There are many things in an NRI’s mind when he/she moves abroad. The mind is busy with thoughts such as –
- Will I adjust to the new country and culture?
- Will my family be happy here?
- How my new job/assignment/project will be in this new phase of life?
- Is the move to the new country worth the money that I will make?
This can lead to financial negligence which can prove to be costly in terms of missed investment opportunities, issues with the Income Tax department, and improper financial planning.
Common Financial Mistakes of NRIs
Here are some typical mistakes that NRIs make and how to avoid them or fix them –
1) Continue with Resident Accounts
There is a lot of work-related to settling in the new place. Amidst this, NRIs might forget about their accounts with the bank in India. They may have savings bank accounts, Demat accounts, FDs, etc. It is a common mistake to neglect these.
All Non-Resident Indians (NRIs) must convert their existing resident bank accounts into non-resident accounts. There are three types of accounts for NRIs to operate – NRE, NRO and FCNR accounts.
An NRO account can be a current, savings, or term deposit account. Interest earned in the account is taxable in India. It can be held jointly with an Indian resident.
AN NRE account can be savings, current or term deposit account. Interest earned on NRE accounts is tax-free in India. It can be jointly held with an NRI.
Read more about them here.
An FCNR account is a term deposit account. The interest and principal are tax-free in India.
An NRI cannot operate the resident Demat account or trading account. NRIs need to open a Portfolio Investment Scheme (PIS). It is an account that can be used by NRIs to buy and sell shares, debentures, and bonds. It can be used to apply for IPOs too.
Even if the amount we save and invest is small, the power of compounding and the long duration of investment will lead to a sizeable corpus. The more the delay in investments, the lesser wealth we will create.
2) Delay Investments for Later
Many NRIs feel it is problematic to invest in India when one is abroad. They think they will invest when they are back in India. Some NRIs feel they cannot burden their loved ones to manage their NRIs’ investment-related work.
Others feel they have just started to earn and their earnings can only cover their expenses. Expenses will always be there and it is in our hands to manage them well. We have to carve out a portion of our income for savings and investment at whatever stage of life we may be in.
Even if the amount we save and invest is small, the power of compounding and the long duration of investment will lead to a sizeable corpus. The more the delay in investments, the lesser wealth we will create. The NRI could also miss out on lucrative investment opportunities.
Moreover, it is not difficult to invest in India from abroad. NRIs can open PIS accounts to invest in equity and mutual funds. NRIs can invest in real estate as well.
3) Tax-Related Misconceptions
Let us face it! Tax rules are not so simple. Moreover, from time to time, there are changes brought in too. NRIs cannot ignore taxation in India. Some feel that they do not earn regular income in India and so they need not file taxes. Some are unaware that taxes can be filed online. NRIs who do not comply with taxation rules can face court trial and penalty charges.
Here are some points to remember –
- An NRI who earns income in India in the form of rent, interest income, etc. is liable to tax. NRIs have to file a tax return if their income exceeds ₹ 2,50,000.
- Capital gains earned in India is liable to tax. Capital gains can be adjusted against capital loss subject to certain conditions.
- TDS applies to income earned by NRI. For example, if an NRI leases home property for rent, the tenant has to deduct TDS at 30% (31.2% including cess) on rent paid to NRI.
- TDS on the interest on bank deposits is 30%.
4) No Will
Over a period of some years, an NRI would have created assets in different countries. If there is no record of the same, there can be issues. Moreover, in case of untoward incidents, such as NRI’s death, inheritors might not even be aware of all assets. There will be problems in the distribution of assets too.
It is better to create a Will to avoid these scenarios. Creating a Will has many advantages –
- It will be a database of all assets across different countries.
- The NRI will have a fair idea of the value of all assets.
- The inheritance will be simple and clean. Unnecessary fights and arguments can be avoided.
In India, it is not mandatory to register the Will. The Will made in India can be applicable for assets across the world. The NRI should note the local rules regarding assets in other countries and follow them to make the Will. It is possible to make multiple Wills for different assets in different countries if needed.
It is not difficult to avoid the mistakes mentioned above. All it requires is careful financial planning, financial awareness, and some self-discipline. Taking care of the financial aspects, will lead to better wealth creation and possibly reduced tax liability.
Financial matters are complex, more so if you are an NRI. But managing them is not impossible.
I know this list is not comprehensive so I will request you to add a few more common mistakes by NRIs in the comment section that people should be aware of.