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Posts Tagged ‘Investment Advisory’

The much awaited RBI policy came in earlier today. RBI cut the repo rates by 0.25% and improved liquidity measures. Let’s understand what it means for you?

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The much awaited RBI policy came in earlier today. RBI cut the repo rates by 0.25% and improved liquidity measures. Let’s understand what it means for you?

Your investments:

  • The rates on Bank and corporate FDs along with other fixed income instruments, will go down which means if your FDs are maturing now, you may have to renew them at lower rates. If you have deposits close to maturity or recently matured, go ahead and lock in right away if you are in a lower tax bracket.
  • The monetary policy was accommodative which means there could be a further chance of rate cuts and/or transmission. This could mean that short term bond funds and accrual funds could become more attractive. Further rate cuts would be subject to levels of rate transmission, Inflation and the monsoon. Thus, use a combination of tax free bonds, accrual and dynamic bond funds in your portfolio if you are in a higher tax bracket
  • For corporates, it could mean lower cost of borrowing, which could help improve earnings for companies, and thus a booster for the equity markets over the medium term.

Your loans:

  • A combination of lowering of interest rates and the introduction of the Marginal cost based lending rate (MCLR)  will mean lower loan rates. You can look to refinance you home loan at a lower rate. Car loans and other loans could also become cheaper.

What did RBI do?

  • The RBI has cut repo rates, the rate at which banks borrow from RBI, by 0.25%, to 6.5% from 6.75% earlier.
  • They have increased Reverse Repo, rates at which banks lend to RBI, by 0.25% to 6% from 5.75%. They have also cut the MSF (Marginal Standing Facility Rates), the rate at which banks borrow from RBI above the repo rate, by 0.75%, reducing the corridor between MSF and reverse repo from 1% earlier to 0.5% now. This reduced corridor means the overnight lending rate at which banks lend and borrow from each other will reduce. This will also mean increased liquidity in the system, making bonds attractive.
  • The Cash Reserve Ratio (CRR) which Banks have to deposit with RBI, remain unchanged at 4% but the minimum daily maintenance of reserves was reduced from 95% earlier to 90% now, which could be marginally positive for liquidity.
  • Going forward, interest rate changes will depend on the monsoon and inflation. There is a liquidity deficit due to slow deposit growth. RBI will continue to provide liquidity when required and will aim to move from liquidity deficit position to liquidity neutral position.

What else has been happening?

Since Jan 2015 RBI had cut interest rates by 1.25% ( Now 1.50%), but the transmission to depositors/borrowers had taken place only partially for multiple reasons. Due to the high rates offered on small savings schemes and post offices, banks were not comfortable cutting deposit rates. Recent rate cut in small savings schemes is aiding transmission of rate cuts. The banks can now go ahead and cut deposit rates. Also RBI has introduction Marginal Cost based Lending Rate, a new method of calculation of loan rates which has come into effect from 1 April 2016. This rate will be applicable for new loans. This rate will replace the base rate which is currently used by banks. The Marginal cost based lending rate (MCLR) will be calculated based on the deposit rates that the bank is offering to its clients. In the shorter term the loan rates will be lower when calculated based on MCLR.

Watch out for the next policy on June 7, 2016

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There was a time when most Indians saved in bank Fixed Deposits, insurance policies and PPF accounts for various goals including child’s education. However, with the cost of education escalating rapidly and domestic education aspirations turning to international, there arises a need for inflation beating products to invest in, for securing your child’s future aspirations. With PPF rates traditionally being kept at an elevated level plus their significant benefits of offering tax free income, the recent decision to make them market linked, and subject to a quarterly review, makes PPF returns a significantly more volatile product in our view. Relying on them in isolation for goals like your child’s education will not help.

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Image Source: www.uncwpse.org

What to do?

If you wish to send your child abroad the cost of education will be higher. To be able to beat the escalating costs and to ensure you do not fall short of funds when you are nearing your goal you must approach it in a planned manner. Choice of products is important but strategy is equally important. When you know how far the goal is and what is the current cost, apply inflation to it to know the future cost. Do not forget to factor in possible currency depreciation impacts.

Choice of products is important but strategy is equally important.

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Image Source: doablefinance.com

Strategy: Equities perform well over longer terms. Therefore, keep a higher percentage allocation towards equity. Take exposure to gold as a partial currency hedge in the portfolio. As time passes move towards fixed income exposure. When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

When you are 3 years away from the need for the monies shift all your money into fixed income to avoid a dent to your savings due to market volatility. Towards the end maintaining the amount that you have saved will be a priority rather than increasing them because education is a goal which cannot be delayed due to financial market volatility.

