What are NRI Bonds?

The Rupee has fallen significantly this year, and with Friday’s Current Account Deficit data release – it tumbled to a new low of 72.63 to a dollar today.

There are reports of the government thinking about issuing NRI bonds to help with this depreciation and it seems like the government will be forced into action soon.

While there aren’t any details available on how NRI bonds will be issued (if at all they are issued) – from previous times we know that the branches of Indian banks outside India will allow NRIs to deposit their dollars, which can then be transferred to the Indian branches thereby helping with the Rupee slide.

For their trouble – NRIs will get a better interest rate than their domestic banks, and usually an ability to convert their Dollars into Rupees back home. There will likely be a lock in period of 3 – 5 years in the scheme, and history is any indicator it will very likely bring in good inflows from NRIs because the RBI was able to raise $30 billion from a similar NRI bond scheme in 2013. 

 

Does it make sense to invest in a 401k for a short term?

Mohit left the following comment on the Suggest a Topic page recently:

Mohit Agrawal March 18, 2015 at 8:13 pm [edit]

Hi,

I would love to know your views on investing in 401(k) in USA if a NRI plans to remain in USA short term like 5-7 years. Is it still worth it?
Because the tax you save and employee matching comes down to around 40% benefit. But when you cash out your 401k account when you leave for India you have to pay tax on that amount in USA at around 30% and then 10% is penalty. Is is really worth the hassle to invest in 401(k) in USA? or should I be investing that money in India

First, let’s take a look at what happens when you prematurely withdraw money from your 401k

  1. Negative: You pay 10% of the withdrawal money as penalties because this is a retirement account, and you are supposed to keep money in it till retirement.
  2. Neutral: Pay taxes that you had saved in previous years on the money withdrawn at the time of withdrawal because you didn’t keep your money for as long as you said you would.
  3. Positive: You keep the employer match to your 401k intact as long as there were no vesting rules that were flouted, so this is free money that you still got to keep.

If you think of these three factors, you can look at your own situation, do a rough calculation of how much free money you are getting, how much you will pay in penalty, and then treat the penalty as simply reduction of the free money you get from your employer’s match. In most situations, I would imagine that the employer match will take care of your penalty, so from a numerical standpoint it will make sense to invest in a 401k for even if it is for a short term like five or six years.

Now, the next thing to consider is whether this employer match is a big enough sum that you couldn’t accumulate while investing in India for four or five years, and that’s a tricky question. I believe that the match will still edge out the high interest rates in India, but perhaps not the high equity returns.

The last thing to consider is that when you are withdrawing the money, you will effectively have to pay around half of it in taxes and penalties, and based on your salary, 401k contribution and employer’s match, the money that you get at the end may not be worth the little hassle you go through during the five or six years for investing it.

So, I think whether you invest or not is based on your situation, and how comfortable you are with the idea of a penalty, and paying a big sum as taxes at the end as opposed to extracting whatever benefit you can from this investment.

Investment options for NRIs in USA

Nritk left the following comment on the Suggest a Topic page a few days ago.

NRITK March 8, 2015 at 5:21 pm [edit]

Hi manshu,
Lot has been written and discussed for resident Indians but very less is been discussed about the Investment options for NRIs in and outside India.
There is adequate information is available for investment in India but nothing is precise for investment options for outside India.
For eg. what about the retirement corpus for the NRI who is not planning to come back to India? What are options for him to invest outside India.
I know you would like to target the majority of your followers but I understand that you are also keeping your eyes open across the world so thought might be good if you can also target small but promising fans of your blogs.

Thanks for consideration and look forward something for NRIs.

Best Regards,
NRITK

If I understand this correctly, then this question really has to be answered in terms of what country do you live in and where can you invest while you’re in that country. Since I’ve lived in the US for a fair bit of time I’ll answer this from the perspective of a NRI in USA; the things that you have to take care of and the places where I used to invest, and you can hopefully draw some parallels from that.

