Venkat

Checklist for a Non Resident Indian

You’re an NRI. Congratulations.

Your NRI status affects your banking and investment accounts as well as Income tax.

As per Income tax act, an individual can be

  1. Resident and ordinarily resident
  2. Resident but not ordinarily resident
  3. Non- Resident

‘Non-resident Indian’ is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. You are a resident if you satisfy any of the following conditions:

  1. If he is in India for 182 days or more during the previous year (e.g. 2018-19); or
  2. If he is in India for 60 days or more during the previous year (e.g. 2018-19) and 365 days or more during 4 years  (2014-15 to 2017-18) immediately preceding the previous year.

The second condition will not apply in the following cases:

  •  If an Indian citizen leaves India during the previous year for employment outside India;
  •  If an Indian citizen leaves India during the previous year as a member of the crew of an Indian ship; or
  •  If an Indian citizen or a person of Indian origin comes on a visit to India during the previous year.

In essence, if you leave India for employment in any financial year when your stay in India (including any travel days to & from India) is 181 days or less then you’re non-resident for that financial year.

 

FEMA governs your banking and investment accounts.

As per FEMA (Foreign Exchange Management Act 1999) if an individual has left India for :

  1. Taking up employment outside India,
  2. Carrying on a business or vocation outside India, or
  3. Left India for any other purpose in such circumstances as would indicate his intention to stay outside India for an uncertain period,

then he becomes a person “resident outside India” immediately on leaving India for the above purposes.

 “Immediately on leaving India” for either of the above purposes, you become a Non-resident under FEMA.

Things to do after becoming an NRI :

  1. Income received or deemed to be received in India is fully taxable. Use your overseas account to transfer funds to your NRE account.
  2. Change the status of your savings accounts from resident to NRO (Non-resident Ordinary). Close those that are not required.
  3. Change KYC status in CKYC  from resident to Non-Resident. This will change your residential status for all future investments that you do while being a Non-Resident.
  4. Open an NRE (Non-Resident External) savings account with a close relative as a joint account holder. (The bank will open it on a “former or survivor” basis i.e. the resident relative will be a Power of attorney holder for that account).
  5. Convert resident Demat account to NRO Demat account.
  6. Open NRE PIS (Portfolio investment scheme) Demat account, if you intend to invest in shares/ trade in stocks. You cannot use the PIS linked NRE bank account for any other purpose.  Pl note – a Non-Resident cannot do intra-day trading.  NRE PIS investments are 100% repatriable. You may have to approach multiple banks since staff at certain branches may not be aware of rules regarding opening and maintaining a PIS account. You will need to be very persistent in following up once you submit the account opening forms ( Bank & Securities section) as well as copies of the required documents.
  7. Use your NRE savings account to invest in mutual funds, if you want to invest on a repatriable basis.
  8. Link the NRE/NRO/Investment accounts with an Indian mobile number, which should remain active while you are overseas.
  9. Depending on whether your family/any dependents are staying back, make sure that they have enough health insurance coverage. You should ideally have a base policy and a super top-up policy to cover health emergencies. You might also require term insurance.

 

What is Asset Allocation?

Asset allocation is the amount of money you commit to each of the asset classes such as equity (equity mutual fund/stocks), debt (FD/PPF/ Debt mutual fund/Bonds) , real estate (residential/commercial), gold and cash.

Asset allocation is the most important step in investment planning says Richard Ferri , author of “All about Asset allocation”.

How do i decide my asset allocation ?

One way is :

  1. I take risks and be aggressive, hence invest primarily in equities.
  2. Real estate gives high returns . (National Housing Bank’s RESIDEX city-wise housing price index shows otherwise).  Hence my primary investments are in real estate.
  3. I “invest in Insurance” (endowment, whole life, child plan, money back ) . Most of my savings goes into paying high policy premiums.
  4. I do not like taking too many risks, hence I invest in FD’s and Debt mainly.
  5. Whatever is the latest fancy – Trading, AIF’s, PMS, futures & options.
  6. Do nothing.

The problem in the above scenario is that you require money at different times to achieve different financial goals.

