Given the lifestyle one gets accustomed to having stayed back outside India for long, there are NRIs who return back to India only for some short term work assignment BUT have a clear intention to move out of India after the said assignment is over.
And to what I came to know to my pleasant surprise in my interaction with some of these clients is that the overarching intention from taking up Indian assignment is that it counts very well on their resume & can help their career curve when they move back outside India.
In case of such NRIs, given the higher yields that India as a market offers, there are high chances that most of the portfolio is denominated in rupees. Now, that is NOT a good thing. Especially if you are very clear that in the long term, you’re going to retire out of India.
However, in this post, I will be discussing issues on how NRIs returning India for short term can position their investments in India to make the most of the transition and at the same time ensure that they are in full compliance with the Indian laws.
to make the most of the transition and at the same time ensure that they are in full compliance with the Indian laws
Note:
- I had written a detailed post some time back on to-do list for Returning NRI I request you can read it here: Returning NRI Financial Checklist
- This post is focussed only on NRI/PIOs – in case of foreign nationals coming back to India, the requirements are different and I will write a separate post on that.
#1: Do not be in a hurry to close your investments outside India – evaluate each investment on merit:
An NRI returning back to India for a short term may have a sizeable proportion of his investment portfolio outside India. Examples of it will be overseas real estate, overseas shares, MF and ETF investments, 401k investments, pension contributions etc.
For some NRIs, it might be a bit scary to leave a good part of wealth outside India for some years and one thought may be to close everything outside India and shift it to India.
According to me, if the NRI wishes to settle back outside India, this may not be very sound logic. There are three angles to the whole thing
- Tax angle: The income from these assets stays non-taxable to person after return to India till he stays a non-resident or a resident and not ordinarily resident (RNOR) which generally extends upto 3 years post return to India. So, this is not an issue.
- FEMA angle: As per Section 6(4) of FEMA, a person resident in India may continue to hold, own, invest in any currency, security, immovable property if it was purchased when it was purchased outside India.
- Financial planning angle: An investment outside India not only provides a geographical diversification, but more importantly a currency level diversification of the portfolio. For example, a 401K investment in USA not only diversifies geographical exposure to equity investment, but since investment is denominated in USD, it protects the portfolio from exchange rate fluctuations – you can also read my post How NRI/PIO families can manage exchange rate risk in their investments
So, we see from above that there is no compulsion under FEMA to liquidate the overseas investments on your return to India. Keeping investments outside India give you an edge in terms of having a globally diversified portfolio
So, if your intention is to again migrate outside India, you must not make the mistake of moving investments to the place you reside (though it may feel quite comforting to do so).
Instead, right approach should be to earmark the currency in which you’ll need the money for the financial goal, and try and protect your savings for that financial goal by remaining invested in that currency.
On the issue of keeping investments outside India, there is one issue that is very often overlooked but so critical, and that is succession planning.
Imagine you are in India, you have some 401K in USA, a property in UK, a bank account in USA, UK, Hong Kong – and you die…yes, die! You need to ask yourself a question that in such a situation, how easy/difficult it will be for your spouse to get those investments repatriated back to India.
There are two angles or possible solutions to this issue as follows:
- Nominations: A nomination ensures that the financial institution will release the money to your spouse after checking the identity proof, no further questions asked. In absence of nomination, the institution will ask for a succession certification or a similar proof of being a legal heir like we do ask in India. So, make sure to check & nominate all your investments and insurance policies taken out of India well before your return to India.
- Will: The settled legal position in India is that the nominee does not become the absolute owner but holds the asset in trust for the legal heir – this legal position may vary from country to country. For example, in the UAE, I understand that in case someone dies intestate (i.e. without a will) courts distribute property as per Sharia law. Similarly there is a 55% estate tax in UK. So, it is advisable to consult an attorney to do proper succession planning or it can cost big time.
#2: Shift a portion of your investment portfolio to an FCNR/ RFC account:
If you are a person resident out of India (ROI), it may make a lot of sense for you to shift some portion of your investment portfolio into an FCNR account till you are a ROI.
FCNR is a non-INR currency denominated account and you can choose the currency. I have discussed in detail about FCNR in this post: NRO, NRE, FCNR, RFC: Tax and FEMA Implications for Returning NRI
Even if you fail to decide on this and return to India, FEMA gives you another option whereby you can transfer it to an RFC account (note that the FCNR transfer option is closed the moment you become resident of India)
A very important thing you must note: Once you convert NRE account to resident account, then you cannot transfer it to an RFC account. So, practically, that money becomes non-repatriable unless by way of the LRS scheme (discussed in next point). So, you need to be very careful at the time of re-designation of accounts on return to India.