Taxation

The first thing to keep in mind is taxation, and remember that the US is different from all other countries in the sense that they want to tax all  your income outside the US as well. You have to report your income in India, and then pay tax on it in US as well.

Retirement Accounts: 401k

The next thing to consider is a 401k account. A 401k is a retirement account and the best thing about this is that if you put in some money, your employer has to match that amount up to a certain limit, and that means free money for you. This account also has certain tax benefits that you should take advantage of and it has certain restrictions on withdrawing your money that you should be aware of but all in all this is a great option and something you should look into.

Invest in Real Estate

The third thing that comes to mind is real estate. The interest rates are so low and borrowing so easy that it is a no brainer to buy real estate in the US.

India based ETF

ETFs and Index funds are probably the best way to invest in the asset classes you like if you are in the US.

While in US, I liquidated all of my India stocks in order to simplify my tax situation and also focus on investments from one place. I still wanted exposure to Indian stocks, and in my opinion the best way to do that is to buy the India ETF INDY that is listed in the US and available in your brokerage account.

US Based Index Funds or ETFs

The next thing in my portfolio were stocks and index funds that gave you exposure to American equities. Equities are the best long term assets in terms of returns in my opinion so it is essential to have a healthy sized allocation to equities in your portfolio. For a retail investors, the best way to do this is to buy cheap index funds or ETFs that buy you a basket or large caps. The ETF SPY is a good bet for this.

Debt Funds

There needs to be some exposure to debt funds and an ETF that gives you exposure to debt in the US is a good hedge against the eventuality that the stocks market goes down which is likely to happen many times over in your investing career.

Stay away from NRE Fixed Deposits

These are some investing ideas that I could think of when it comes to investing in the US as an NRI. There is one specific thing that I think US based NRIs (who don’t wish to return or use money in India) should avoid investing in and that is opening a fixed deposit in a NRE account.

There are two reasons for this. The first one is that the Rupee has traditionally depreciated against the USD and that means when you covert those Rupees into Dollars you will get less than what you put in there. There has been no change in the economies of these two countries, and I think it is fair to assume that this depreciation is going to continue in the future also.

The second reason is that the interest from this investment is tax free in India but is still taxable in the US and that reduces the potential return from this asset for you. So, in case you are never going to use this money in India, I don’t think there is any benefit of having it invested in these type of fixed debt instruments.

How to transfer money from overseas to a NRE account?

John sent in the following email yesterday, and I thought this was a good topic for a post.

Hi Manshu,

I have opened NRE account but still not clear on transfer of money to NRE. If i want to transfer money to NRE account from overseas, will it transfer in foreign currency or it first gets converted into INR and then transferred to NRE account.

What is best, transferring money from local overseas bank or transferring through eRemit or Western Union.

Also is it good idea to transfer the local currency into USD and then transfer into NRE or can we transfer the local currency directly in USD into NRE account.

Thanks
John

This is a common question because there is in fact no link between an international bank, say a Bank of America and a NRE account opened with an Indian bank, and once you open a NRE account, it isn’t intuitive what the next step should be. The two accounts you now own are two distinct entities with no link to each other, and you need to use a third service to link the two and fund your NRE account.

A lot of Indian banks have their own money transfer service, and you can use that to fund your NRE account or use a third party service like Xoom.

What is the best way to transfer money to India?

I would imagine that the answer to this question depends on which country you are transferring money from, and while I don’t know about other countries, I can speak with some confidence as far as the US is concerned. Using Western Union or any other wire exchange service usually costs a lot more than a money transfer service like ICICI’s Money2India or Xoom. I have used Money2India for a very long time myself till I discovered Xoom, which is perhaps the best money transfer service (for India) that exists today. It is quick, has low fees, gives you a good exchange rate, and is transparent with the exchange rate you will get as well as what status your transfer is in.

If Xoom operates in your country then I suggest you give it a try, if not, then try one of the other services that

If you are overseas then transferring money from your resident country to your NRE account is the best bet.

