There is a very limited amount of information available in the public domain regarding investment opportunities for Overseas Citizen of India (OCI) residing in India.
One of the frequently asked questions is whether OCIs residing in India can invest in Government Savings schemes such as EPF, VPF, NPS, PPF, Post Office Savings Schemes, SCSS, KVP, Sukanya Samridhi Yojana. According to Section 7A of the Citizenship Act, OCIs have parity with Non-Resident Indians (NRIs) in respect of all facilities available to them in economic, financial, and educational fields except in matters relating to the acquisition of agricultural or plantation properties. Once an NRI becomes a resident in India, they are eligible to invest in all Government Savings schemes. That means OCIs have the same investing privilege as NRIs when they become a resident in India.
However, this opportunity may not be sufficient to create a sustainable long-term investment plan for OCIs. What if an OCI has to go back to the country of their Citizenship? In that scenario, the OCI will become NRI and will have to stop investing in Post Office Savings Schemes, SCSS, KVP, and Sukanya Samridhi Yojana. That would create discontinuity in their investment plan or at best those investments could be cobsidered tactical investment opportunities.
Complexities abound for US-based OCIs
Then there are country-specific nuances that can make it difficult for the OCIs residing in India to invest in India. It is more pronounced for the US-based OCIs. The following points need to be read in the context of the US-based OCIs (hereafter referred to as OCI or OCIs).
The investment in PFIC (Passive Foreign Investment Company) outside the US for US Citizens is tax in-efficient and has a cumbersome reporting requirement using IRS Form 8621. In India, investment options such as Mutual Funds, ETFs, ULIP, and REITs are PFIC, and hence investment in those is not advisable for the OCIs.
The OCI need to be cognizant of the fact that receiving a pension from an Indian Government Savings scheme such as EPF and NPS may reduce US Social Security payments through the Windfall Elimination Provision (WEP). This may discourage OCIs from contributing voluntarily to the pension schemes such as VPF and NPS.
If the earned income 0f OCIs in India is less than the Foreign Earned Income Exclusion (FEIE) limit of USD 120,000 (for 2023), it may be advantageous for them to convert a portion of their pre-tax retirement funds, such as traditional IRA assets, to after-tax Roth assets at zero or lower taxation. Please note that the same conversion as a US tax resident attracts state taxes.
The OCIs (or US ex-pats) cannot contribute to IRA if they do not have income left over after deductions and exclusions. For example, if they exclude all of their income with the FEIE and have no other sources of earned income, they are not eligible to contribute to IRA.
The opinions expressed here are intended for educational purposes only. It is recommended that the reader conduct their own due diligence before making any investment decisions.
The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services.
He has advised many clients in India, the US, Europe, the Middle East, South East Asia, and Australia.
To know more about him, click on https://finmyn.com/about/.
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