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Image Source: finvisionconsultants.com

Products: To start with, broadly divide your portfolio between equity, debt and gold. Based on your risk tolerance, choose products for yourself. Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts.. On the equity side use a combination of diversified equity funds and equity ETFs . Ensure that you stay diversified between sectors, Asset Management Companies and market capitalisations. You can also look at balanced fund which have approximately 65% towards equity and rest towards debt. Avoid exposure to direct equity, unless you can give it time. On the fixed income side you can look at PPF, debt mutual funds, and bonds. For gold you can look at gold ETFs and sovereign gold bonds.

Since education tends to be a goal that is hard to fully realize the scale of when your child is younger, ensure that you get into a flexible product that enables changes with minimal cost impacts..

All in all, keep it simple and keep it flexible.

PPF still works, but only for a portion of the portfolio.

 

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  1. You are overweight equity allocation for your short term goals

In the short term volatility is likely to continue. If you have a high equity allocation for your short term goals then it’s definitely a cause of concern. If you have a financial plan and well defined asset allocation strategy in place, then it’s highly unlikely that you would have a large allocation to equity towards short term goals, so stop worrying.

Whenever FIIs pull out money, Indian equity markets tend to be impacted as evidenced from the data below. However, the opportunity to buy also emerges simultaneously.

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Data Source: HDFC MF

  1. Your income is depending on oil or commodity prices

If you are working in a company that is in the commodities business, be careful as there mightbe a need to cut costs. If you are a consumer of commodities or oil, you are probably singing all the way to the Bank, just like India is, so stop worrying.

  1. You hold large amount of US bonds or investments in China

There is uncertainty around the US interest rate hikes and news from China is not very good. This is not good news if you are an investor in long term bonds in the US or a holder of Chinese stocks. If you hold Indian bonds and equities, stop worrying.

  1. You are significantly overweight a few stocks in your portfolio due to your ESOPs or are a sort term trader

 High NPAs are not good for shareholders in banks. If your portfolio is overweight PSU banks, the clean up process may be painful. If you hold construction or metal stocks, demand is very weak.

On the other hand if you have a diversified investment portfolio and your asset allocation is in place, then it’s an opportunity to invest in line with your asset allocation in a staggered manner to benefit from falling prices. On a 3 year Nifty rolling returns basis, the opportunity for investors seems to be getting much better as can be seen in the chart below

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Data Source: Morningstar, Birla AMC

I would suspect most of you will not be in any of the above 4 categories. So stop worrying and start investing, gradually.

 

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Given the high and constantly escalating cost of higher education, especially for students going abroad, most parents find it difficult to fund their child’s education out of their own funds. Education loans have emerged as a highly beneficial instrument for funding this need gap.

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Image source: thehungryfish.com

 Whom should you turn to?   

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Imagesource: careerindia.com

Public sector banks remain the most popular source of education loans. With the RBI classifying education loans as priority-sector lending, PSU banks are more willing to lend. Private sector banks are not too enthusiastic about this loan. Non-banking financial companies—players like Credila Financial services (promoted by HDFC) and Avanse Financial Services (promoted by Dewan Housing) have also jumped into the fray. They try to compete by lending a higher amount, processing the loan faster, and by waiving the margin amount. However, their rates may be on the higher side than that of PSU banks.

What are the costs associated with the loan?  

Interest rates on education loans are usually 1.5-3 percentage points above the bank’s base rate. For example PNB (9.60-12.60%) offers one of the cheapest education loans. For SBI, the biggest lender in this domain, the rate is 11-11.30%, depending on the loan amount.

The processing fee could be 1-1.5% of the loan amount. Lenders may or may not have a prepayment charge on this loan.

According to the model education loan scheme formulated by the Indian Banks’ Association (IBA), loans up to Rs. 4.5 lakh are extended without any collateral, with just a co-borrower (usually the parent) required. For loans above Rs. 4.5 lakh and up to Rs 7.5 lakh, banks seek third-party guarantee. For loans above Rs 7.5 lakh, students and parents need to show collateral. Life insurance policies, shares, mutual funds, bank deposits, post office savings products and property papers can serve as collateral. The value of the collateral must equal the value of the loan.

