30 January, 2012

Financial Planning for NRIs

NRIs are a very big community of Global Indians ( about 20 million at last count ) who have an umbilical connection with their motherland and have been regularly investing  in India.  While the emotional tugs are there, there are also real reasons why NRIs want to invest in India.

The returns on investment abroad are low, which makes sending money to India even more attractive, what with India having attained a degree of popularity as one of the engines of growth for the world and consequently the attractive returns that it is able to offer.

From the NRI perspective, the returns from virtually every investment done in India, would be significantly better as compared to the returns possible in jurisdictions like US, UK or other developed economies. 
That being the case, NRIs  are predictably excited to invest here.

Planning for them
Broadly speaking, there is not too much difference between a financial plan for NRIs and resident indians. Both have goals which need to be achieved from the cashflows that they have.  So, a financial plan would broadly be the same. However, there would be differences which are worth noting.

Currency Fluctuation :  Since, they would be earning in one currency and investing in Indian Rupees, the currency fluctuation can play a major role in determining whether an investment would turn out to be  good for them or not. For instance, if the investments are made in India and they do not want to repatriate the proceeds, the currency fluctuation risk is not there. However, if they are investing here and may want to repatriate at some point, a weakening rupee would eat into their returns. Hence, though an investment may offer attractive returns in rupee terms, it may not remain attractive when it is repatriated. This is a real and present danger. Hedging for this could be an option. But, this is has not been easy even for corporates, who were caught on the wrong foot recently, when Rupee weakened to below fifty two against the dollar. Corporates had hedged, assuming the rupee will at best weaken to Rs.48-49 to a dollar.  

Estimation of income/ expenses :   Many NRIs have intentions of coming back to India at some point. Many in my association, have expressed intentions of coming back to India after their working lives.  This would mean that all Income, expenses & inflation for those expenses, till their stay abroad, will conform with the prevalent norms in the host country.  Also, the benefits which they will get in the host country will also have to be taken into account. The benefits after retirement, which includes medical benefits could be a lure for many to stay back. Also, though they have every intention to come back, they develop cold feet, nearer the event and simply stay put. So, while planning, one has to make a provision to take care of this situation - if at all they do not come back to India and continue to reside there, they  should still have the resources to live in comfort,  in the host country.

Travel  :  NRIs do visit India from time to time, with their families. This is a unique expense that has to be provided for in their case, based on their frequency of travel. This can be a big expense, considering that the entire family will be flying down to India and will travel within India. Also, it is almost an accepted  custom that NRIs would book and send tickets for their parents and other close relatives, when they have to visit them in the host country. These expenses would need to be factored in, in a plan for NRIs.

Nuances  :  There are local customs, expectations which need to be complied with. An example of this would be that, in some communities, charity is an article of faith and hence a client living abroad may have to contribute according to expectations there. These can be estimated only with the help of the client, as a planner would never come to know of such expenses.  

Investment aspects to be considered for NRIs

Taxation is an aspect to be considered in case of NRIs, before deciding whether the investment option is a good one or not.  For instance, the taxation for Equity Mutual fund investment for NRI is nil, just like in the case of resident Indians, if the investment is kept for more than 12 months. Even Dividend Distribution Tax is nil. This makes this investment class, quite worthwhile from their point of view, if invested for over a year. 
Short-term capital gains are at 15.45% for both NRIs and Resident Indians.  However, in case of NRIs, there is a TDS deduction of 15.45%, in this situation. 

However, in case of debt mutual funds, in case of short-term capital gains, the taxation applicable is at one’s income tax slab. However, TDS will be deducted at 30.9%, which can be claimed back by a person who is filing tax returns in India.  This is a long and tortuous process of waiting out for the refunds.  

Long-term capital gains ( LTCG ) tax for debt mutual fund schemes for both resident and non-resident Indians, is the lower of 10% without indexation and 20% with indexation. However, in case of NRIs, there is a TDS of 20.6% ( the rate after indexation ). Since it is after indexation, the actual incidence of tax will be lower than 10%. However, claiming back this amount is an issue for those who file returns and is completely lost to those who do not file returns.

A better option for NRIs investing in debt funds for 12 months or less, would be to invest in the dividend option and in the growth option, if it is for over 12 months. 

FMPs have been giving good returns, in the recent past. One can approximately expect to receive about 8.5% returns after tax, based on the instruments in which FMPs of just over a year invest. This would be after the TDS, which would be deducted.  Debt Mutual Funds of medium to long maturities also are attractive for NRIs, especially at this point, when interest rate cycle is poised for a direction change. Over the next one to two years, double digit returns can be expected. The same beneficial tax treatment would work here, making these funds attractive bets for NRIs.  

The other investment option of choice for NRIs is property.  NRI / PIO  may acquire immovable property in India other than agricultural land/ plantation property or a farm house out of repatriable and / or non-repatriable funds. On sale, repatriation of the sale proceeds is possible, either from NRE or FCNR account. This would be possible only if the property was acquired out of foreign exchange sources in the first place.

It is apparent that planning for NRIs is not very different, as compared to resident Indians. There are a few differences, which a planner needs to be aware of while planning for an NRI. A knowledge of the financial, tax and legal landscape of the host country would be helpful in drawing up a meaningful plan for NRIs.

Article by Suresh Sadagopan published in Jan 2012 issue of Financial Planning Journal

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