, this will lead to reduction in discrimination between existing and new borrowers. It will also encourage competition among banks, which will result in better pricing of floating rate home loans.

I intend to return to India shortly. Some of my friends in Chennai who are retired bankers have suggested that a business be started in India of owning and operating ATMs. Is this feasible, and, if so, what are the guidelines?

- K.C. Raman, Doha

Presently only banks are permitted to set up automated teller machines. However, in order to expand the reach of ATMs in Tier III to Tier VI centres in India, it has now been decided to permit non-bank entities, which are incorporated in India under the Companies Act, 1956, to set up, own and operate ATMs in India. These entities would be called white label ATM operators (WLO). They will provide banking services to customers of banks in India based on the debit, credit or prepaid cards issued by these banks. The WLOs would need to establish technical connectivity with existing authorised ATM operators.

These non-bank companies will have to obtain authorisation from the RBI under the Payment and Settlement Systems Act, 2007. Therefore, you will have to incorporate a company in India along with your friends to set up White Label ATMs and such company will have to apply to the RBI for seeking authorisation.

Currently, the window for this application is open only up to October 19, 2012. It is important to note that such non-bank companies are required to have a minimum net worth of Rs100 crore as per the latest financial year’s audited balance sheet, in view of the fact that owning and operating ATMs is a capital intensive project.

My son is getting married later this year. I will need to incur heavy expenditure on the marriage. Should I transfer the funds from here to incur the expenditure or can I spend the amount without having any records of the same? Do I have to pay tax on the amounts received as chandla or gifts on the occasion of marriage of my son?

- S. Chand, Ruwi

Expenditure incurred on any occasion, which is not explained by adequate income or receipt of funds can be made liable to tax in India. Under the provisions of sections 69, 69-A, 69-B and 69-C of the Income-tax Act, 1961, a person incurring expenditure, which is not explained by linking it with a source of funds, or expenditure on purchase of jewellery or any other valuable article which is also unexplained, would be liable to tax as the unexplained income of the person incurring the expenditure.

Therefore, it is advisable that you should remit sufficient funds to India to cover the expenses, which will be incurred on the occasion of your son’s marriage, or which will be utilised for purchase of jewellery or other valuable assets/articles. The tax department makes surveys at the time of such occasions in order to estimate the quantum of expenditure incurred.

Gifts received by you or your relatives on the occasion of your son’s marriage would be liable to tax if they exceed Rs50,000 during the relevant financial year. Only gifts received from close relatives are exempt. However, if your son or his wife receive gifts on their marriage, even from non-relatives and friends, the amount received would be exempt without any limit.

The writer is a practising lawyer, specialising in tax and exchange management laws of India.

Money Times adviser H.P. Ranina answers questions from our readers. Write to: Money Times, P.O. Box 11243, Dubai, UAE or CLICK HERE

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