According to the model education loan scheme formulated by the Indian Banks’ Association (IBA), loans up to Rs. 4.5 lakh are extended without any collateral, with just a co-borrower (usually the parent) required. For loans above Rs. 4.5 lakh and up to Rs 7.5 lakh, banks seek third-party guarantee. For loans above Rs 7.5 lakh, students and parents need to show collateral. Life insurance policies, shares, mutual funds, bank deposits, post office savings products and property papers can serve as collateral. The value of the collateral must equal the value of the loan.

All loans of above Rs. 4 lakh carry a margin money requirement: 5% on loans for studying in India and 15% on loans for foreign courses.

Women students and those admitted to a premier institute can get a discount on interest rate of around 50 basis points.

 What can you use these loans for?

The money obtained from an education loan can be used to pay for tuition fee, examination fee, library fee, hostel fees; travel expenses for going abroad; purchase of books and equipment, including a computer; and to pay the expenses for project work and study tours.  Try to take all costs into account when quoting a loan amount to the lender.

What are the eligibility criteria?

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 Image source: timesofindia.indiatimes.com

 The borrower must be an Indian national and should have secured admission in an approved professional or technical course through an entrance test or selection process. Some banks have an age criterion (16-35 years) while others require certain minimum marks in the last qualifying exam. If you are applying to an Indian institution, it must be on the Indian Banks’ Association pre-approved list of 1,100 institutes.

Before approaching a bank or NBFC, compare their interest rates and processing fee. If you have got admission to a good institute, check if any bank has a tie-up with that institute. See if you can get preferential treatment from that bank, say, on interest rate, loan amount or collateral.

Before approaching a bank or NBFC, compare their interest rates and processing fee. If you have got admission to a good institute, check if any bank has a tie-up with that institute.

The high default rate of around 8% of the total education loan portfolio is nowadays making banks wary of giving out this loan freely and there is talk of the eligibility criteria being made stricter.

How is the loan repaid?

The bank grants a moratorium period of one year to the student after he has completed the course or six months after he has got a job, whichever is earlier. Then the loan has to be repaid within a specified tenure, which could range from 5-15 years.

The bank grants a moratorium period of one year to the student after he has completed the course or six months after he has got a job, whichever is earlier.

Banks grant an extension of up to two years if the student is unable to complete the course on time owing to factors beyond his control.

Pay the simple interest that is charged on the loan while your ward is studying. If you fail to do so, you may not get the 1 percentage point concession on the rate of interest that regular borrowers are entitled to. Doing so will also help lower your EMI.

What are the tax benefits?

The entire interest paid on an education loan (with no ceiling) is eligible for tax deduction under Section 80E of the Income Tax Act. This tax benefit is, however, available only for eight years and not more, even if the tenure is longer. No tax benefit is available on principal repayment.  To avail of the benefit of Section 80E, the loan has to be from an approved entity.

The entire interest paid on an education loan (with no ceiling) is eligible for tax deduction under Section 80E of the Income Tax Act.

What happens if you default?

Before taking an education loan, students and their parents should evaluate the job prospects and likely salary package after the completion of the course. If there is a default on an education loan, the credit score of both the student and the parents gets affected. This means that in future you will have difficulty in getting any loans and credit cards.

Before taking an education loan, students and their parents should evaluate the job prospects and likely salary package after the completion of the course. If there is a default on an education loan, the credit score of both the student and the parents gets affected.

If EMIs become due for 90 days, the loan gets classified as a non-performing asset (NPA) by the bank. Most banks wait for a month or two after the EMIs stop. If non-payment continues, they first issue a notice. Then they try to contact the loan guarantor. Only as a last step and after due notice do banks move to take possession of the collateral.

If the borrower agrees to start repayment once again, a penal interest rate of 2 percentage points over the regular interest rate is charged for the period of non-payment.

If you have difficulties in repayment, don’t try to avoid your lender. Inform him about your difficulties and try to get the loan restructured. Sometimes, banks do agree to lower the EMI and increase the tenure of the loan.

 If you have difficulties in repayment, don’t try to avoid your lender. Inform him about your difficulties and try to get the loan restructured. Sometimes, banks do agree to lower the EMI and increase the tenure of the loan.

Finally, the co-borrower (parent) should get an insurance cover equal to the loan amount, preferably a pure term insurance plan, to cover this liability.

The co-borrower (parent) should get an insurance cover equal to the loan amount, preferably a pure term insurance plan, to cover this liability.

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In the first article of this series, we had discussed the challenges you are likely to face in meeting your child’s higher education goal. Here we shall discuss the nitty-gritty of the investment planning that you need to do to achieve this goal.