A little background on the NRE account now. One of the key features of the NRE account is that the money in the NRE account is freely repatriable which means that it can be sent out of the country any time and there is no upper limit on it. This is different from other accounts like the NRO account which has a clearly defined limit, and in general the tendency of the government and RBI is to keep a close watch on foreign exchange going out of the country, and don’t allow it so easily.

The second important thing about this type of account is that the interest is completely tax free, and this is also different from any other account type.

In this light, it is easy to see that the ways you can fund your NRE account is limited. You need to use foreign currency to fund this account, and the easiest way to do that is to remit the money from your host country to India. If you are already in India and have foreign currency with you then you can also use that to fund your NRE account.

You can’t deposit INR in a NRE account fund it so the option to convert foreign currency to INR doesn’t really exist, and if your foreign currency is not one that is freely convertible then you need to first convert it in a freely convertible currency, and then deposit that in your NRE account.

Please ask any questions that I may have missed addressing in the post in the comments, and I’ll answer them.

Should NRIs bother to invest in India?

Chauhan left the following comment on the Suggest a Topic page recently.

Chauhan March 17, 2014 at 1:26 pm [edit]

I’m keen that we somehow start a theme that compares keeping your money abroad (in say USD, GBP or SGD etc) vs sending it to India for investment purposes. Which is to say, how do foreign currency gains v the Indian rupee compare with high interest rates (on a/c of high inflation) in India.

REPLY

My first impression was that it was indeed futile for most NRIs to send their money back home for investing because of how fast the Rupee has depreciated recently, but further digging revealed that it wasn’t really the case.

NRE accounts were made tax free, and the interest rate was raised to domestic savings rate on them in December 2011, and at that time there was quite a lot of excitement about them, and a lot of money did find its way to Indian NRE accounts.

The USD to INR rate was about Rs. 51 at that time, and right now it is about Rs. 62, which is a depreciation of about 17%.

So, roughly speaking, if you were an American NRI who were thinking of opening a NRE bank account back in December of 2011, but didn’t do anything yet (28 months) you had a 17% return.

However, if you had invested your money in a NRE account at that time then you would have made about 25% on your money. This is assuming the NRE rate was 10% for 28 months, which is the rate several banks were offering at the time, but none are offering today. The rates are around 9% right now.

So, if you were in the US then it was obviously better for you to have sent money home, and opened a NRE account, but what about other countries?

I plotted the same data for some other countries UK, Singapore, Australia, UAE and Canada and here are the results.

Currency Gains Versus NRE Interest Rates

As you can see, only GBP has been able to keep up with the Indian interest rates, and the rest of them have been lagging behind, some considerably so.

I feel it is a function of the high domestic interest rates, and the fact that most of the global economies aren’t doing that great that has resulted in these numbers.

Will these results continue to hold up in the future? I’m going to say, probably yes because the interest rates are still high at about 9% right now, and that results in a gain of about 54% in 5 years , and I think the probability of the Rupee losing half its value against these currencies in the next five years is probably lower than that.

How to prepare for parents coming from India to USA?

I’ve often seen that when your parents first decide to vist you in the USA – a lot of time and energy goes into preparing for the visa, but once that is done, you don’t prepare as much for what they are going to do when they reach the country.

As a result, parents get terribly bored during their stay, and what should be a great holiday is reduced to weeks of boredom. There are several things that you can do to prepare for your parents who are visiting the US from India, and this is definitely a situation where a little planning can go a long way.

Flight

The first thing of course is the long flight. Non stop flights can be 15 hours, and other flights can make your journey extend up to a day or more. That alone is enough to discourage most people from flying. This is a long flight, and it’s not going to be comfortable for most people, but in reality it isn’t as much an ordeal as most people think it is either.

I’ve found that drinking a lot of water, having your own entertainment like loading a movie or two on your laptop, wearing comfortable slip on footwear and having ear muffs make the journey less arduous. It will never be a cakewalk, but these are simple things that you can do to make it a little easy to travel.

