A typical NRI with no set return date to India has a unique financial planning dilemma. Should I plan to stay put or for return? Do I invest in NRE FDs paying 7% or global equities expected to deliver between 4-6%? Should I buy a house abroad or rent instead? It’s an endless list. In this guest post, Amit Kapoor, an NRI based in the UK, provides few pointers to help you navigate in the right direction. Amit is the founder of Mindful Contract Solutions – providing managed professional services to the UK public sector.
Note 1: Since tax laws change from country to country, readers should consider the relevance of the suggestions below in context to their country of residence.
Note 2: This is the first guest post in response to my call for guest authors. My plan was to post such articles separately, but since Amit’s post will be quite useful to readers, it is presented here.
If you are a typical non-returning NRI like me, some of the following will ring true. It’s likely that you:
- have parents and in-laws who live in India. They have almost no desire to emigrate to live with you permanently. Likewise, you have little desire to live in India.
- travel to India at least once in a year or two. You want your children to stay connected with your roots, in the event you choose to come back.
- Are always apprehensive of making big / long term financial commitments abroad because you are always unsure how long you might want to (or be able to) live abroad.
- have had a late realisation that your locked-in investments in India are hampering your quality of life abroad.
Much of the mainstream financial press focuses on only the returning NRI. For example, whist writing this post, I came across an excellent guest post by Vikram Krishnamoorthy. It is apt for returning NRIs. There isn’t much literature on the category of NRIs I allude to. Ones who are half here, half there – and will remain so, in the long term. Also, most Indian financial planners would need answers to two questions, before they can advise: When do you want to return to India? And what you intend to do from then on? A non-returning NRI finds it difficult to answer these questions.
Having been a NRI for 13 years, I will say the following financial planning issues are unique to a non-returning NRI
- Your emergency funds are for more than just your family: As you live abroad and stay connected to India, you grow the reputation of being a wealthy individual. In fairness, that’s true on an absolute basis – although relatively (taking cost of living into account) it isn’t. Gradually over time, several extended family members will expect you to bail them out of their emergencies. If you are already not creating a provision for such emergency funds, this could mean you have to liquidate your longer-term investments to pay for others’ emergencies.
- Your investments have a high India-weighting: This means you have a property or more in India. You have a PIS account with Indian equities. You also invest in Indian mutual funds, and the list goes on. Although you intend to live a life abroad, your investment profile would suggest you are preparing for a life in India. The complications with this approach is when a return to India doesn’t materialise. Indian equities are highly volatile. When based abroad, you are not just dealing with equity volatility, but also exchange rate volatility and global taxation considerations. So, whilst you may sell Indian equities or redeem Indian FDs at an absolute profit in rupee terms, maybe exchange rate changes have already eaten into some profits. Whilst Indian taxation rules may give relief on the investments (such as, NRE fixed deposit interest is tax free), you are possibly being taxed on global income in your country of residence meaning you will pay a hefty tax there.
- Your future location dilemma constrains your investment criteria: You are most likely giving long term financial schemes and products abroad a pass. You think about buying a house abroad much later after draining significant sums in paying rent. You maintain a high cash component, and often look for the right time to remit funds to India and lock them into FDs. The problem with this approach is that it detracts you from building a significant corpus you will need for your financial goals if you remain abroad for the long term. Having done a personal cashflow forecast for a scenario I retire abroad at 60, I found that I would need a surprisingly high corpus of £750,000 (about 7 Cr) when I had thought only 2-2.5Cr would be OK if I retired in India.
Financial Planning Tips for NRIs
From my personal experience, reflection & regrets, I can suggest the following to help you on the right track financially.
- Have a larger emergency fund: Have a larger emergency fund than one recommended for the country of residence. In the UK, they recommend keeping between 3 and 6 months of expenditure. However, medical costs are close to zero in the UK. Also, it is not usual for adults to become dependent on you because of Government pension. The general lack of health and safety in India means the chances of emergency dawning upon someone who will depend on you is higher. To add to it, healthcare costs are high in India. It’s a good idea to keep your emergency funds physically separate. I have kept my Indian emergency fund invested in a multi-asset fund in India, whilst my UK emergency fund is in my bank account abroad.
- Buy a property if possible, as against renting: Just because you are not sure if you will stay abroad permanently, is not a good reason to continue paying rent. In my case, I calculated that if I stay in my mortgaged house for 16–18 months, it would financially outweigh the rent I would have had to pay. In western countries, interest rate is low and home loans are considered good debt. Property laws are much more stringent and property purchase transactions are safe and largely carried out by lawyers / conveyancers. No wonder, London gets a high level of property investment from investors sitting abroad.
- Start a business if you can: Have you read Rich Dad Poor Dad and felt confused with the author’s suggestion of owning a company and incurring expenses through it? Such a strategy is possible abroad. Starting a business does not necessarily mean hiring offices and people. Even individuals can set up limited companies – and trade as contractors / temporary labour. Although, it is never a good idea to set up a business for tax reasons alone, such a structure aids creative financial planning. For example, if I knew I have India investments / deposits maturing in a financial year, I could draw out less personal income from the business abroad that year. In this way, I could keep to the lower tax bands.
- Give longer-term investments a chance: It pains to hear from friends they haven’t been contributing into a pension. Nor using tax relief investments abroad because of lock-ins of over a year. In the UK, pension contributions can provide a tax benefit of up to 45%. They are also portable meaning you can transfer them to an equivalent Indian pension scheme on return to India. Investments in Venture Capital Trust schemes in the UK can provide a tax relief of 30%. Building wealth abroad without using benefits provided by the Government is like a travelling on a long-haul flight with headwinds. It will just take longer. This means you will have to work more before you become financially independent. True, your return to India before investments mature might lead to tax implications. However, informed financial planning can help minimise these notional losses.
- Temper Indian investments: This may appear counter-intuitive to some. After all, as Indians and insiders, we know and believe the India growth story more than others. However, what we mustn’t forget is that returns are higher in Indian equities (relative to global) because the risk is relatively higher too. I mean, relative to a globally diversified portfolio that is intrinsically well-hedged. One of the best advantages living in abroad is that investing across any financial asset worldwide is possible. Through instruments like Vanguard passive funds and Blackrock exchange traded funds (ETFs)– at a low cost too. That is not an opportunity you should miss. However, in terms of the debt component, Indian bank fixed deposits / debt funds offer a return several-fold higher than global bonds. So, it isn’t a bad idea to use those.
- Hire a financial planner abroad: A non-returning NRI would benefit more from a financial planner abroad on an ongoing basis than one in India. There are several financial / tax planning schemes in foreign countries you should take advantage of. If you plan it well for a life abroad, chances are: it will be more than sufficient if you choose to return. Disclaimer, I don’t have a financial planner. And, I suspect most readers of freefincal would consider themselves DIY capable; even on foreign land. If you are contemplating a return to India, an Indian fee-only financial planner would be your best bet.
About the author: Amit is a NRI based in the UK. He is the founder of Mindful Contract Solutions – providing managed professional services to the UK public sector.
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