Today, India is pretty much everywhere across the globe. If you follow cricket, then a live testimony of this fact could be seen in the recently concluded India vs Australia series where looking at the crowds, it was difficult to fathom whether the match was being played in Australia or India!
Speaking of hard numbers, as per a recent UN Survey1, Indian diaspora stands largest (followed by Mexico and Russia) in the world with 16 million Indians living outside the country. In another survey carried out by the World Bank2, India also leads in the inward remittances pulling in USD 70 billion from its global migrant workforce, which point towards the close family ties that Non Resident Indians (NRIs) share with their families back home in India.
With an increasing trend of Indians going abroad for various reasons, be it money, career or in search of a better lifestyle, there is also a significant population within that, who wish to return back to the roots. Reasons may be one of many: family/dependants back in India, not able to gel in the foreign culture, wanting to retire back in India or simply a love for the country.
In this article, I am trying to pick up some of the challenges and dilemmas faced by such families, so that a planner can equip herself and understand the context better to handle & add value to such cases.
R2I: A dream or a dilemma
Speaking of returning to India (R2I) profiles, you can find “n” number of articles on the internet on non-resident taxation and how these families can save tax by investing in India. However, in my little experience in planning for these families, it is my realisation and belief that returning to India (R2I) is not just a financial decision. It is a “life” decision. A returning NRI family (especially those having stayed for long outside India) goes through a emotional rollercoaster ride in the process & hence, planning for such families involves a significant life planning element which goes much beyond numbers and cannot be compressed in excel sheets, charts and projections.
Before moving forward, we need to understand the concerns & pain points that these families face, which make them seek out the services of a planner. The concerns can be broadly divided in two heads as follows:
- Financial concerns:
A R2I family in all likelihood will have investments both within & outside India. The primary financial concern for these families is to see that they are able to transfer and consolidate their investments to India in a) the most tax efficient way, b) in line with their short and long term financial goals AND c) while doing so, ensure that they are on the right side of the law given the separate set of rules and regulations on taxation and foreign exchange prevalent in both countries. Also, there is a transitory requirement of cash flow planning for the initial few months after relocation to India.
A common pain point for these families is that despite the humongous amount of free information available online on issues like planning the residential status to save tax, double taxation avoidance, black money compliances, FATCA rules etc., when they speak to their bank relationship managers or agents back in India, their knowledge level on these aspects is very sketchy and not credible enough to create a confidence in the mind of the client to “act” on it. Further, given that NRIs still get treated as a “cash cow” by unscrupulous product distributors, these families may also be carrying with them a baggage of not-so-good experiences where an unsuitable advice might have cost them dearly in terms of a higher tax liability, getting locked in toxic financial products etc.
And this is the precise reason that the planner’s first conversation with such a family is very crucial, where a planner will not only have to showcase her knowledge and competence of dealing with such profiles, but also be prepared to answer probing questions on how she is getting compensated and the revenue model for the advisory practice. And given the fact that NRIs are quite well read on conflict of interest piece and are on a lookout for a pure fee-only planner in India, this kind of a zero conflict revenue model can create a solid differentiation for the planner.
- Emotional and physiological concerns:
Now, spare a moment and put yourself in the client’s shoes: You’ve been staying for x number of years out of India and built your own small home: you have taken your time to build your social and professional network. At your home, every small thing must be carrying a special memory for you, of the time you’ve spent time together as a family. When you decide that time is up to finally trash the well-intentioned advice of your social circle to stay back & you finally brace up for uprooting everything to return back to India, you can just imagine the amount of physiological and emotional pain and feelings that you and everyone in your family will undergo during this transition.
And as they say, the most difficult questions to answer in life are those which one has to answer to oneself. And so the questions that such families have to answer themselves are like these: The Sharmas think we’re making a fool of ourselves leaving such a good lifestyle for an unknown future back in India…are we actually doing so? Have we actually been able to save “enough” for our financial independence? Having raised our children here, will they understand this decision & tomorrow not blame us for it? Should we burn all bridges or keep an option open to return overseas, in case things don’t work out here as planned?