 Jet Lag

Jet lag can easily ruin the first week of your vacation, and you should try to beat the lag to whatever extent possible. The thing I’ve seen work for me best is to go to sleep only during the night no matter how tired you are when you reach your destination.

You can go out during the day and get some sunlight, meet people and do things that don’t strain you physically, and also keep you going throughout the day. Keep reminding yourself that you are trading a few tough sleepless hours for several jetlag free happy days. Here are some tips to beat jet lag.

Television

These days you have great options to get Indian TV channels in the US, and if your parents are visiting, then you should definitely have the TV set up so they can see the same shows they were seeing in India. Find out the channels that they are used to watching, and then get a package that has all these channels. You may not get everything, but you can cover a lot of channels by researching thoroughly.

Phone

Even if you think your parents won’t move about much without you, it is better to get them a cellphone or if they have a cellphone then you can get a prepaid SIM card so they can keep the phone with them when they go out without you. You don’t want them in a situation where they are outside and don’t have an easy way to contact you. Prepaid cards are really cheap and all major carriers offer them.

You also need an easy and cheap way for them to call India so they can spend time on the phone without worrying about the bill. Things like Vonage, Google Hangouts, Skype etc. work great for these, and  you can choose an option that is most convenient for them.

Health Insurance

Buying health insurance is quite necessary for parents because if they fall sick then the doctor bills in the US can be really substantial and you don’t want to go through that.

You can buy a plan very easily in the US and I feel that’s better than buying health insurance from India. It’s not that the health insurance bought in India doesn’t work or there is a lot more deductible but from the few examples I know, you will have to pay money up front, and then claim the insurance money later on. While an American insurance from something like Seven Corners gets cashless facility, which is preferable.

Transportation

The lack of public transport in most places in the US can become a big problem as parents can’t move about on their own, taxis are often too expensive to be used as a regular option, and that leaves very limited choices.

Some cities have van-pools or para-transits that can become a viable option, I think of these as a slightly better version of shared ricks.

How these work is they have a set area that they service, and you can call them up to come and pick you up from your house and then drop you at a certain location say the gym or the mall, and then call them back up and ask them to drop you back home. They are really cheap, and usually safe as well. You can read about one such service called the Pace Bus Paratransit service here to get a better idea of what I’m talking about. 

Weekend Getaways

It will most likely not be possible to spend a lot of time with your parents during the week when you have to go to work, but you can plan the weekends so you see something new every weekend. Most big cities have several places you can visit on a 3 hour drive, and that means a day trip or just staying a night, and returning next day. You don’t need a leave for such trips, and if you can find a handful of these then you will have the weekends to look up to.

Weekday Activities

If your parents did something regularly in India then try to find the equivalent in the US. The gym is an easy one, swimming is another one. If they were engaged in something that can also be done in the US then you should definitely explore it and see how practical it is to get them to do that in the US.

The other side of this is to try out new things which they never did in India, but are easily accessible in the US. You can look up golf lessons as one example, it isn’t very physically demanding, and not very expensive either. If you find three or four of these type of activities, that might be enough to fill up the day for the most part.

Visiting Friends and Relatives

I think social interaction is what parents miss the most when they are in the US, and if you have friends or relatives near your place that you can arrange lunch and dinners with that’s another good option to spend time pleasantly.

Conclusion

I always feel that you can make any situation better by being prepared and this is certainly one of them. Prepare well in advance, talk to your parents, talk to your friends, get ideas and don’t let a potentially great idea get ruined by boredom! You’re only there because of them, do all that you can to make them feel that way!

Finally some great ideas from IndusLadies on this topic.

Can NRIs invest in the Indian stock market?

NRIs (Non Resident Indians) are allowed to invest in the Indian stock market and while I’ve felt the paperwork and the methods are a little cumbersome to do so, there are many NRIs who regularly invest in the Indian stock market and I’m sure like most other things, once you overcome the initial setup hassles and teething troubles, this process isn’t all that bad.

In my mind, there are three main ways for NRIs to invest in the Indian stock market.