Also please note that after you return outside India and become a person resident out of India, bank will convert resident account to NRO – so in that case, if you want to repatriate that money out of India or transfer to NRE account, you will have to furnish Form 15CA and a CA certificate in Form 15 CB to the bank. This can be avoided if you transfer funds from NRE to RFC, when you come back to India as reverse transfer from RFC to overseas/NRE account does not require Form 15CA/CB.
Essentially, FCNR and RFC are similar accounts – both are denominated in foreign currency and yield very low interest – around 1-2% at present and have the same tax treatment.
Speaking of tax, remember that exemption to these apply only if account is opened in a bank which is not a co-operative bank.
So be careful. Never open FCNR or RFC accounts with co-operative banks. Even otherwise also, given that co-operative banks in India are poorly regulated and carry a high risk of default, it does not make sense to put a single rupee in such banks.
Coming to the question of what portion of the portfolio should be invested in FCNR/RFC, ideally it should be a subset of a broader financial planning process – I have tried to explain it in a step wise manner below as follows:
Step 1: Tag your investments to your financial goal
Step 2: Decide on the currency level breakup of investments tagged to that goal
Step 3: Fix an ideal ratio of currency level break up between INR and non-INR – let us assume it as 50:50
Step 4: If actual ratio of USD denominated is less than ideal ratio, there you have it – you can create that much investment in FCNR/FD to fill the gap.
Step 5: Monitor this allocation on a yearly basis & bring it closer to USD as the goal requirement comes nearer.
What I have listed above is not a perfect way to do it, but it can bring some process around the overall objective to keep some amount of funds in USD.
Now, the practical issue that comes when I speak with my clients is that there is a big attraction towards the equity and fixed income yields in India.
So, despite my well intentioned suggestions, there are clients who say that they are OK with taking a currency risk, but want to invest in Indian equity MF and NRE FD only.
Assumption being that the higher yields on these investments will offset the currency depreciation – I humbly submit that this is not a great approach according to me.
#3: Explore Liberalised Remittance Scheme (LRS) of RBI within the transition period:
Till you are a ROI, there is no restriction on outside India investments & FEMA has no role to play. However, as soon as you become a RII, restrictions do come in. India does not till now offer full currency convertibility.
But the good thing is, given the strong forex reserves in place now, RBI offers a Liberalised Remittance Scheme (LRS) to persons resident in India – it can be used to remit money outside India, for investment, personal, business use etc.
The limit is USD 2, 50,000 per person per financial year: so, for a family of 4, it can go upto USD 1 MN which in most of the cases is more than enough. I have written a detailed post on LRS, you can check it here: Liberalised Remittance Scheme (LRS) under FEMA: Analysis & Issues
So, as a RII, even after return to India, you can continue to invest outside India or pay insurance premiums outside India, or maintain relatives out of India, through the LRS.
One flip side of this scheme is that the permissible limit which is USD 2, 50,000 is very dynamic and depends on RBI’s assessment of forex situation & risk factors: in a blink of an eye, RBI can even can be even reduced to USD 50,000. So, it will not be very wise to depend on this scheme.
Good thing is that the balances in FCNR or RFC accounts are over and above the LRS limit, which makes an even stronger case for keeping some portion for funds in USD denominated goals in FCNR/RFC avenues.
#4: Invest in India basis a careful due diligence:
After you return to India and your residential status changes to resident, you can claim tax exemptions by making investments under Section 80C.
It is here that some advance planning is required. Even before coming to India, you need to take special precaution to make investments in only those avenues from where money can be repatriated outside India else you could end up in a situation where you are stuck with certain investments & will have to use them up in India only.
Top of the mind NON REPATRIABLE investment avenues that come to my mind are Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Pension Scheme (NPS) etc. – think ten times before investing in these schemes in India.
So, what are you left with, mutual funds, bank deposits, shares? Even for these investments, it is repatriable only if made from overseas remittances or through NRE account.
So, essentially, till you are an NRI, your overseas earnings should hit your NRE account & your investments into repatriable avenues should go through the NRE account only. That way, you can substantially ensure that your money remains repatriable outside India.
You may have a question as to what happens to investments made after becoming a resident of India – do they remain repatriable if invested from resident account?
Answer is NO.
However, you have option within your stay in India to repatriate it out of India through the LRS window. Even in case you go back outside India, money lying in Indian accounts can be repatriated out of India by doing an NRO to NRE transfer – there is a limit of upto USD 1 MN per financial year for doing that. You can read more on this in my post: Remittance facilities to NRI & Expats under FEMA
Another important point: there can be a lot of pressure on you to purchase property in India from well meaning relatives and friends. My advice, DO NOT FALL FOR THIS TRAP and do not block your hard earned money into Indian real estate. It calls for a separate post on why I hold this view, will write on that shortly and post a link here.
