Indians are highly mobile and as part of their job, they frequently travel abroad. Some of them stay outside the country for a significant part of the year and hence are called NRI (Non-Resident Indians) which has significance in investing and taxation. Some of them settle abroad and become a citizen of another country. With the IT boom, a significant number of Indians have travelled to the US. Currently, approximately 4 Million Indians are residing in the US upwards of 1% of the US population.
Indians feel proud of their motherland and are emotionally connected. They financially support their parents and relatives while they are abroad. They would be heirs of the properties received back home through the inheritance.
Through the PIO (Person of Indian Origin) scheme, the Indian government has ensured that the Indian diaspora (NRIs, PIOs) is welcome in India. India is the largest recipient of remittances from its diaspora, which is a reflection that Indian prefer managing assets across both shores.
Why invest across shores?
India has one of the largest populations and a burgeoning middle class whose needs must be met. That means the consumption demand will be high and the industry needs to scale up to produce and service their needs. While the Indian economy has gone through a rough patch in the recent past, nobody can deny the fact that India is still one of the fastest-growing economies in the world. The equity market will follow the economy and that means you need to own a pie of Indian Equity for the long term.
The US, being one of the most mature markets in the world, provides a plethora of investment opportunities. These investments can be done anywhere in the world by sitting in the US and at a lower cost.
The NRI must use investment opportunities across countries to make their portfolio smart.
What are some of the key considerations for investing across countries?
- Diversification – The return on investment across countries are not directly correlated because the return depends on many factors which have local influence. Investors can use this fact to design their portfolios to reduce the volatility of return on their overall investments across multiple geographies.
- Investment Options and Ease of Investments – The US provides a wide variety of investment options. Index Funds and ETFs (Exchange Traded Fund) are a proven way of investing in the equity market and has democratized the investment. The large volume of ETF transactions reduces the Bid-Ask spread making the market more efficient. The market is very competitive and one can invest in ETFs with an expense ratio of as low as 0.03%. The REIT (Real Estate Investment Trust) provides a liquid option for investing in real estate. Sitting in the US, you can invest abroad using international/emerging market funds/ETFs.
- Currency Conversion – The US dollar (USD) is a dominant currency because a significant amount of the world’s Forex transaction (approximately 88% in 2019) is done in USD. The Indian currency is depreciating year over year against the USD that means any asset invested in India may lose its value because of currency depreciation if you are ultimately planning to move the money from India o the US.
- Taxation – India does not charge taxes on gains of NRE and FCNR investments. This is one of the factors which can influence the Debt investment strategy. The US tax residents on the global income. India has DTAA (Double Taxation Avoidance Agreement) treaty with the US and that means US residents can take credit of the taxes paid in India and vice versa.
- Tax Compliance – The US has very stringent tax compliance and taxes the global income of US residents. For the US residents, the filing of FATCA (Foreign Account Tax Compliance Act) and FBAR (Foreign Bank and Financial Accounts) is a must. The US taxes passive income earned outside the country. Any investment in the passive income (e.g. Mutual Fund) outside the US needs to be reported as per PFIC (Passive Foreign Investment Companies). The US taxes notional gain (the difference between valuation at the end and beginning of the year) on PFIC hence one needs to be careful while investing in it. If you are planning to surrender US Citizenship or Green Card, you need to file Form 8854 to comply with the Expatriation Tax.
The NRI needs to clearly decide the country where he (/she) is going to live permanently. While creating a plan, he should consider inflation of the country where the corpus of a particular goal will be consumed e.g. If the NRI is planning to retire in India, he should use Indian inflation in the range of 5%-6% (rather than using 2%-3% of US inflation). For investment return, he should consider the return rate of the country where the money is being invested. If an NRI is planning to move back to India, he needs to ensure that his asset is moved to India in a tax-efficient way using RNOR (Resident but not Ordinary Resident) status.
The US-based NRIs have a great opportunity to take advantage of the investment options in the US and India. It is important that they educate themselves about potential investment opportunities and compliance requirements and get the best out of them.
You may also like to read Finance Best Practices for US based NRIs.
The writer is a SEBI Registered Investment Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. He is helping out many NRI Clients across the globe. To know more about him, click on https://finmyn.com/about/.