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Image Source: visualphotos.com

Goal setting

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Before you start saving and investing for your child’s education, you must set a goal regarding the amount of money you need to accumulate. Get an estimate of the cost of some of the major courses that your child might possibly want to pursue. To the current cost, apply an inflation rate of at least 11-12%. This will give you an idea of the amount of money you will need when your child is ready to go to college.

 Get the asset allocation right

Since this is a long-term goal for which you have at least 17-18 years, you should build an equity heavy portfolio. Around 70-75% of the child education portfolio should consist of equity or equity mutual funds. Unless you build an equity-heavy portfolio, you may not be able to earn a rate of return that beats the high inflation rate that sends the cost of education spiralling upward year upon year. Also, since this goal is a long time away, it doesn’t matter if your portfolio is equity heavy, since you can simply ignore the interim volatility.

 

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Image Source: www.thesedoricgroup.com

The rest of the portfolio may be invested in fixed-income instruments like Public Provident Fund (PPF), fixed deposits and tax-free bonds. If on the fixed-income side you wish to invest in debt mutual funds, choose funds whose average maturity does not exceed 4-5 years (longer duration funds will be too volatile). Among debt mutual funds you may also invest in long-term fixed maturity plans (FMPs).

Instead of using separate instruments on the equity and fixed-income sides, you could also invest in equity-oriented balanced funds. These funds maintain more than 65% allocation to equities. The advantage of investing in them is that even the debt portion of these funds receives the more favourable tax treatment that equities enjoy.

Instead of using separate instruments on the equity and fixed-income sides, you could also invest in equity-oriented balanced funds. These funds maintain more than 65% allocation to equities. The advantage of investing in them is that even the debt portion of these funds receives the more favourable tax treatment that equities enjoy.

If your goal is less than five years away, you will have to be content with using fixed-income instruments, where the return rate of return tends to be lower than from equities.

Pay heed to liquidity

When you are choosing the investment instruments for this goal, you have to be very particular about liquidity. The education goal has a peculiar nature. In the year when your child is ready to go to college, and for a few years thereafter, you will need large sums of money. The date when this money will be needed cannot be altered or pushed forward to suit your convenience. That is why the liquidity aspect becomes important. If you invest in an instrument like the PPF, ensure that the account will mature before your child is ready to go to college.

 The date when this money will be needed cannot be altered or pushed forward to suit your convenience. That is why the liquidity aspect becomes important. If you invest in an instrument like the PPF, ensure that the account will mature before your child is ready to go to college.

As you approach your goal

 About three years before your child enters college, withdraw money from the equity instruments that you have invested in. This precaution must be undertaken so that a downturn in the stock markets does not jeopardise your child’s dreams. The withdrawn corpus may be invested in less volatile instruments like short-term and ultra short-term debt funds and fixed deposits.

 About three years before your child enters college, withdraw money from the equity instruments that you have invested in.

Be well insured

Parents should also buy adequate term cover so that even in case of an unfortunate eventuality, their child’s education goal is not jeopardised. One rule of thumb is that you should buy term cover equal to at least 1.5-2 times the current cost of the education goal. For a more accurate assessment, you may need to speak to your financial planner.

Parents should also buy adequate term cover so that even in case of an unfortunate eventuality, their child’s education goal is not jeopardised.

What should you avoid?

Since the rate of inflation in education is quite high, avoid building a portfolio that is weighted in favour of fixed-income instruments like fixed deposits and recurring deposits. Investment-cum-insurance products from insurance companies may also not be suitable, especially if they are traditional plans, since their rate of return tends to be very low. It is best to buy two separate products: a term cover for your insurance needs and mutual funds for your investment needs. Branded products, which advertise themselves as being designed to help you meet your child’s education goals, whether from mutual funds or from insurance companies, offer no special advantages. It is best to go with plain-vanilla diversified equity funds that have a robust track record and relatively lower expense ratio.

Since the rate of inflation in education is quite high, avoid building a portfolio that is weighted in favour of fixed-income instruments like fixed deposits and recurring deposits. Investment-cum-insurance products from insurance companies may also not be suitable, especially if they are traditional plans, since their rate of return tends to be very low. It is best to buy two separate products: a term cover for your insurance needs and mutual funds for your investment needs.

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NRIs looking for higher rental yield should consider investing in a commercial property in India. Here is a look at the pros and cons of such an investment and advice on what to do and what to avoid while making this investment.