  1. Having an emergency fund of 6 months expenses – Since this fund could be required at any time , you save in an FD/Liquid fund so that you can access it at any time.
  2. Short term goals (3 to 5 years) – Buying a car, Education expenses, Travel expenses. Given the timeline of the goal , you will not want to risk losing a chunk of the capital saved for these goals. That would mean investing mainly in Debt.
  3. Medium term goals (5 to 10 years) – Down payment for Buying a House, Higher education, Overseas vacation , Parents long-term care. Some of the goals here like buying a house can be postponed but Higher Education or Parents long-term care cannot be. Hence the asset allocation would have a higher share of medium term debt rather than in riskier assets.
  4. Longer term ( 8-10 years & more) – Some of the expenses mentioned above , FIRE (Financial Independence Retire Early ) , Transitioning to Retirement. The investments can be divided among equity/debt/real estate since you have more time for achieving these goals as well as being able to take relatively higher risk.

Is a one-time asset allocation activity enough ?

 

No. It will have to be combined with Portfolio rebalancing especially for medium & longer term goals .

E.g. You have an asset allocation of 60% (equity) & 40% (debt) for a child’s Higher education (H.E.). If at the end of the 1st year your invested amount ,after including returns ,has resulted in an increased equity allocation (65%) then you would sell the additional 5% of equity and invest it in debt. Rebalancing involves annually buying or selling assets in a portfolio to maintain an original/desired level of asset allocation.

In the final 3-4 years of the goal, reducing equity allocation and increasing debt allocation annually can help in diminishing the risk of not being able to achieve your stated goal.

Why is asset allocation important ?

A close friend of mine Ajay (name changed) recently lost his job since his division was no longer considered profitable. His son is in the middle of completing his MS in the United States. Ajay had used most of his severance pay-out to fund a part of his son’s 1st year expenses. Ajay had not taken an educational loan (he did not know about Section 80E and its benefits ) and was relying on his real estate investments to fund his son’s studies. His problem now is that he is not getting any offers for either of the two properties that he’s trying to sell. He’s still paying EMI, maintenance, taxes etc on them though. With nearly 25 lakhs still to be paid, he will have to take a significant loss on the properties since he doesn’t have any other “easier to sell” or liquid investments.

To summarise asset allocation can be helpful provided it is linked to a financial goal. It has to be combined with rebalancing done in a timely and consistent manner.

What is Lifestyle Inflation ?

You know you have arrived when you get a fat increase in your salary and look for different ways to spend it. After all you feel “I deserve it after all the hard work”.  How about buying that 40k smartwatch or the 50″ TV  or the 5 star vacation you had planned.

Welcome to lifestyle inflation.

Lifestyle inflation means an increase in one’s spending as a result of increase in one’s income.

As quality of life improves with higher income your expenses could increase in various ways like :

  1. Dining out/Food take out more frequently and at pricier restaurants
  2. More frequent upgrades to the latest smartphone / newer model cars
  3. Taking out personal loans for short term expenditures like luxury vacations
  4. Buying a larger apartment/house because “you can afford an higher EMI”
  5. Impulsive Purchases of Branded clothes/footwear/accessories
  6. Buying gadgets which you promise yourself you would use “every day/week/fortnight” but which end up lying around in your house rarely being used
  7.  Keeping up with the Joneses
How does lifestyle inflation impact your financial goals ?

In a way lifestyle inflation happens as you progress in life from being a student to an employee , get promoted, earn bonuses, work abroad, get a higher paying job etc. The higher the income that you earn, more are the opportunities to buy/spend/experience that you get. However the flip side is that the new spending levels become the new normal, leaving us playing a catch up game. One fine day you might realize you don’t like your job but “I can’t leave this job because despite the higher level of income, my savings aren’t enough”.

As compared to Consumer price index (CPI) which tracks inflation at the retail level for  a fixed basket of goods and services and has an impact of 4-5% , lifestyle inflation can have an additional impact of around 4-6% on our average monthly expenses every year. Consequently , if you don’t take lifestyle inflation into account, you will end up saving less for major financial goals.

How do I minimize lifestyle inflation ?
  • Save at least 1/3rd of your income

Keep aside 1/3rd of your income , before spending, towards investing for financial goals. Ensure that you have basics of personal finance covered like having an emergency fund, term insurance and health insurance .

  • Debt planning

Use bonuses/increments to partly repay your home loan or car loan . You can also use them for  investments for long-term goals.

  • Say no to high interest personal loans/ Credit card debt

Avoid taking personal loans where you end up paying 12-15% interest. Same goes for rolling credit card debt which can set you back with interest charges of 40% or more.

  • Live your life rather than your neighbour’s / colleague’s /friend’s

Remember that your goals and your budget are your own.  Similarly the goals you’ve prioritized have a better chance of being achieved provided you stick to your financial plan. Societal pressures with regard to spending won’t help you make the best of your money.