NRIs across the globe face the paucity of time. They often visit India at short notice and cram many things on their to-do list. Critical investment-related decisions often take a backseat or get outsourced to friends and relatives in the process.
Here are the five common investment mistakes which NRIs make:
Invest unduly in real estate
NRIs usually have higher liquidity and tend to disproportionately invest in Indian real estate. It could be for emotional reasons or sheer preference for physical assets. Nevertheless, it makes little financial sense. For one, rental yields from residential properties are very low – earning, on average, 3% annually (pre-tax). This is further exacerbated by the maintenance costs which are quite high for premium apartments.
Finding tenants and keeping the flat occupied is also a big challenge especially when you visit the country on rare occasions. Then there is also the fact that selling the apartment is a cumbersome process. The past decade has also seen a slowdown in capital appreciation, especially for expensive properties. The current pandemic has added additional stress on residential property rates as potential buyer reconsider their financial position.
Even if one were to buy a property with the idea of settling down in India sometime in the future, it would be best to make the buying decision when they actually make the shift.
Buying a residential property requires a lot of due diligence and any negligence can prove costly. Yet, some NRIs hastily invest in residential houses or commercial properties in India. One needs to check the track record of builders as well as the title to the property land before signing the dotted line.
Carry on with resident accounts
When you change your residence and become an NRI, you can no longer use your savings bank account in India. It needs to be converted into an NRO (Non-Resident Ordinary) account, as per the foreign exchange guidelines. If you have investments in mutual funds, you need to inform them or its registrar about the status change and accordingly update all the necessary documents (KYC, PAN, etc).
And if you are planning to trade in shares and non convertible debentures of Indian companies on an Indian stock exchange, you cannot operate the usual trading account. It needs to be routed through a designated Portfolio Investment Scheme (PIS) account. Similarly, the regular DEMAT account has to be converted to NRO DEMAT account. Non-compliance can attract hefty penalty charges from the regulator.
As per the new rules set in 2018, while you can continue with your PPF account opened in India, you cannot extend it beyond the maturity period of 15 years. Moreover, you cannot open a new account as an NRI.
However, despite the depreciation of the Rupee, if we look at the 10-year data in Dollar terms, the Nifty 50 has still outperformed most global indices apart from the S&P 500 and the Nikkei. A well-diversified global portfolio will be incomplete without investing in the Indian equity market. This is irrespective of whether you want to finally settle down in India or any other country.
Ignore tax implications
Investing in 401(k) retirement plan while being in the US gives you tax advantages. However, any premature withdrawal (before the age of 59 ½ years) attracts a 10% penalty in addition to income tax on its distribution.
For NRIs in the 24% tax bracket, a $5,000 early 401(k) withdrawal could cost about $1,700 in taxes and penalties. Many a time NRI makes such long-term investments, while not being sure about their stay abroad.
Furthermore, there could be double taxation if you reside in a country that doesn’t have a DTAA (Double Tax Avoidance Treaty) with India. Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK, and the US are among the 90-odd countries with which India has a comprehensive DTAA.
Back home, TDS (Tax Deducted at Source) rates are different for NRIs. Mutual fund redemption by NRIs is subject to TDS at the highest tax rates. For instance, TDS for LTCG made in equity funds is 10% while it is 20% for debt funds. As an NRI landlord, there is a compulsory TDS that needs to be deducted by the tenant at the rate of 30%. Similarly, there is a higher TDS of 20%-30% applicable for the capital gains made from the property sale made by an NRI.
NRI who are not fully abreast with the latest tax rules applicable in both countries are frequently taken by surprise.
Worrying excessively about rupee depreciation
NRIs often worry about the falling value of the rupee. After all, the rupee has depreciated by 8.2%, 5.8% and 2.8% (annualised) against the US dollar, Euro and Canadian dollar respectively in the last 10 years. This has often made them wary of investing in Indian assets from their foreign income.
However, despite the depreciation of the Rupee, if we look at the 10-year data in Dollar terms, the Nifty 50 has still outperformed most global indices apart from the S&P 500 and the Nikkei. A well diversified global portfolio will be incomplete without investing in the Indian equity market. This is irrespective of whether you want to finally settle down in India or any other country.
Indian equities are actively sought by investors across the world. That’s because India has been among the fastest-growing economies in the world. When things normalize, it has the potential to grow faster than developed nations which in turn bodes well for its companies and stock market returns as well.
Not seeking professional investment advice
When do you plan to retire? Would you come back to India after retiring? How are you funding your child’s higher education? One needs to ask these questions before investing. While it’s likely that you might be investing in both the countries, it’s also important how these investments are working together towards your financial goals.
Having a financial plan gives a sense of how much you need to save in order to achieve various goals. Some NRIs make the mistake of relegating such important decision-making to relationship managers or relatives.
It is prudent to seek conflict-free advice from a certified investment professional who is abreast of investment rules in both countries. Moreover, they should be able to facilitate a robust estate planning for you that will enable smooth transfer of your assets (in India and abroad) to your near-and-dear ones in case of any unfortunate event.
NRIs should refrain from overinvesting in real estate. They should systematically update their status in all the resident accounts while hiring a finance professional, if need be, to take care of tax and financial planning needs.