A reader says, “I have a question about modern-day challenges associated with mid-age immigration. For Example – An individual at around 37/38 years of age has been working in India for close to 15 years and has a good amount of money already earned with a decent portfolio but is looking for an opportunity in the U.S. for a better career option. What should be the approach of this individual to take care of his existing portfolio?”
“Let us assume the individual wanted to use his existing investment in India as a major lever for his retirement because he plans to return to India after 15 or 20 years. He also does not want to buy any apartment/land as an investment option. He ideally wanted the existing portfolio to perform better/on par with inflation once he returns after 15-20 years”.
About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website plnr.in. Ajay is part of the freefincal list of fee-only advisors and fee-only India.
Here’s a detailed walkthrough designed to assist individuals in managing their current portfolio. This guide is tailored for those relocating to the United States. Remember that the steps may vary for individuals moving to tax-free regions such as Middle Eastern countries. Additionally, seeking guidance from your SEBI registered fee-only financial advisor before making any definitive choices is strongly recommended, as each step depends on your unique life stage and situation. Let’s begin.
This article will solely focus on portfolio management. If you’re interested in learning about tasks such as opening NRE/NRO accounts and residential status, refer to this article- My wife has an onsite assignment; what should she do with current investments?
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To begin, it’s essential to assess the contents of your current portfolio. This evaluation is particularly crucial when relocating to the U.S. due to the taxation applied to worldwide income. To illustrate, imagine possessing a Fixed Deposit (F.D.) of 10 Lakhs with an annual interest rate of 7%. This would yield an annual interest of 70,000. Even though the interest is earned in India from your previous income, you’d be liable to pay tax on this 70,000 in the U.S. due to its global income taxation policy.
Here’s another example: Taxation applies to notional PFIC investment gains. Suppose you hold 10 Lakhs in equity mutual funds and relocate to the U.S. If the value increases from 10 Lakhs to 11 Lakhs the following year, you’d be liable to pay tax on the hypothetical gain of 1 Lakh. This tax would be imposed on the 1 Lakh gain whether or not you’ve withdrawn the funds.
You might wonder why not simply transfer the entire portfolio to the U.S. if taxation applies to all assets. However, the situation is a bit more complicated. Let’s delve into what is subject to taxation and what qualifies for exemptions when relocating to the U.S.
Retirement Investments
Investments categorized as retirement/social security investments are tax-free in the U.S. Here’s a list of investments falling under this category:
Provident Fund (P.F.): A Provident Fund is considered a retirement investment. If you have funds in your P.F. account and still contributing to your P.F. account, it’s advisable not to make withdrawals. This is because the interest earned in your P.F. account will be tax-free in the U.S. However, remember that if you’re not contributing monthly amounts to the P.F. account, the accrued interest will be taxable in India. Despite this, it’s often preferable due to the high interest rates on P.F. accounts.
No concrete deduction exemption is available to U.S. persons who contribute to the EPF but also have a U.S. tax return filing requirement. Some tax consultants in the U.S. also ask you to pay tax on P.F. interest. It is better to withdraw from a P.F. account if you have to pay tax.
As per my understanding and paragraph 2 of article 20 in the DTAA agreement, social security benefits and other public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State. Ideally, the interest amount should not be taxable in the U.S. I would still suggest hiring a tax expert before making a decision. Also, see this document from the Ministry of Labour and Employment.
Superannuation Account: Some companies provide the option for superannuation contributions alongside regular P.F. contributions. These contributions are also considered part of a retirement account and remain tax-free in the U.S. If you have funds in a superannuation account, leaving them untouched is recommended, as this strategy will yield tax-free returns.
In these scenarios, it’s important to ascertain whether your company permits the retention of funds in a P.F. or superannuation account (if you have stopped contributing). At times, if the company manages its own P.F. trust, it might request you to withdraw the accumulated amount. If the P.F. amount lies in EPFO, you will keep getting interest until age 58.
National Pension System (NPS) Account: The funds in your NPS account should remain untouched as it is considered a retirement investment. Even if you decide to withdraw, you’ll only be able to withdraw 20% of the accumulated amount (if it exceeds 2.50 Lakhs). You must utilise the remaining 80% of the amount to purchase an annuity.
The above investments may be considered retirement investments. Now, let us talk about other investments.
Is PPF considered a retirement investment?