And this is unfortunately where an planner’s left-brain expertise will not be of any use. It will call for empathy, counselling skills and above all, listening without judgement. While a planner cannot be expected to answer these questions but hey wait, the client does not expect her to do so: instead, she has to just hear out the other person completely. Yes, she may offer useful perspective as her experience with handling such profiles grows BUT the critical point is not to rush into forcing the views on the client, howsoever well meaning and well intentioned they are.
Common observations in these profiles & how a planner can handle those better:
- R2I decision get constantly postponed
You finally decide that ok, this one day I’m finally going to move back and that day never arrives for many people. What it gives a person and his family is pain and anxiety about the future. And you can find families finding one hook or another for postponing this decision: money is not enough, let me spend some more years for the getting eligible for social security, then a couple more to get a Green Card, and then some more to get a US Citizenship, and it goes on!
From a financial planning standpoint, the biggest impact on the R2I decision is on the cash flows analysis. On the one hand, the family is keen to know how they’re placed financially, but it may not be sure of itself when it comes of when it’s moving back to India. Given the fact that cash flows will be completely different being in India vis a vis outside, it can be a really painful task at the end of the planner to do the analysis amidst changing variables and moving targets. One good way out is that the planner should get the client to agree on a fixed date in future for, while assuring that any course corrections can be incorporated at the annual plan review stage.
Speaking about postponing the R2I decision, it needs to be mentioned that as the family spends more time out of India, they grow their professional and social network and so do the kids. So, the more the decision gets delayed, the harder it can become for the family and this is something that the planner needs to communicate to the client. Especially if the kids are grown up, they can face considerable challenges adjusting to the Indian culture, language, educational curriculum etc. and in an extreme situation, the decision can even create a lifelong resentment towards the parents.
Also, there’ll be clients who’ll so confidently tell you that R2I is something they’ll “think” about after turning 50. Here, the planner has to make the client realise that after 50, it may be difficult for them to move from one room to another within their home, forget about moving back to India. Also, old age is a time where one needs social company and creating that capital from scratch after moving back can be not a very pleasant experience.
- Return to India = Retirement:
Another common issue observed while dealing with R2I families is that return to India is equated with retirement. So, the mindset is that once they are back, they should have enough to retire and live off the accumulated corpus from day one in India. If the family has parents/relatives back in India, they already know about the increased cost of living in India thanks to the years and years of comparatively high inflation in India vis a vis the developed countries. I’ve seen people creating projection after projection only to realise that the costs have gone up since last time, and the corpus is still not enough. And once the reality strikes, the family starts to feel let down and feel that it has missed the boat.
And hence a question that planner needs to be always ready to face from such clients: “Have I accumulated enough for my return to India”? And before getting down to the numbers, the planner can first clear the perspective & ask the client some tough questions: Are you going to stop working once back in India? If yes, what’ll you do with the ample free time that you’ll get: do you have a plan for that? So, planner has to communicate to the client that the corpus requirement where one returns and starts working back in India will be very less & cause far less anxiety as compared to return and retire in India, and so the client has to choose accordingly.
There is also this big pressure of buying a home back in India, and a client in all probability might have already purchased/ earmarked a good chunk of the investment portfolio towards this goal. One of the underlying reasons for this is that there is a good deal of pressure on these clients to “look good” and maintain their status in front of families back home, and what a better way to do that by boasting of the number of properties one owns in India. Also, the best free advice that returning NRIs get on a consistent basis from their “well wishers” back in India is that the Indian real estate is risk-free investment & you should buy atleast one property here, if not more! It is here that the planner has to tell to the client the pitfalls of a retirement portfolio skewed towards real estate and actually help her visualise a cash-poor retirement where all that the family has a nice home for itself but not enough to meet the day to day expenses.
Speaking about the corpus requirement, I would like to add that the decision should be less about money than about time: if you have time on your hand, and you’re a bit less on money, that will do, as compared to the opposite situation.
