Non-resident Indians (NRI) refers to citizens of India who reside in another country for more than six months in a financial year for their job or business. NRIs are allowed to invest in India in various asset classes such as mutual funds, real estate, direct equity, fixed deposits and others. They also need to make a decision about creating accounts like Non-Resident External(NRE) and Non-Resident Ordinary (NRO) accounts, Foreign Currency Non-Resident Accounts (FCNR).
NRIs contribute to the growth of the Indian economy by their investments. In turn, they also earn high returns on their investments in India, but lack of awareness and improper planning can create losses if not viewed carefully. Here are some financial pitfalls that every NRI must be aware of and avoid while investing in India.
1. Not Changing Investment Status
Non-resident Indians should change the account status of their bank account or Demat account (if any) after attaining the NRI status. As per the Reserve Bank of India (RBI) regulation, once a resident gets the NRI status, he cannot operate a resident account for conducting transactions in India. An NRI must update Know Your Customer (KYC) details as well.
An NRI can use his resident savings account after converting into an NRO or NRE account. He/She can convert his Demat account into NRO Demat account. If an NRI investor wants to trade in equities and non-convertible debentures of Indian companies in the Indian stock market, he needs to open a designated Portfolio Investment Scheme (PIS) account. If S/he fails to do this, S/he will have to pay a heavy penalty to the Income Tax and also face FEMA violations.
2. Barred Investments for NRIs
Generally, NRIs continue their residential status in their investment instruments. This is due to ignorance regarding regulation and processes. To avoid unnecessary complexities of compliance, many mutual fund houses don’t accept investments from NRIs residing in the USA and Canada. This happens due to stringent compliance requirements by their regulatory body SEC. Only a few mutual fund houses accept the investment plans of NRIs residing in the US. NRIs residing in other countries may continue with their current mutual fund plans after simple updates in KYC and submission of required documents.
3. Ignorance regarding tax implications
Most NRIs are unaware of tax clauses of both countries, India and country of residence. Sudden tax cuts can be a surprise. If an NRI investor earns income from his investment in the Indian share market that exceeds a limit, he will have to pay tax on that exceeded amount. Thus he is liable to pay tax in India and in the country where he is residing as well. This is the case of double taxation, and it is an extra tax burden. India has signed the Double Tax Avoidance Agreement (DTAA) Treaty with 90 countries including Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK., and the USA. According to DTAA, there is a fixed specific rate at which tax would be deducted from the income of the NRI. If an NRI earns in India, the applicable TDS would be according to the rates set in the DTAA with that country. Here are examples of sources of income in India included in DTAA.
– Services provided in India
– Salary received in India
– Income from a Real estate located in India
– Capital gains on transfer of assets in India
– Fixed deposits in India
– Saving bank account in India
Further, investment plan 401(k) gives a tax advantage in the USA, and premature withdrawal of this retirement plan imposes a penalty of 10% in addition to income tax. Residents invest in this long-term plan without being sure of their residing place. There are some more complexities in tax implications like, Tax deducted at source(TDS) is different for NRIs and higher TDS is applicable on capital gains(20%-30%) on selling the property by NRI. NRI who are not fully aware of different tax rules may face financial difficulties.
4. Lack of Diversified investment
Many NRI investors rely on traditional investment plans through investment in real estate or investment in gold or fixed deposits. Relying only on a single source of income may prove to be a wrong decision. The diminishing rate of interest on fixed deposits is not fruitful for NRIs. Rental proceeds from real estate investment are not as high as maintenance costs. The Indian market scenario has changed a lot and various investment opportunities usually give a very good return with high liquidity. NRIs need to analyze the various investment opportunities in the Indian market and try to diversify their funds invested in various plans.
5. Investment in Digital assets
There is a hoard of investing in cryptocurrency and Non-Fungible Token(NFT) without knowing their legality. NRIs should avoid investing in these digital assets which are not approved by Indian Law. Tech-savvy young NRIs are often inclined to invest in digital assets with the expectations of high returns. However, they must be aware of its volatility and legal consequences (especially in India). Therefore NRIs should allocate their funds to those products which are legally recognised in India.
6. Incomplete Management of debts & investments before attaining NRI Status
NRIs must review their ongoing debts and investment plans and try to settle them before leaving India. They may not receive the benefits or tax advantages in another country that they are availing in India. For example, investment in National Savings Certificate(NSC). The interest earned on NSC is tax exempted under Section 80 of the IT, Act. A resident who attains the status of NRI can not continue with this investment plan. Same with the Public Provident Fund(PPF). A resident cannot continue this plan beyond 15 years. Interest earned under this scheme is tax exempted under section 80C of the IT, Act. Here again, an NRI can not continue a PPF account after attaining the NRI status. Like investment plans, there are many outgoing debts such as education loans, house loans, or personal loans. It is a wise step if an NRI repays the loan before leaving the country.
7. Investment decision Taken without professional assistance
Many NRI investors seek advice from relatives and close friends while making investment decisions. It might turn out to be a gamble. It is prudent to contact certified finance professionals who are knowledgeable about the laws of both countries. These professionals can suggest the right plan for avoiding future conflicts. RURASH is one such investment management financial institution that can help you invest wisely as an NRI.
8. Lack of awareness of TDS
Most NRIs are less aware of Tax Deducted at Source(TDS). Different rates for different sources create hassles for NRIs. Short-Term Capital Gains from equities attract 15% TDS, whereas gains from gold and property investment, debt funds, and debentures attract income tax slab rates. In the case of Long Term Capital Gains(LTCG), property and gold attract 20% TDS. There are 30% TDS on interest on bank deposits for NRO accounts. Interest earned in NRE and FCNR accounts is tax-free in India. These are various TDS rates, which an NRI must know.
An NRI investor can avoid the above-discussed financial pitfalls by taking care of them and managing his finance with the objective of great returns. In case of doubts, you can approach an established and reputed name like RURASH Financials specializing in NRI investments for making sound and profitable investments.
RURASH is one of India’s innovative Investment management investment firms, providing financial solutions to augment the client’s wealth and facilitate building a legacy.