Public Provident Fund (PPF) Account: The PPF account is considered an investment instrument, and the interest earned on the PPF account is taxable in the U.S. It is better to close the PPF account if you are shifting to the U.S. for the long term.
Premature closure of the PPF account is allowed five years after the opening date if your residential status changes to NRI, and the interest credited to the account will be reduced by 1% in case of premature closure.
Sukanya Samriddhi Scheme– With the latest regulations, if you have opened a Sukanya Samriddhi Scheme for the girl child, you can continue investing in it even if the residential status of the girl child changes to NRI.
Sukanya Samriddhi Account is considered an investment account, and you must pay tax on interest earned. It is better to close the Sukanya Samriddhi account if you are shifting to the U.S. for the long term.
Stocks – You can keep investing in Indian Stocks as no tax is levied on the notional gains. The tax must be paid only if you have sold the stocks and there are gains on them or received any dividends. Also, existing stocks can be kept as it is if you are confident about the performance of stocks.
Other investments like Mutual Funds, ETFs, ULIPs
These types of investments fall under PFIC (Passive Foreign Investment Company). Simply put, any gains from these investments, whether realized or hypothetical, are subject to taxation. The earlier example of hypothetical gains on mutual funds illustrates this concept.
F.D.s – F.D.s do not come under PFIC instruments, but the interest earned on F.D.s is taxable. It is better to withdraw.
Deciding whether to transfer these investments to the U.S. is a nuanced decision. Firstly, it’s essential to consider the duration of your stay in the U.S. If your intended stay is relatively short, around 2-3 years, relocating your investments to the U.S. might not be advisable.
However, suppose you plan to reside in the U.S. for extended periods. In that case, I recommend considering a delay of a year or two before initiating the transfer of your investments to the U.S., i.e. unless you are sure of the extended period.
What if I want to keep my investments in India Only?
Consider the following options if you intend to retain your investments in India:
- Transferring Investments to Spouse’s Account: If your stay in the U.S. is short-term and your spouse isn’t accompanying you, you can consider transferring your investments to your spouse’s account. However, evaluating the tax implications of such a transfer is as crucial as determining if the effort involved in tax savings is justified.
- Transferring Investments to Parent’s Account: Another option is to transfer investments to your parents’ account. The income generated from these investments won’t be considered part of your global income, potentially leading to tax savings. It’s important to note that if you transfer funds to your parents, your siblings might have equal claims to the money. In such cases, even wills and nominations could be subject to challenges.
- Transferring Investments to a Hindu Undivided Family (HUF): You can transfer your existing investments to HUF, as HUF would be considered a different tax entity in the U.S. More insights on this are available here –HUF & U.S. Tax Impact.
If you’re not inclined to liquidate mutual funds, you can convert them into DEMAT units and gift them to the HUF. While this action might be deemed income clubbing in India, it doesn’t apply when moving to the U.S., and the HUF is treated as a distinct entity. Nonetheless, you’ll still need to pay taxes in India for the income generated by the HUF.
What is the ideal solution? There isn’t any. It depends on your individual circumstances. The ideal solution is to liquidate your investments (which are taxable) and transfer them to the United States, as opposed to attempting to reduce your tax burden and engaging in complexities.
- Investments in retirement accounts can be kept like P.F. (after checking the taxability), NPS, Superannuation, etc.
- The tax-free investments in India and taxable in the U.S., like PPF, Sukanya Samriddhi Scheme, etc., can be withdrawn too.
- For investments that come under PFIC, moving those investments to the U.S. is better.
- You must also consider other aspects like rental income (if any), sale of real estate or agricultural land and power of attorney, etc., which I have not covered in the article.
- And what instruments should be used to invest in the U.S. – whether in 401(k)s or ETFs/Index funds? Let us discuss this in another article.
Ensure that you purchase term and health insurance from India before you move to the U.S. if you are planning to return to India.
Till then, happy investing!
*Disclaimer- Nothing contained in the article is my solicitation, recommendation, endorsement, or offer. If you have any doubts as to the merits of the article, you should seek advice from an independent financial advisor. Registration granted by SEBI, BASL membership, and NISM certification does not guarantee the intermediary’s performance or provide any assurance of returns to investors. Investment in the securities market is subject to market risks. Read all the related documents carefully before investing.
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