- Investment portfolio mistakes:
It is not easy to firm up one’s mind on returning back, especially where one has an option to get a citizenship and permanently settle down in a foreign country (unlike gulf countries which don’t offer citizenship irrespective of the period of stay), and it here that the planner has to get this clear and ask the client at the initial stages of the engagement: where do you plan to spend your retired life?
If the answer to this question is “India”, the couple needs to have most of the portfolio in rupee denominated assets like Indian mutual funds, NRE fixed deposits etc. However, if the answer is otherwise, then no matter how compelling the world media makes of the “India story”, planner has to get the client to focus on her own finances and barring a small exposure to India, the portfolio should otherwise be in the currency of the country of residence. The simple reason is the risk of adverse foreign currency fluctuation and this is a risk that families completely ignore, given the higher bond yields & equity returns that an emerging market like India offers as compared to the more developed markets. In such cases, planner has to explain the client that it is a completely futile exercise to predict future exchange rate movements and also bring about the worst case scenario of an adverse exchange rate close to retirement, where the corpus as adjusted for exchange rates can significantly fall short of the requirement, thereby jeopardising their entire retirement planning.
Another mistake one can observe in such profiles is the presence of toxic financial products in the portfolio: yes, you guessed it right: ULIPs, pension plans, and to top it all, traditional or guaranteed return plans from insurance companies. Since the propensity to save for NRI deputies is quite good, in absence of the right investment advice and short on time, they tend to “park” their money in a low risk avenues thinking that when they’re back, it will all be sorted out. Planner has to be prepared to analyse these policies for surrender and paid up clauses, educate the client about risks in continuing with such investments & suggest the right way to get out of such investments at the lowest possible expense.
- Client’s assumptions/expectations about life back in India:
For those clients who’ve stayed for long outside India (say more than 10 years) and especially for ones who return from the “developed” nations (e.g. the US, Europe, Singapore, Australia/NZ etc.), the client gets attuned to a standard of life there that may not be in sync with the reality of life that they’ll get back in India. For example, a client returning back from Australian can feel the shock over lack of open spaces and sporting facilities for her children. Similarly, a client having spent time in a country like the UK or Denmark can be in for a rude shock when they see the healthcare system back in India. A client who has experienced a highly sophisticated Singaporean economy and way of things cannot stop cribbing about the slowness of how things work, corruption at every step and the cash based economy back in India. And then, thanks to the media, there is an everyday dose about growing intolerance, increased pollution levels and the odd-even system!
As a planner, you can basically find clients at two extremes: first, those who are blissfully unaware of the life back in India and second, who are aware and they crib a lot about it. In the former case, planner can suggest that before moving back permanently, the family should atleast takes some time off and live for a month in India to see whether they (especially the kids) can adjust here. For the latter, it can happen that planner’s own biases may come in the way in the conversation: either the planner can get all worked up & question the client’s patriotism for the country, or he/she can empathise too much with the client and lose the focus on the planning process. In my view, planner needs to maintain a firm and balanced stand on the issue & as enunciated in the brilliant book “Start with Why” from Simon Sanek, in such cases, the planner should get the client to step back & explore the “WHY” of their R2I decision: so if the motive is care for sick parents or simply their love of India, then the planner has to leave it to the client to meditate on how these small things matter in the overall picture & decide accordingly.
- Transitions planning will form a big part of the overall process:
As compared to a resident Indian family, the planning process for returning NRI differs significantly in terms of the fact that the primary need & focus is on the transition to India. And if the transition is not properly planned out, it can even jeopardise the client’s long term financial interests and ability to benefit from the upside of the savings made during the stay out of India. Speaking of transitions, there are three pillars in this process as follows:
- Cash flows planning: As the family relocates back to India, there will be expenses on relocation of belongingness, payment for security deposit for rental accommodation, admission and other development fee for the kids’ schooling, purchase of insurance covers and a few months of household expenses in case the client does not have a job at hand at the time of relocation. Here, it can help if the planner keeps herself updated on the on-ground intelligence and share some ballpark estimates for these costs which can prove useful for the client.
