The no-go investment area in India for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) is quite microscopic.
But there is one such investment avenue that has not been allowing any non-resident participation in recent years, and those are Indian government backed ‘small investment schemes’.
The no-go investment area in India for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) is quite microscopic.
Although a ban has turned a lot of NRIs away from what was previously widely considered a low-risk, high-return and a much popular investment choice, there are many who still benefit from them.
But let’s first look into what these schemes are and how it drove multitudes of Indian expats to once benefit from it, before exploring what caused the ban and who still stands to benefit.
They include investments in National Savings Certificates (NSC), Public Provident Fund (PPF), Monthly Income Schemes, Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme and other time deposits.
(A time deposit is a bank account deposit that cannot be withdrawn before a set date or for which withdrawal notice is required.)
Popular investment choice among middle-class Indians
With its income tax benefits, low-risk, and guaranteed returns, such schemes have become a widely popular investment vehicle for many Indians.
Backed by the Indian government, most of the schemes - particularly the PPF - is seen as a way to help build savings for retirement while enjoying the tax benefits today.
The annual minimum deposit amount to keep the account active is INR500 (Dh24), while the maximum that can be deposited in 1 year is INR150,000 (Dh7,327).
A crucial feature of the instruments is its long time horizon – it has a minimum tenure of 15 years, and allows for indefinite extensions of 5 years at a time. Another is evidently minimum to low taxes incurred.
One catch is that you cannot close them before maturity. But for long-term conservative investors looking for tax-free returns, it is a win-win. (As of January 2020, the PPF interest rate currently stands at 7.9 per cent per annum.)
Rebuilding finances in pandemic-struck times
As economies worldwide currently undergo a pandemic-induced crisis, it has undoubtedly been a period of dire financial unrest particularly for the middle class section of most societies.
With the aim to build their cash reserves - if things go further south - and to insulate oneself during these turbulent times, the middle class opted for such schemes by making minor changes to how one invests money.
Despite the interest rate cuts, small savings schemes like the PPF, NSC and other post office time deposits offer assured returns and capital safety. They form the foundation of most investment strategies.
An unkind exclusion for most non-resident Indians
Since many of these schemes offer a rare combination of no-risk and attractive, tax-efficient returns, it was not received well by a lot of those in the NRI community when the government decided to ban it.
Small savings schemes like the PPF, NSC and other post office time deposits offer assured returns and capital safety!
It was not made exactly clear as to why non-residents were not permitted do so other than the government’s intent being to restrict social security schemes to resident Indians.
While their categories are different, both NRIs and OCIs are largely subject to the same rules on what’s allowed and what’s not, regarding their money, banking and investments in India.
Further in the article, the term ‘non-resident’ includes NRIs and OCIs.
Door not fully shut, but slightly ajar: NRIs make the most of a limited opportunity
In late 2017, the government had notified the immediate effective closure of such from the day a resident Indian became a non-resident. Thankfully months later this notification was suspended.
So, now, it’s back to the original position — the account opened by a resident Indian can be continued until its maturity even after the person becomes a non-resident. And extensions were not allowed.
The account opened by a resident Indian can be continued until its maturity even after the person becomes a non-resident
As most of the deposits having an original maturity of 15 years, NRIs that opted for the scheme before leaving the country to settle abroad, still continue to benefit from it.
(A similar notification of effective immediate closure of NSC accounts was not specifically kept in abeyance; so, there is ambiguity on that front.)
How NRIs can still benefit from investing in such small savings schemes?
If a NRI needs to invest in the post office savings scheme he or she can still do so. He or she would have to do it through his parents or other friends who are resident Indians and in their name.
However, in that case remember that your parents’ income is taxable, since most post office schemes attract tax, apart from the PPF.
If a NRI needs to invest in the post office savings scheme he or she can still do so.
Also, if you are a current Indian resident, planning on becoming an NRI, you can still open such an account in your name, or on behalf of a minor that you are a guardian of.
To be able to check your let’s say your PPF account online, it is suggested that you open the PPF within the same bank that you currently do your online banking with and have the accounts linked.
Your ongoing contributions will follow the same rules that apply to Indian citizens.
