Many non-resident Indians (NRIs), when returning to India, are unsure about financial planning as they are troubled by uncertainties about investment, taxation, etc. Here are a few necessary steps that NRIs returning to India can take when it comes to investments and taxation:
Investing Assets For NRIs
When you move back to India after a stint abroad, you want to put your money in an asset that is capable of beating inflation and reducing tax liabilities. Although there are many investment options in India, if you have not been following the market closely it could be a bit of a struggle. For NRIs who have taken citizenship of another country, the compliance requirements are more intense compared to that of the NRIs who have not taken foreign citizenship too.
Mutual Funds are the best investment tool for NRIs as they don’t just fetch high returns but are also managed by competent fund managers. You can choose between equity Mutual Funds, balanced funds, and debt funds. While equity Mutual Funds invest in companies listed in the stock market, debt funds invest in fixed-income securities. And balanced funds divide the investment amount into two types of assets.
Equity Mutual Funds come with high risk as they invest in companies. Debt funds have low risk associated with them as they invest in bonds, which offer fixed returns. Balanced funds lie somewhere in between high and low risks/returns. The presence of bonds lowers the risk that equities bring in with market movements.
Fixed Deposits are preferred by many NRIs when they return to India as the interest rates are relatively higher in India, and the instrument is widely understood.
Investing directly in bonds by corporates is a good option too. Every bond has to go through a rating process that certifies its quality, which indicates the ability of the associated project or company to repay its obligation to the investor. Before investing in bonds, look at the ratings assigned by rating agencies over a substantial period of time. A high rating signifies lower risk of default.
Tax Planning And The Rates For Different Investments
NRIs returning to India must understand their tax liabilities well. Different investments are taxed differently. While you can always consult a Chartered Accountant (CA) for better understanding of taxability, you need to be aware of the Long-Term Capital Gains (LTCG) taxes and Short-Term Capital Gains (STCG) taxes. Indexation is another aspect in calculation of taxes.
In case of equities or equity-based Mutual Funds, the LTCG tax is zero, wherein long term is defined to be a period longer than one year. The STCG tax, which is applicable if the fund is sold before a year, is calculated at 15% on the capital gains.
In case of bonds and bond Mutual Funds, the STCG is added to the income and taxed as per the tax rate of the individual. LTCG is taxed at 20% with indexation benefit. The LTCG in case of bonds is defined as a period longer than three years.
In case of real estate, LTCG tax is applicable if a property is sold after two years. The tax rates are similar to that of bonds. The LTCG is 20% with indexation benefit while the STCG is added to the income and taxed as per the tax slab of the individual.
The short-term and long-term capital gains tax are deducted at the time of redemption when it comes to NRIs.
An ideal portfolio depends on the investment horizon and the risk appetite of an individual. NRIs returning to India in their 40s or 50s are recommended to invest in bond funds or balanced funds as they offer relatively lesser risk with good returns.
Real estate is a good investment option too, but make sure you carry out your due research before delving into it. You can either talk to your friends in India or to real estate agents to gauge the price of real estate.
Before you put your money into the investment market in India, make sure you do your research and take advice from reliable sources in order to ensure good returns and reduce tax liabilities.