- Tax planning: As we know, that tax liability depends upon residential status, timing the physical return to India in a smart way can ensure that the client can hold on to the Non Resident (NR)/ Resident and Not Ordinarily Resident (RNOR) status to the maximum thereby reducing the tax liability on certain investments. Returning back to India will in most probability require the client to start filing tax returns in India. For the tax deducted at source (TDS), planner can also check for tax credit in Form 26AS to see if there is a merit to file the return and claim a refund. It is here that the tax computation should be done separately as per the normal and special provisions for non-residents under the Income Tax Act. For ongoing tax return filing, planner can connect the client to a chartered accountant in his/her city or explain the various available Do It Yourself (DIY) options. Income Tax Act also allows an assessee the power to claim the benefits of Double Taxation Avoidance Agreement (DTAA) & those provisions override the provisions of the tax code of both countries. Accordingly, planner must also evaluate the DTAA and check possibility of lower tax rates and other benefits. In case the returning NRI has become a resident and ordinarily resident (ROR) under the Income Tax Act, requirements on disclosure of foreign income and assets arise under the Black Money Act will also arise effective April 1, 2016 and clients can be sensitised accordingly, in view of the penal consequences.
- FEMA compliances: This includes surrendering unspent foreign exchange, re-designation of accounts within a “reasonable time”, doing fresh KYC in mutual funds, closing the demat account under Portfolio Investment Scheme (PIS) and transferring the shares in a new resident demat account, deciding on whether to park funds in Resident Foreign Currency (RFC) account (if the intention is to keep a chunk of money freely repatriable and free from exchange risk in case of moving back outside India or to meet certain goals in foreign currency like child’s overseas education etc.).
Now, given the myriad compliances and planning angles involved, it can be overwhelming for the planner to keep a track of everything. As enunciated in the book “Checklist Manifesto”, an exhaustive checklist can really serve as a handy reference to ensure that no important point gets missed. The checklist should be continuously refreshed basis regulatory developments and client insights as the planner grows her practice.
- Setting clear expectations at the start of the engagement
Unlike resident Indian families, planning for returning NRI families involve multi-country and multi-currency investments which are governed by the tax and foreign exchange regulations of multiple countries. So, a client returning from the US may have a good chunk of money invested in the 401K plan, you can have a UK client who might be contributing to a pension scheme that she wishes to transfer to a qualifying recognised overseas pension scheme (QROPS).
At the time of prospecting, while there may be a strong temptation to project oneself as a “know it all” planner to garner the business, it can result in serious consequences later on if the advice is proved unsuitable due to planner’s negligence. Hence, it is very important to set the right expectations with the client while taking up the assignment. Where the planner does not specialise in foreign taxation and other aspects, she can have specific clause in the letter of engagement wherein the advisory is limited only to extant Indian law. Also, she can encourage the client to also engage a CFP/CPA professional in the country of residence for such matters. Also, the planner can communicate the protocol etc. for communicating with such overseas professional, if the need arises.
Apart from this, since the plan execution and delivery is mostly online unless the client has already returned back to India and located in the same city as that of the planner, planner need to also check the client’s comfort level over non face to face communication and use of tools like skype and e-mail for doing so. Especially for countries like US where time zone differences are high, the planner and client can agree beforehand on a mutually convenient time slot for the calls.
Conclusion
From the client’s perspective, I can say that the anxieties and challenges involved in a R2I decision is very close to a decision to leaving a well paid corporate job & taking up entrepreneurship. You can keep analysing endlessly, but one fine day you have to leave the security of the shores & take a leap into the unknown. From the perspective of a planner, planning for returning NRI families offers a golden combination of hardcore investment and tax advisory expertise with the softer skills like life planning & counselling. If done right and with the insights gained over time, it can prove to be not only be an intellectually stimulating exercise where every case ends up teaches the planner something new and become a better professional, but also a heart warming and immensely satisfying experience where a planner can look back at her work and satisfy herself on having helped a family finally return back to its roots.
References:
- UN Report on Key trends in International Migration: 2015 Revision
- World Bank Migration and Remittance Brief: October 2015
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