First-generation Indian migrants are far more likely to return to India annually to visit family, friends, or relatives, attend family events, or travel across the country. During these short trips, they have been known to squeeze in their financial appointments for India-based investment decisions. This hasty process usually leads to critical investment decisions being pushed aside or delegated to relatives or friends, which ultimately leads to financial pitfalls.
In our experience with NRIs, some of the usual pitfalls they are known to fall into and must consciously try to avoid are as follows:
Investing as a resident
Once an individual attains the status of an NRI he must convert his existing bank accounts to an NRE, NRO, or FCNR accounts. As an NRI you can open an
& NRO account that are rupee designated accounts and are repatriable.
Similarly, investment instruments like MFs, direct equity, bonds, and more have their restrictions. For instance, an NRIs DEMAT account will need to be converted to an NRO DEMAT account, while stock trading activities will need to be routed through a PIS (Portfolio Investment Scheme) account. The rules and regulations are ever-changing; keen NRI investors need to keep abreast with these changes to avoid falling into the trap of losses.
Often NRI’s tend to continue with their residential status-based investment instruments as well, ignoring processes and regulations. For instance, as an NRI settled in the USA there are restrictions to which mutual fund houses you are allowed to invest through. This is due to the stringent compliance requirement by the USA & Canada’s regulatory body FATCA. To avoid the complexities in compliance only a handful of investing houses accept investments from NRIs residing in the US. For NRI’s in other nations continuing with the current MFs may require a simple status change update by submitting the necessary documentation.
The taxation web
Tax avoidance or double taxation is another pitfall that most NRIs fail to account for. Income earned in India, which exceeds the specified amount, in the form of interest, dividends from equity shares or MFs, rent, capital gain, etc. become liable for tax filing. In some countries income earned in India could be taxable both in India as well as in the country of the NRIs residence. To circumvent this double taxation burden on NRIs a tax treaty better known as the Double Tax Avoidance Agreement (DTAA) is signed between India and multiple countries. This treaty assists in tackling the problem of tax avoidance as well as determines the efficient method implied to tax an NRI income. This avoids double taxation and offers relief by reducing the burden of taxes on income earned, provided a DTAA provision exists between the two countries. Beyond intent, the foremost reason for NRIs to default on taxes is unawareness linked to the Indian tax laws that are constantly changing.
Tying your portfolio to a single asset class or even a single country’s fate is a gamble. NRIs often fail to diversify their investments across asset classes and invest in fixed returns assets like FD’s or physical assets like gold and real estate. The reason for this tunneled vision could be correlated to avoidance of the complicated web of regulations, transactional compliances, and taxation by NRIs. Reports suggest NRI investments in Indian real estate are likely to grow at 12% in FY22. The average prices of properties in leading markets like NCR and Mumbai showed flat growth in the October-December period of 2020 as compared to the previous year (2019). Falling interest rates too have caused traditional asset classes like FD’s and more to lose their sheen. There are multiple avenues for NRIs to choose from that are both risky as well as secured. Mutual funds, NPS, direct equity, PPF, and more are avenues that can be considered based on the financial goals of the investor, be it early retirement, post-retirement planning or simply securing their dependents’ future.
The latest fad of Non-Fungible Tokens NFTs and Cryptocurrency along with its ambiguity over its legality by Indian laws are leaving investors in a tizzy. Young NRIs that are tech-savvy often tend to invest massive amounts of their corpus in such digital assets. Owing to its volatility and legal repercussions (especially in India) it is best if investors maintain investing in such assets within their allocated limit ensuring that its uncertainty or volatility does not put their complete financial portfolio at risk.
Clearing off all forms of debt needs to be top a priority for every investor. First-generation NRIs who migrate often have loans for a home, education, or personal requirements. They must ensure to plan repayment and pre-payment of these loans from day 1. It is easy to get carried away and spend on lifestyle expenses in a new country. Prudent planning ensures you stay in control of your expenses and invest efficiently, especially during these unprecedented times of volatile markets, job cuts, visa delays, and more.
As NRIs, investing in Indian markets need not be a burdensome task. Today, in the post-pandemic world processes and procedures have swiftly moved to online modes offering investors much transactional ease, even if they are across borders. The Indian markets are proving their grit and potential, it is now time for NRIs to decide if they want to benefit from India’s future potential.