Five common mistakes NRIs make while investing in India

Worldwide, NRIs struggle with a lack of time. They frequently travel to India on short notice and pack a lot of activities into their schedules. Critical investment-related choices frequently get delegated to friends and family or put on hold.

The five common investment errors made by NRIs are listed below:

Invest unduly in real estate

NRIs typically have more liquid assets and have a propensity to invest disproportionately in Indian real estate. It can be due to emotional factors or a simple preference for material possessions. However, it doesn’t seem to make much financial sense. One is that rental yields from residential properties are quite poor, only producing an average of 3% yearly (pre-tax). The maintenance fees, which are rather high for luxury flats, only serve to make matters worse.

A significant issue is finding tenants and maintaining occupancy, particularly when you only visit the nation occasionally. The procedure of selling the apartment is extremely laborious, which is another factor. Additionally, capital growth has slowed during the previous ten years, particularly for costlier houses. As prospective buyers reevaluate their financial situation in light of the present pandemic, residential property rates are under extra pressure.

It would be ideal to make the purchase decision when one makes the move, even if one were to buy a house to settle permanently in India at some point in the future.

A residential property purchase necessitates extensive due diligence, and any errors could be costly. However, some NRIs make hasty investments in commercial or residential real estate in India. Before signing on the dotted line, one should investigate both the ownership of the property and the track record of the builders.

Carry on with resident accounts

You can no longer use your savings bank account in India after you move and become an NRI. As per the foreign exchange rules, it must be changed into an NRO (Non-Resident Ordinary) account. If you own investments in mutual funds, you must notify the registrar of such investments of the status change and update any relevant paperwork as necessary (KYC, PAN, etc).

Additionally, you cannot use the standard trading account if you intend to trade shares and non-convertible debentures of Indian corporations on an Indian stock market. A designated Portfolio Investment Scheme (PIS) account must be used to channel it. The ordinary DEMAT account also has to be changed to an NRO DEMAT account. The regulator may impose severe penalties for noncompliance.

By the new regulations adopted in 2018, you may keep the PPF account you first opened in India, but you are not permitted to extend it above the 15-year maturity period. Additionally, as an NRI, you are unable to open a new account.

The Nifty 50 has nevertheless outperformed the majority of international indices, except the S&P 500 and the Nikkei, if we look at the 10-year data in Dollar terms, despite the depreciation of the Rupee. Without investing in the Indian equities market, a well-diversified global portfolio will fall short. This is true whether your ultimate goal is to relocate to India or another nation.

Ignore tax implications

You receive tax benefits if you invest in a 401(k) retirement plan while residing in the US. However, if a withdrawal is made too soon (before the age of 59 or 12 years), a 10% penalty is added to the income tax due on the payout.

A $5,000 early 401(k) withdrawal may cost NRIs in the 24 per cent tax bracket $1,700 in taxes and penalties. Such long-term investments are frequently made by NRIs who are uncertain about their future abroad.

If you live in a nation without a DTAA (Double Tax Avoidance Treaty) with India, there may also be double taxation. Among the 90 or so nations with whom India has a comprehensive DTAA are Australia, Canada, Germany, Mauritius, Singapore, the United Arab Emirates, the United Kingdom, and the United States.

NRIs are subject to various TDS (Tax Deducted at Source) rates at home. NRIs are subject to TDS at the highest tax rates when they redeem mutual funds. For instance, TDS for LTCG made in equity funds is 10%, whereas TDS for LTCG made in debt funds is 20%. There is a mandatory TDS that must be withheld by the tenant at a rate of 30% as an NRI landlord. Similar to this, an NRI’s capital gains from the sale of their property are subject to a higher TDS of 20–30%.

NRIs who are not fully up to speed on the most recent tax laws that apply to both countries are frequently caught off guard.

Worrying excessively about rupee depreciation

NRIs frequently express concern about the rupee’s declining value. After all, over the past ten years, the rupee has declined by 8.2%, 5.8%, and 2.8% (annualised) against the US dollar, the Euro, and the Canadian dollar, respectively. Due to this, they have frequently been hesitant to use their foreign earnings to invest in Indian assets.

The Nifty 50 has nevertheless outperformed the majority of international indices, except for the S&P 500 and the Nikkei, if we look at the 10-year data in Dollar terms, despite the depreciation of the Rupee. Without investing in the Indian equities market, a well-diversified global portfolio will fall short. This is true whether your ultimate goal is to relocate to India or another nation.

Investors from all around the world are actively looking for Indian shares. India’s economy has been among the world’s fastest-growing, which explains why. It can grow faster than industrialised countries when things return to normal, which is good news for its businesses and stock market returns as well.

Not seeking professional investment advice

When do you anticipate retiring? If you were to retire, would you return to India? How do you plan to pay for your child’s college education? Before investing, one must ask these questions. Even while you may have investments in both nations, it’s crucial to consider how your investments will help you reach your financial objectives.

A financial plan can help you determine how much money you need to save to reach certain objectives. Some NRIs commit the error of leaving such crucial decisions in the hands of relationship managers or family members.

It is wise to get conflict-free guidance from a licenced investment advisor who is knowledgeable about the laws governing investments in both nations. Additionally, they ought should be able to assist you in creating a solid estate plan that will provide a smooth transfer of your assets (both domestically and internationally) to your loved ones in the event of an unfortunate circumstance.