What critics in favor of government move argue?
Some proponents in favor of the government move argued how many of the schemes cannot hugely benefit NRIs as such investments involve a tax liability, versus let's say a NRE (Non-Resident External account) fixed deposit.
NRI can get tax free income on his NRE (Non-Resident External accounts) fixed deposits. (We revisit this concept in detail further below.)
Some argue how many of the schemes cannot hugely benefit NRIs as such investments involve a tax liability versus other investments that don't!
Pertinently, along with being tax free, NRE fixed deposits offered by banks have a higher rate of interest then some of the post office schemes.
Interestingly, NRIs can also look at investing in property, tax savings bonds, IPOs, mutual fund schemes etc., where they are permitted to invest – critics argued!
NRIs and OCIs are not allowed to buy agricultural land, farmhouses or plantations. If you had bought such property as a resident Indian, you can continue to hold them even after you become a non-resident.
You can also inherit or receive such property as gift from relatives. But new purchases are not allowed.
Sovereign gold bonds issued by the Reserve Bank of India are also off the list for non-residents, but these bonds, if acquired as a resident, can be held until redemption or maturity.
Interestingly, NRIs were not permitted to invest in government savings bonds as well.
Until recently, OCIs were not allowed to invest in the NPS (National Pension System) - Tier I. But now they are permitted, at par with NRIs. NPS - Tier II is not open to NRIs and OCIs. (Explanation below)
Since Tier I is a retirement account, you can withdraw the money only when you reach 60 years, as a lump sum withdrawal and a pension.
Where should NRIs invest, if not post office schemes?
There are plenty of other places that NRIs can invest, even if they cannot invest directly in post office schemes.
Bank deposits, company deposits, stocks, bonds, mutual funds, exchange-traded funds, insurance products, residential and commercial property, gold, derivatives — the options are many.
There are plenty of other places that NRIs can invest, even if they cannot invest directly in post office schemes.
Even the recent Bharat Bond issue was open to NRIs and OCIs.
The more popular ones would be the NRE fixed deposits (Non-Resident External accounts). The interest rate on NRE deposits may not be as high as post office schemes, but they are only marginally lower.
Experts however recommend that you do not place money in NRO deposits (Non-Resident Ordinary account). This is because they are taxable, as compared to NRE fixed deposits.
While on the topic of NRI bank accounts in India, let’s also briefly revisit the process how non-residents go about investing India, setting up NRE and NRO account types.
An NRE account, which is a rupee account, is generally funded by inward remittances from abroad, and the money can be repatriated (sent back) abroad without restrictions.
An NRO account, also a rupee account, is generally funded by income earned in India or from Indian assets, and there are restrictions on repatriation.
How taxation applies to NRE and NRO accounts? Which do NRIs benefit from?
Interest earned on deposits linked to NRE accounts is not taxable, while interest earned on deposits linked to NRO accounts is taxable.
That makes NRE term deposits quite popular among non-residents since the after-tax return is attractive. Banks offer 6.2-6.5 per cent annually across tenures (1-2 years to 5-10 years)
Interest earned on deposits linked to NRE accounts is not taxable, while interest earned on deposits linked to NRO accounts is taxable.
NRO term deposits also offer similar rates, but interest is taxable and hence, post-tax returns lower.
Savings bank deposits, both NRE and NRO, currently offer 3.25 -3.5 per cent annually (some banks offer higher rates for large deposits).
Let's summarize!
• Indian small savings schemes are essentially small savings accounts backed by the Indian government, which are also commonly referred to as ‘post office savings schemes’.
• A 2017 ban has turned a lot of NRIs away from what was previously widely considered a low-risk, high-return and a much popular investment choice, there are many who still benefit from them.
NRIs that opted for the scheme before leaving the country to settle abroad, still continue to benefit from it.
• NRIs can still invest in the post office savings scheme through his parents or other friends who are resident Indians and in their name.
• Apart from such postal savings scheme, there are other avenues NRIs and OCIs cannot deploy their money across.
• There are plenty of other places that NRIs can invest, even if they cannot invest directly in post office schemes.
