For Indians working abroad, especially those getting paid in US dollar, dollar-pegged currencies or other hard currencies, these are rosy times. The depreciation of the rupee over the past 15 months and the increasing amount of money sent home has led to a much higher value of these remittances.
At the end of last year, the $71 billion (Dh261 billion) that flowed into India from the accounts of overseas workers was worth Rs4.39 trillion. The estimated $73 billion in remittances that will have been sent to India by the end of 2015 will be worth around Rs4.8 trillion when the exchange rate will likely have reached Rs70 to the dollar, according to forex forecasts. Add to that an estimated 10-15 per cent of cash sent through informal channels.
What to do with all the money? First, it’s worth noting that NRIs are treated differently from Indians residing within the borders of the country in terms of the scope of allowed investment, as well as for taxation and repatriation of money.
However, in a recent liberalisation of India’s foreign direct investment (FDI) policies, NRIs have been given more incentive to invest on home soil. Investments on a non-repatriable basis are now treated as domestic investments, and some caps on the nature of instruments have been removed. Furthermore, NRIs can now also invest in sectors where FDI is prohibited for others, explains Ramesh Vaidyanathan, Managing Partner at Mumbai-based law firm Advaya Legal.
“NRIs have been categorised as a separate category of investors,” he says. “This policy is expected to increase investments by NRIs in India.”
Let’s take a look at less complex investment vehicles that should give NRIs reasonable returns in rupee terms.
1. Gold
For Indians, gold is a classic investment, considered a store of value and a must in any portfolio. But this doesn’t necessarily make it a good investment.
Widely perceived as a safe haven, the precious metal should rise when equities tank and traders seek refuge, but as patterns show, this is not always the case. Gold prices have only been heading south since the second half of 2012. And even if it rises, returns seldom beat productive asset classes like equities.
For people who can’t do without, it is advisable not to invest more than 5-10 per cent of one’s portfolio in physical gold or gold certificates.
Meanwhile, NRIs also face a stricter gold allowance when travelling to India. Men can carry gold worth Rs50,000 duty free, while women are allowed double that. Anything more than that — up to a maximum of one kilogramme per person — is subject to a 10 per cent import duty.
Physical gold also needs to be stored safely, which further increases the cost of ownership.
2. Mutual funds
As investors expose themselves to considerable risk by buying single stocks, NRIs might want to invest in mutual funds or exchange-traded funds with diversified baskets of Indian companies. There are a large number of funds to choose from, structured by region, industry and business sector.
While investment in India-domiciled mutual funds must be made in rupee, investors can also pick India-focused offshore funds, which hold several advantages, including saving of taxes and reduction of the rupee exchange rate risk. Investments in India-based equity funds held over one year are exempt from tax.
3. Bonds
NRIs are allowed to invest in government-dated securities and treasury bills, bonds issued by a public sector company, debt instruments by companies incorporated in India and banks, as well as other vehicles, depending on whether or not the investor is to repatriate the money.
The highest-yielding bonds are by private companies, housing funds, infrastructure companies and government savings schemes, offering anything from 8-12.5 per cent in annual payments.
However, NRI bond investors are taxed at 20 per cent on the income (30 per cent if held less than a year).
Alternatively, NRIs might want to invest in the National Pension System (NPS). “The Pension Fund Development and Regulatory Authority recently clarified that investment in the NPS is open to NRI citizens,” says Saraswathi Kasturirangan, tax expert and director at accounting firm Deloitte Haskins and Sells, in a company note, adding that contributions by individuals are eligible for tax deduction, while withdrawals or annuities remain taxable.
4. Stocks
Those who don’t want to deal much with the tax man are better off investing in India-listed stocks. While profits on short-term equity investments are taxable by 15 per cent, profits on any equity held longer than a year is tax-free.
NRIs can invest in Indian stocks from outside the country under the Reserve Bank of India’s portfolio investment scheme through an NRE account. Dividends on Indian securities aren’t taxed.
5. Bank deposits
These days, interest rates on most bank accounts and even term deposits are dismal in the developed world. So putting money in a savings account or in a term deposit at an Indian bank only makes sense if it is converted into rupees first. This can be done through a NRE account.
This account is for foreign exchange earned outside India and transferred into the country, where it has the advantage that interest earned is tax-free and the money is freely repatriable — it can be transferred without restriction.
NRE accounts can be in savings, current, recurring or fixed deposit accounts. Banks are free to determine the interest rates of savings accounts and term deposits of maturities of one year and above. However, interest rates on NRE deposits cannot be higher than those offered for comparable domestic rupee deposits.
Major banks currently offer around 4 per cent annual interest on ordinary savings accounts. Mid-sized or online banks can offer more, some even up to 7 per cent.
But a fixed deposit on a NRE account is more lucrative. Cooperative and small private banks are the most generous, with top rates of 8-9 per cent, but investments in most of these fixed deposits are capped at Rs10 million.
