Financial advice for NRIs returning to India

The decision to return to India is a big one for many NRIs. Here’s how you need to financially plan it.

Many non-resident Indians (NRIs), when returning to India, are unsure about financial planning as they are troubled by uncertainties about investment, taxation etc. 

Let us at take a look at the steps NRIs returning to India can take to plan their finances, mainly in terms of investment and taxation.

Investing Assets For NRIs

When you move back to India after a stint abroad you want to put your money in an asset that is capable of beating inflation and can reduce tax liabilities. Although there are many investment options in India, if you have not been following the market closely it could be a bit of a struggle.  For NRIs who have taken citizenship of another country, the compliance requirements are more intense compared to that of the NRIs who have not taken foreign citizenship.

Mutual Funds are the best investment tool for NRIs as they don’t just fetch high return but are also managed by competent fund managers. You can choose between equity mutual funds, balanced funds and debt funds. While equity mutual funds invest in companies listed in the stock market, debt funds invest in fixed income securities. Balanced funds divide the investment amount into two types of assets.

Equity mutual funds come with high risk as they invest in companies, debt funds have low risk associated with them as they invest in bonds, which offer fixed return. Balanced funds lie somewhere in between these extremities of high and low risk/return. The presence of bonds lowers the risk that equities bring in with market movements.

Fixed Deposits are preferred by many NRIs when they return to India as the interest rates are relatively higher in India and the instrument is most widely understood.

Investing directly in bonds by corporates is a good option too. Every bond has to go through a rating process that certifies its quality, which indicates the ability of the associated project or company to repay its obligation to the bond investor. Before investing in bonds, look at the rating assigned by rating agencies over a substantial period of time.  A high rating signifies lower risk of default.

Tax Planning AndThe Rates For Different Investments

NRIs returning to India must understand their tax liabilities well. Different investments are taxed differently. While you can always consult a Chartered Accountant (CA) for better understanding of taxability, you need to be aware of the Long-Term Capital Gains (LTCG) taxes and Short-Term Capital Gains (STCG) taxes. Indexation is another aspect in calculation of taxes.

In case of equities or equity-based mutual funds, the LTCG tax is zero, wherein long term is defined to be a period longer than one year. The STCG tax, which is applicable if the fund is sold before a year, is calculated at 15% on the capital gains.

In case of bonds and bond mutual funds, the STCG is added to the income and taxed as per the tax rate of the individual. The LTCG is taxed at 20% with indexation benefit. The LTCG in case of bonds is defined as a period longer than three years.

In case of real estate, LTCG tax is applicable if a property is sold after two years. The tax rates are similar to that of bonds. The LTCG is 20% with indexation benefit while the STCG is added to the income and taxed as per the tax slab of the individual.

The short-term and long-term capital gains tax are deducted at the time of redemption when it comes to NRIs.

Ideal Portfolio

An ideal portfolio depends on the investment horizon and the risk appetite of an individual. NRIs returning to India in their 40s or 50s are recommended to invest in bond funds or balanced funds as they offer relatively lesser risk with good return.

Real estate is a good investment option too, but make sure you carry out your due research before delving into it. You can talk to your friends in India or real estate agents to gauge the price of real estate.

Before you put your money into the investment market is India, make sure you do your research and take advice from reliable source in order to ensure good return and reduce tax liability.

 

(The author is CEO of Bank Bazaar)