Financial planning is a comprehensive process that helps people manage their income, savings, investments, retirement, and taxes, to ensure future financial security. For NRIs, this process isn’t just important, it’s non-negotiable. NRIs have to deal with complex tax and investment regulations, foreign exchange risks, and repatriation rules across countries. Without a financial plan, growing wealth efficiently, minimising tax burdens, supporting family, and realising their own financial dreams can become quite challenging. Effective financial planning for NRI individuals can not only help you smoothly tackle these problems but also turn these complex rules into advantages.
Setting Financial Goals as an NRI
Clearly defined financial goals form the basis of a strong financial plan. Without them, the financial planning journey becomes directionless. It becomes challenging to make wise decisions, measure progress, allocate resources, manage risks, or achieve long-term financial security.
One of the biggest mistakes you can make is not setting clear, measurable financial goals right from the beginning. For NRIs, this becomes even more important with all the confusing rules surrounding foreign income, currency fluctuations, cross-border taxation, and repatriation.
Start by setting your short-, mid-, and long-term financial goals. Make sure to define these clearly to be more effective. You can use the SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) goal planning method to confirm your goals fit this criterion. For example, if your long-term goal is to have your child’s wedding in India in 20 years, you should estimate the expected cost in today’s terms, factor in inflation, and calculate how much you would need to invest each year to reach that target.
A plan tied to this specific goal might include investing a certain amount in suitable assets, like stocks and equity mutual funds, for the 20-year period. As you make progress, you can review whether or not you are on track and make adjustments accordingly.
We all work towards many goals at the same time – some are short-term, like saving for a vacation, while others are long-term, such as planning for retirement. A clear structure can help you easily juggle multiple financial priorities. A certified financial advisor can help you lay a strong foundation by creating personalised plans which cover all areas of finance including goal planning, investments, taxes, retirement, and more.
Investment Strategies for NRIs
For NRIs, there’s an abundance of investment options to choose from. But before we get into them, let’s first understand what is needed to start investing. NRIs have to comply with specific banking, taxation, and investment regulations before they can invest in Indian markets.
These rules are governed by the RBI and FEMA (Foreign Exchange Management Act) rules. RBI regulations cover banking and associated regulations, while FEMA covers how NRIs can transfer money, invest in assets, repatriate funds, and manage their earnings.
Since NRIs cannot use a regular savings account in India, they need to open either a Non-Resident External (NRE) account or a Non-Resident Ordinary (NRO) account.
1. NRO account
Any income you earn in India, such as rental income, dividends, and interest, must be deposited into an NRO account. As soon as you get an NRI status, your existing savings accounts must either be converted into an NRO account or closed. This account allows you to manage and withdraw your Indian income while staying compliant with FEMA. The interest earned on this account is taxable in India, and the repatriation of funds is subject to a limit of USD 1 million per financial year.
2. NRE account
This account can be opened to deposit any funds earned abroad. It is maintained in Rupees and is ideal for NRIs who want to send and maintain their overseas income in India. A big advantage of an NRE account is that the interest earned is tax-free in India. Also, holders enjoy full repatriation, meaning funds (principal amount and interest) can be transferred abroad without restrictions.
Once you have opened an NRE or NRO account, you’ll need to complete a fresh KYC to start investing. For stocks and other securities on stock exchanges, you’ll also need to open a Portfolio Investment Scheme (PIS) account. You can invest in mutual funds with just an NRE or NRO account. With everything set up, you can start investing! Have a look at the plethora of options you can choose from:
1. Equities
Equity investments like stocks and equity funds offer high return potential but come with high risks as well. NRIs can invest in stocks through PIS.
2. Mutual Funds
Mutual funds don’t require a PIS account. You can simply open an NRE or NRO account, complete your KYC, and start investing in debt, hybrid, or equity mutual funds. Some countries, like the US and Canada, have strict tax regulations on foreign investments. If you live in such countries, you may be subject to additional tax reporting requirements and higher tax liabilities. Consult an investment planner before making investments to save as much on taxes as possible.
Real Estate:
NRIs are allowed to buy land and properties classified for residential and commercial purposes, but they cannot purchase agricultural properties.
3. Fixed Income Options
Vehicles like the PPF, FDs, and NPS offer lower but stable returns. Their lower risk makes them attractive investment choices for NRIs looking for capital preservation and a steady income.
4. Alternative Investments
HNIs can also explore options like private equity, hedge funds, and venture capital which have higher return potential but come with increased risk and longer lock-in periods.
5. Gold
NRIs can invest in physical gold or gold ETFs and mutual funds. According to FEMA, NRIs are not allowed to invest in Sovereign Gold Bonds. Any existing SGB investment, however, can be held till maturity.
Of course, before investing, you must assess your risk tolerance and align your investment choices with your financial goals and investment horizon. A sound approach to financial planning and analysis can help you understand different asset classes and potential risks, and create a diversified portfolio suited to your needs.