1. Invest in India based ETFs

The US and UK have ETFs that allow you to invest in the Indian stock market without having needing to do any additional paperwork or documentation with an Indian bank or broker.

These ETFs trade in their respective countries in their respective currencies and you can trade in them like you would trade in any other stock.

There is one big thing to consider when you buy India based ETFs.

They will be impacted by the exchange rate movements, which means that along with the underlying asset, which is usually the Nifty, this ETF will also be impacted if the Rupee goes up or down against the host currency.

Also, this ETF is just not for NRIs, and anyone living in the country can buy these ETFs. Here is a list of India based ETFs in the US that I did some time ago.

2. Invest Directly in Indian Stocks

NRIs can also invest directly in Indian stocks, but they need to set up some accounts before they can do this.

First, you either need a NRE or a NRO bank account, then you need an approval under the PIS (Portfolio Investment Scheme) which allows you to invest in the Indian stock market, and then you also need a Demat account to transact in India. Usually, banks can help you get this approval and the same bank can help you open a NRE / NRO account, get a PIS approval and open a Demat and a trading account.

When you have all this done, you can invest in Indian stocks but not all stocks are eligible for NRI investment. RBI publishes a list that shows you which stocks are or aren’t eligible for NRI investing.

3. Invest through Indian mutual funds

NRIs can also invest in Indian mutual funds and you need a bank account in India like the NRE or NRO account to invest in mutual funds. As far as I understand, you don’t need to have PIS approval or a Demat account in order to invest in mutual funds. If anyone knows differently then please leave a comment and let me know.

Conclusion

These are the three ways for a NRI to invest in India, and when you actually go down to the execution of these ways you will find that it is difficult to do all the paperwork or even get answers to your questions if you are going for the second or third route, which is why you see a lot of Indians sending money home to their parents or spouses and then letting them invest this on their behalf. These things have their own complications and it’s just better to face the trouble to have everything setup correctly at the beginning rather than face trouble later on down the road.

Can Indians on a visa buy stocks in US?

I get this question from time to time, but I never did a post on this because there is a lot of conflicting information about who can do what with respect to the different visa types out there.

I hope to start a discussion with the information I have and then hope that people will share their experience on comments, and we can learn from each other’s experience.

Work Visas like H1B, L1A or L1B

If you have a H1B, L1B or L1A visa which allows you to work then you can definitely open a trading account and buy and sell shares in the US.

At the end of the year, when you’re filing your tax returns, you will have to include your earnings from your investing activities and pay taxes on them.

At the time of opening the account they will ask for your SSN, and you should already have that if you have been working in the US.

Tourist or Business Visa B1 / B2

As far as I know, if you have a business or a tourist visa, you can’t trade in stocks in the US. You won’t have a SSN in this case, and the brokerage won’t open your account without that. Additionally, you will not file your tax returns in the US at the end of the year, so I think that also points towards not being able to trade or buy shares.

If anyone knows differently, or has a different experience, please leave a comment.

Student Visa like F1

There are a lot of conflicting posts online about whether or not F1 visa holders can own stocks, and I am not sure about this one. Students on F1 Visa can get a SSN number, so they should be able to open an account, and the common theme in the posts I read is that F1 students can generate passive income and if that’s the case then they should be able to own stocks as well, but I didn’t read anything that answers this definitively.

In general, the advice that is often repeated is that if you’re in doubt then you better stay away from doing it as it may later impact your green card processing, and in that context it is better to play safe right now than repent later.

How can NRIs receive rental income on Indian property?

A few days ago Raj left the following comment:

Raj October 1, 2012 at 8:10 pm [edit]

Hi Manshu,
Came across your website while trying to do some research and I was wondering if I could trouble you for some advice
I currently live in the UK and the father lives in India and looks after some familial property in India.
He has now come to an age that he will need to be looked after and he’s planning to come and live with me.

I was looking to open a bank account which me and my brother (who lives in the US) can manage it online from abroad and primarily deal with funds coming from tenants and also if necessary transfer some money from the UK or from the US if any property maintenance is needed.