Also, once you’re back, there will be lot of commission agents eyeing a good business opportunity from you. So, it is your duty not to purchase toxic products like traditional insurance cum investment plans, ULIP plans, corporate fixed deposits, non convertible debentures, chit fund etc. In my view, a simple portfolio of mutual funds is all that is required to meet your financial goals and keep a lean and manageable financial portfolio.
Also, take care to deal with only SEBI Registered Investment Advisers and Research Analysts – read this SEBI caution
#4: Meticulously comply with tax laws in the intermittent period:
Stay > 182 days of stay in a financial year makes you a resident as per ITA. Read more on this in my earlier post: NRI Definition: FEMA Act VS Income Tax Act.
This can have tax implications on your accounts and investments in India.
As regards non-resident accounts, I have discussed in this post: NRO, NRE, FCNR, RFC: Tax and FEMA Implications for Returning NRI
After becoming a resident, it is mandatory to file a return in India if you have a single rupee in foreign assets abroad, or if your income is > INR 2, 50,000. You can read more on this here: Does a Non Resident Indian (NRI) need to obtain PAN & file Income Tax Return in India?
So, you need to either file yourself or get a CA to assist you in filing your tax returns in India.
Given the increased scrutiny on black money under the new BJP regime, you need to ensure that you maintain a supporting documentation for source of funds & tax payments outside India in your tax file even for the prior years that you were non-resident.
Any gift/loan to relatives/friends should be duly supported by a gift deed.
You need to have a justification for all credit entries in your bank statements (be it for resident or non-resident accounts)
I also maintain my stand that NRI should file tax returns even if taxable income below qualifying limit. Read my post on this: Why Returning NRIs should continue filing tax returns even if no taxable income
As per the very recent Finance Act 2016 amendments, Assessing Officer now has the power to open your assessment since your birth. I have discussed more on this issue in this post: 2016 Income Declaration Scheme: Should you opt for it?
One good thing for returning NRIs is that NRI can claim a reduced rate of tax on some investments which were purchased in foreign currency and such benefit extends even after he becomes a resident.
Though the practical utility of this section has greatly reduced with abolition of long term capital gains tax on equity, it is still relevant for investments like an NRE FD.
So, if you have a NRE FD, and it becomes taxable from the day you return back to India, and basis your total income for the year you fall into the 30% tax bracket, a good tax planning strategy will be to claim a 20% tax rate on the FD interest portion of income and calculate the remaining income as per the normal provisions of ITA.
It is also critical to disclose foreign assets and incomes in tax return from the year that you qualify as ROR – till your residential status is NR or RNOR, there is no compulsion to disclose these details.
You should also look to file an address change application in PAN and separately ask your file to be transferred to the Assessing Officer in your jurisdiction. As regards PAN, you can also check my post: Returning NRIs: Know how to apply online for PAN in India
#5: Meticulously comply with FEMA laws in the intermittent period:
Till you are a RII, not much issue as far as FEMA is concerned. FEMA does not even come into play w.r.t. transactions you do outside India.
However, once you become a resident, FEMA places some restrictions on you on various transactions with any person resident outside India so you need to be doubly sure that it is allowed as per FEMA before you undertake it.
I have done a series on posts on this issue – you can check it out:
Capital and Current Account Transaction as per FEMA
FEMA Implications on NRI Loan Transactions: A Scenario-wise Analysis
FEMA Implications on NRI Gift Transactions: A Scenario-wise Analysis
Remittance facilities to NRI & Expats under FEMA
#6: Buy life and personal accident insurance in India:
A conversation with NRIs wanting to settle outside India reflects a bias towards buying insurance outside India. However, in my view, it is not a very good approach. It is you as a couple who wish to relocate out of India, but what’s the plan if the husband is no more? Does the spouse stay out of India, or comes back to India?
If the answer to above question is the latter, in my view, it makes a lot of sense to purchase insurance policies (life and personal accident) IN INDIA. I have provided a detailed reasoning on this view in my post: NRIs: Think twice before buying life insurance outside India
The best thing about buying life and PA in India is that the restrictions that would have otherwise applied to NRIs (e.g. not issuing policy, sum assured cap on policies) will not be there – as a resident, you’ll be easily able to buy a policy in India to the insurer and sum assured of your choice.
As regards health insurance too, it makes sense to buy a policy in India for the time that you spend in India as having own plan is much better than relying on employer’s group cover. At the time you move back outside India, you can stop renewing the plan. More in this article: How Returning NRIs can frame an effective health insurance strategy
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