Managing Currency Risks and Repatriation of Funds
Currency risk is a reality every NRI must consider when managing their finances. Exchange rate fluctuations can have a huge impact on the value of investments, savings, and remittances, so it’s essential to have solid financial planning and analysis back your every decision.
Some of the best ways to deal with this risk include building diversified portfolios (meaning diversified across currencies), using currency-hedging strategies like forward contracts, futures, and currency swaps to lock in exchange rates, and monitoring currencies to time remittances efficiently. A wealth advisor can be your valuable guide to reducing currency risks as much as possible.
You can also consider opening an FCNR – B (Foreign Currency Non-Resident Bank) account which will allow you to hold deposits in a foreign currency without exposure to Rupee depreciation. They work like NRE accounts in that they allow full repatriation of both principal and interest, and the interest earned is completely tax-free in India. As far as repatriation of funds is concerned, remember that NRO accounts offer limited repatriation, up to USD 1 million in a financial year whereas NRE accounts are fully repatriable with exempt interest.
Taxation for NRIs: Key Considerations
Taxation for NRIs can be very confusing. Not only do you have to comply with Indian tax laws, but you also need to consider the tax regulations in your country of residence. The income you earn in India is taxable in India. If your country of residence has a Double Tax Avoidance Agreement (DTAA) with India, you’ll be able to claim relief and avoid paying tax twice on the same income in both countries. To do this NRIs must submit Form 10F and a tax residency certificate from their country of residence. A tax consultant can ensure full compliance so you don’t run into legal complications or pay more tax than you need to.
The taxation on various investments is largely the same for NRIs and residents, but there are some differences which result in higher TDS paid by NRIs. For example, investing in an equity mutual fund will attract a 12.5% LTCG (excess of Rs. 1.25 lakh) or 20% STCG for both residents and NRIs. However, NRIs are subject to higher TDS on certain investments like fixed deposits. This can be mitigated through DTAA, so it’s important that you consult a qualified NRI financial advisor to understand how to optimise your tax liabilities.
Retirement Planning for NRIs
The first step of retirement planning is fleshing out the details like where one would spend their twilight years, what kind of lifestyle they would want to live, what their sources of income would be, and what special needs and expenses (like medical) they’d have. This helps estimate how much one would need to invest today to build a sufficient retirement corpus.
Once you’ve settled on whether you want to retire in India or in your country of residence, you can get a decent idea of the cost of living, healthcare expenses, taxation, and investment options available to you. From here you can start planning retirement investments. You can use our retirement planner to help you estimate the investment amount based on your future financial needs, expected inflation, and expected returns.
The first part of retirement planning is when you earn, save, and invest in appropriate vehicles. Make sure to build a diversified portfolio that aligns with your financial goals and risk tolerance. In this stage the risk tolerance of investors is generally high, so high-growth options like equity funds can help you create wealth in the long term.
You can explore any of the investments listed above like equities, funds, ETFs, gold, real estate, REITs, private equity, and hedge funds and select the ones that suit your needs. Again, guidance from a certified NRI financial advisor can be invaluable as their personalised approach can help you maximise returns and minimise taxes.
The second stage of retirement planning starts when you approach retirement and your primary goal shifts from capital accumulation to capital preservation. This concerns mainly on ways one can minimise risk and to efficiently withdraw the accumulated retirement corpus. Annuity plans, pension plans, debt mutual funds, fixed deposits, bonds, SCSS, SWPs are some safer vehicles that can help retirees create a steady stream of income for their expenses.
It’s important to start planning today, so you can enjoy your golden years with independence and without any financial stress.
Estate Planning and Wealth Transfer for NRIs
Estate, or as it is also often called legacy planning concerns how your wealth and assets will be managed, distributed, and preserved for your heirs. It ensures that your wealth is passed on as you see fit, with minimal legal complications, taxes, and court disputes. Some ways one can go about this planning is by gifting, designating nominees, drafting wills, and setting up private trusts.
NRIs can use wealth management services to create a well-structured estate plan that aligns with both Indian regulations and the laws of their country of residence. For example, India doesn’t have any inheritance tax but your country of residence might impose estate taxes. Proper estate planning can help mitigate these tax liabilities and make sure that your beneficiaries receive a bigger share of your wealth. For HNIs, private trusts can be especially powerful tools as they can not only ensure a smooth transfer of wealth but can also be used to effectively protect assets.
Conclusion
Financial planning covers many aspects of personal finance, from investment and taxes to retirement and estate planning. The importance of financial planning for NRI individuals cannot be understated. Regulations governing their taxation, investments, inheritance, and repatriation of funds can be quite complex, which makes having a rock-solid financial plan in place essential.
It can help NRIs maximise wealth creation, minimise tax liabilities, and ensure financial security for themselves and their families. Start your financial planning journey today with our experts to build a secure and prosperous tomorrow!
