Are you an NRI worried about managing your money? Perhaps you are going to become one soon? Perhaps you kn0w of NRI friends who may require some help? In this guest post, SEBI registered fee-only investment advisor Vikram Krishnamoorthy discusses money management factors that NRIs should consider and the questions they should ask.
About the author: Vikram is a member of fee-only India (FOI) and part of the freefincal fee-only planner list. He is an MBA in Finance and a Post Graduate in Financial Planning from Canada. He provides fee-only financial planning and investment advisory services for individuals and families from all over India. His website is: insightful.in
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NRI finances are a little different compared to that of residents, it has a few additional layers of complexity relating to taxation, product options, currencies, and drastic cash flow changes. Many residents assume that NRIs have a great financial life, but only when you are in their shoes, you understand the challenges that they face and realise that they sometimes have to work even harder.
I was an NRI myself for 8 years in the past and returned to India in 2014. From my own experience of having lived abroad and now working with many NRI clients, I have found these to be the biggest challenges and points that should be considered while building a solid financial plan. Most NRIs will relate to this blog and many residents too may find things applicable to them.
The biggest NRI dilemma is the ‘Return to India’. Most NRIs have the desire to come back at some point in the future, to settle down. But the biggest questions are ‘Is it a good decision?’ and ‘When?’. When asked, it is always ‘a few years away’, while their heart really says ‘as soon as possible’. They want to come back for many reasons, such as being with family, wanting kids to grow up in India, schooling, to be with ageing parents, or just to retire. But the biggest decision-making factor for them is finances and money. This uncertainty is what stops them from making the decision confidently.
Understanding and structuring your finances and not just leaving it to chance can give a lot of clarity and thereby leads to better-informed life and financial decisions.
These are some of the common differences
NRIs may sometimes have to deal with investments in two countries and with an additional impact of exchange rates, it may get difficult to evaluate investment options well. If they choose to invest in India, there are many options like FDs, Mutual funds, Stocks, PPF, Real Estate, FCNR deposits etc. Most of these can also be invested under the NRE or NRO options.
Sometimes, NRIs are an easy target for product salesmen and are sold unnecessary complex products. The same strategy applies for NRIs, just as for residents. The best investment options are often the simplest products, used well. Many NRIs also by default invest in ‘real estate’ rather than spending the time to understand the other asset classes. Once they understand their goals and what they are investing for, the right combination of simple products is all that is needed.
NRIs also have to sometimes decide if they want to invest in their country of residence too and if they should participate in pension plans in their country, eg., 401k in the US.
In the past, it was cumbersome for NRIs to invest in Indian MFs. With the advent of many online platforms, especially for ‘direct’ MFs, it has never been easier for NRIs to invest and are not constrained by their remote locations. NRIs in the US and Canada continue to have certain limitations with MF options, but there are workarounds to that limitation too.
NRIs enjoy certain tax benefits when they invest in India, like nil tax on FDs. However, the source of funds and the account type they use (NRE or NRO) should be considered for better tax planning. The same products, for example, FDs, are beneficial under NRE funds as they are not taxed in India, but not as much under NRO which are taxed. Debt funds may be better an option if in NRO funds.
Depending on the country of residence of the NRI, there could be tax implications in that country when investing in India. Proper tax planning and optimizing leads to better post-tax returns.
NRIs may also have to file taxes in India if they have any income in India exceeding 2.5 lakhs. Although there is no TDS on MFs for residents, TDS is applied to NRE and NRO Mutual funds and could be claimed back if applicable in the tax returns.
While making the transition to India, long-term NRIs can make use of the RNOR (Resident but not ordinary resident) status to minimize their tax for a couple of years on return to India. Certain products like FCNR deposits can be used to benefit from this.
Cash flow scenarios:
Many NRIs find this the most interesting part of the planning exercise. A proper understanding of cash flows, before and after their planned return, will help make fully informed decisions in career and certain life decisions as well.
The biggest challenge NRIs face is how to deal with a drastic change in cash flow if they return to India. They usually have a bigger monthly surplus while working abroad and may not expect the same on their return to India. While an NRI, and while having bigger disposable monthly surpluses, it is very easy to upgrade your lifestyle there, with bigger houses and cars. Many get caught in this cycle of increasing their lifestyle before guaranteeing at least their current lifestyle for the rest of their lives and don’t think about their big long-term goals. In a way, NRIs are like sportsmen, their incomes are higher during their peak career but cannot depend on that income to last lifelong. If planned well, they can ensure that they use this resource optimally to achieve a sustainable lifestyle and financial freedom at the earliest.
With the cost of living in both countries is very different, and with different inflation scenarios, it is important to understand how to balance and compare apples to apples. Playing different cash flow scenarios, we try to find answers to questions like ‘what if I stop working x years from now?’, ‘What if I want to return x years from now?’, ‘What if I move to another country?’. This helps to see how your career and life decisions are impacting the long-term financial picture of your family.
What most NRIs really want to know
All the points that have been discussed above are the technical financial aspects. In the end, what NRIs really want to know and want clarity on are some of these big-picture questions.
- What is the best timeframe to plan the return to India? Will I be able to maintain my lifestyle when I return?
- Am I considering all the investment options available to me and is it optimized to achieve my goals?
- What is the income I should target when I return to India, so I can maintain my desired lifestyle and save for my long-term goals too?
- Can I achieve ‘financial freedom’ before my return to India so that I need not work for my basic necessities anymore, just work only for my desires? What is the corpus amount I should target for this?
Understanding the big picture in life helps you find answers to the above questions and have more clarity in your financial life. If you focus only on investments and returns, you lose focus on what you need the money for and what value it adds to your life.
As mentioned in my previous blog post, Financial Planning is not just about investing money into the best mutual funds and getting the best returns. Money and investment products are only tools. Financial planning is more about how your money is helping you achieve what you want in life and to live a more peaceful and happy life.
Many NRIs have enough resources to achieve financial freedom, but don’t realise it and still lead a stressful life, giving up many things. Many NRIs have the benefit of larger monthly surpluses but fail to put it to optimal use to achieve their life’s goals. Having a proper plan and understanding the big picture will help you to make better and fully informed career and life decisions.
If you wish to work with Vikram, his website is: insightful.in
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