It’s all Kosher and needs to be quite straightforward for both of us to use.

Is there such facilities available in India and if so would you be kind enough to point me in the right direction.
Most banks seems to be interested in opening savings accounts but have been unable to find this information

Many thanks in advance

Raj

I think I’ve seen the question about how NRIs should deal with rental incomes earlier as well, and I imagine this must be a fairly common scenario with so many Indians living abroad and owning property in India.

However, as Raj says, most bank staff don’t seem very knowledgeable about this and the few people I asked gave me some conflicting answers as well.

I’m going to share what I found anyway and as usual, comments will help point out any inaccuracy and help further the discussion.

You can receive rental income in NRE and NRO current accounts

The link on NRE and NRO accounts on the FEMA website state that you can receive rental income on current accounts of both types and then repatriate this money as long as you comply with the other rules governing the account.

Here is the relevant text about the NRE account:

Credit of current income like rent, interest, pension, dividend etc. after deduction of tax (IDS) and obtaining CA certificate that the funds are eligible for remittance and applicable tax has been paid/provided for. – RBI circular No. 5 dated 15-7-2002.

This means you can receive rental income as long as tax has been deducted on it and you have obtained a CA certificate stating that tax has been deducted on it.

Here is the relevant text about the NRO account:

NRIs can repatriate their current incomes like rent, dividend, interest, pensions etc. by debit to their NRO Account. They should produce a certificate of Chartered Accountant that the amount is eligible for remittance and applicable taxes have been paid/provided for

This again states that you can repatriate the funds as long as you produce proof in the form of a CA certificate that shows that you have already paid tax on this income.

Shiv found a very useful ET article on this which asks for clarity in repatriation rules and covers a lot more ground than I’ve done in this post.

Finally, I would think that if you were in this situation, you should avail the services of a CA before opening the account so that the CA can acquaint you with the nuances of this transaction, and you would anyway need the CA to get a tax certificate later on so might as well hire one earlier in the process and ask any questions you may have.

Are NRE FDs better than FMPs for NRIs?

In a prior post I compared FMPs (Fixed Maturity Plans) with bank fixed deposits, and said that if you are in the higher tax bracket, the tax advantage of FMPs tilt the balance in their favor somewhat (if you can live with the uncertainty).

That’s true for domestic investors but what about NRIs?

Allwyn left the following comment on the Suggest a Topic page a few days ago:

allwyn September 4, 2012 at 12:59 am [edit]

Hi,
Could you pls. explain the advantages/disadvantages of FDs(presently int. rates of over 9% tax free) over FMP/Debt funds for NRI’s

Thanks in advance

Allwyn

This is an interesting question, and in my mind since it’s only the tax advantage that makes you think of FMPs over fixed deposits for domestic investors, you need to look at the tax angle to answer this question for NRIs as well.

For close to a year now, NRE fixed deposits are tax free, and this was one step by RBI to arrest the Rupee slide. This means that NRE fixed deposits are currently better than NRO fixed deposits, and they are an obvious competitor to NRI investments in FMPs.

I didn’t know how FMPs are taxed for NRIs but this DSP BLACKROCK page on NRI taxation states that NRIs will be taxed at their applicable assessee rate in case of short term capital gains, and will be taxed at 10% without indexation or 20% with indexation for long term capital gains on non – equity mutual funds.

Since most FMPs are slightly over a year to make them count under long term capital gains, this means that most of the time your NRI FMPs will taxed at 10% whereas the returns from your NRE fixed deposits are tax free.

I think in general it is easier to open a NRE fixed deposit than it is to buy a FMP for NRIs, so that’s another thing in their favor along with the fact that you know before hand how much your fixed deposit will earn.

If the tax situation for NRIs change as far as FMPs are concerned then this might be worth a re-look but until then I can’t think of a good reason to favor FMPs instead of FDs for NRIs.

This post was from the Suggest a Topic page.