The following points are very important for NRIs/PIOs who are coming back permanently or planning to stay back in India for an indefinite period:
1. NRE deposits become taxable from the day you land back in India. This is because NRE deposits are tax exempt for NRIs (as per FEMA). Anyone planning to settle back or stay back for an indefinite period of time becomes Resident in India immediately, as per FEMA. The NRE deposits should be marked as Resident or moved to RFC (Resident Foreign Currency Account) ideally within 3 months.
2. FCNR deposits/RFC deposits and any international income is tax exempt till the time you are an NRI (as per Income Tax Act) in 9 out of the last 10 years or been in India for less than 729 days in the last 7 years. In simple terms, a person who has been an NRI for more than 10 years at a stretch, might get another 2 years to enjoy this. This intermediate phase is also called RNOR (Resident but Not ordinarily Resident).
3. Once a returning NRI becomes a Resident and Ordinarily Resident (ROR), all his domestic and international income is fully taxed.
The following strategy would help in managing Personal finances:
1. Plan to move to India post October of any year to enjoy one additional year as an NRI as per IT Act. However, if you have stayed in India for more than 365 days in the last4 years then plan to come back to India only after February.
2. Restrict the taxable income in India by using tax efficient options like RFC and FCNR during the RNOR (intermediate) phase. Also, one could look at exploring investments in tax efficient mutual funds during this phase. It could be noted that debt mutual funds would be taxed at concessional tax rates if the units are held longer than 3 years.
3. Restrict income from taxable Fixed deposits and any other taxable incomes (like rentals) so that they are below Rs. 6.50 lakhs p.a.
4. Use tax saving deductions like Sec 80C (maximum Rs. 1.50 lakhs p.a.) to bring the taxable income to below Rs. 5 lakhs (there is no tax for income below Rs. 5 lakhs).
5. Invest extra funds in tax efficient options like debt mutual fund (for conservativeness) and equity mutual funds and gold products for aggressiveness, based on your risk appetite.
The portfolio construct should balance safety (through FDs, RFC, FCNR), liquidity (through savings account/liquid mutual funds), growth (through equity and gold) and tax efficiency.
Equity and gold allocation should be between 25 to 35% of your entire financial wealth based on one’s risk taking ability. Invest this portion gradually. Regular income should be managed by FD’s, RFC and FCNR. You could also look at rental income and gradual withdrawals from debt funds to increase your regular income. However, do not get over exposed to real estate as it is an illiquid asset.
Invest in appropriate insurance covers like health, house and any vehicle insurance. In case, if there is a need for life insurance, buy a pure term plan. Traditional, ULIP and Pension Plans of Insurance companies are easily avoidable.
Have a proper nomination and a registered will so that your wealth is easily transferred to your dependents.
- Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
- All other investments too have different levels of risk like credit risk, regulatory risk etc. Appreciate this before initiating any investments.
- Past performance of any asset class is not an indicator of future performance.
- It is very important to consult a Professional Planner/Investment Adviser while implementing any of the above ideas.
- The above are mere suggestions and not Investment Advice as individual cases might differ.
In case, you would like professional financial guidance, than feel free to connect to me at 9845557582 or firstname.lastname@example.org.
Naveen Julian Rego-CFPCM
SEBI Registered Investment Adviser
21st April, 2020