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Image Source:www.bangalorebest.com

NRIs keen to invest in a property in India should evaluate the prospects of the commercial (office) segment. This segment offers several advantages vis-a-vis the residential segment. The rental yield is currently higher at 7-9% p.a. compared to the 2-3% p.a. yield that the residential segment offers. Rental yields drop when one comes to smaller commercial spaces though, but are still likely to be higher than those offered in the residential segment. Whereas residential real estate in India is caught in a downturn which may last for quite some time owing to the high inventory levels in most leading cities, there is greater equilibrium between demand and supply in the commercial segment, and rentals are inching up in most leading metros. As the economic recovery gathers momentum, as is widely expected to happen in 2016 and 2017, the demand for commercial space should increase further.

This segment offers several advantages vis-a-vis the residential segment. The rental yield is currently higher at 7-9% p.a. compared to the 2-3% p.a. yield that the residential segment offers.

Another advantage of investing in a commercial property is that NRIs can use it to run their own venture if and when they return to India. However, be warned that the capital appreciation in office property tends to be lower than in residential property over the long term. And if you are looking for a loan to buy the property, that too may be harder to get than a loan for purchasing a residential property. While the Indian economy is on the cusp of a cyclical recovery, be warned that a downturn in the economy has a negative impact on the demand for office space. The office space you have bought could remain vacant or you may find it difficult to revise rentals upward.

Capital appreciation in office property tends to be lower than in residential property over the long term. And if you are looking for a loan to buy the property, that too may be harder to get than a loan for purchasing a residential property.

Outlook for office segment

According to CBRE South Asia’s third-quarter 2015 report on the office segment, sentiment within this segment is positive, with the ongoing economic recovery supporting the demand for office space. Leasing demand is expected to be steady in the coming months. Demand will be driven chiefly by IT-ITeS and banking and financial services. To a lesser extent, it will also come from manufacturing and engineering, e-commerce, research and consulting and pharma companies.

According to CBRE South Asia’s third-quarter 2015 report on the office segment, sentiment within this segment is positive, with the ongoing economic recovery supporting the demand for office space.

While demand in the central business districts of all the major cities will remain strong, there will also be demand in the peripheral markets from occupiers looking for cost-effective spaces.

The report from CBRE adds that demand for quality office buildings will be high and such spaces are likely to get leased out even before they are completed.

What to do? And what to avoid?

When buying commercial property, choose a location where the pace of economic growth and job creation is likely to be high in the future. While capital values tend to be lower in the peripheral areas of a city, the availability of empty land in the vicinity means that there is no limit on the supply that can come in. This has the potential to cap the growth in rentals in these areas.

When buying commercial property, choose a location where the pace of economic growth and job creation is likely to be high in the future.

Check the infrastructure in the locality that you choose to invest in. The area should be well connected by highways and possibly a Metro or rail link. The inner roads in the locality should be in good shape. The building that you choose to invest in should be situated on a wide road so that it is easily accessible.

Next, the NRI should check the credentials of the builder in whose project he intends to invest. One way to do so is to have a trusted source visit a couple of his older projects and speak to owners in those buildings. They will be able to tell whether the builder had delivered the project on time and had adhered to the quality standards that he had promised. Check out the quality of maintenance in his older projects. Either the developer himself or a maintenance agency could be handling this task. The quality of maintenance is crucial since it determines the ability of a building to attract new tenants.

Next, the NRI should check the credentials of the builder in whose project he intends to invest.

NRIs should get a lawyer to do the legal due diligence. This includes determining that the developer has acquired and is the rightful owner of the land on which he is developing the property, and has obtained all the statutory clearances for developing the property.

NRIs should get a lawyer to do the legal due diligence.

The stage of development at which the NRI invests in a commercial property also determines its level of risk. If he invests in a property that is under construction, he is likely to get more capital appreciation in it. But he will also have to face what is known as development risk—the risk that the project may be delayed or may not be completed at all. On the other hand, if he invests in a property that is completed but not rented, or completed and rented out, he is likely to get lower capital appreciation in such a project. But his risks will also be much less.

If he invests in a property that is under construction, he is likely to get more capital appreciation in it. But he will also have to face what is known as development risk—the risk that the project may be delayed or may not be completed at all. On the other hand, if he invests in a property that is completed but not rented, or completed and rented out, he is likely to get lower capital appreciation in such a project. But his risks will also be much less.

Owing to the slowdown in the real estate market and their inability to raise cash either from buyers or banks, developers nowadays offer assured return schemes on their commercial projects. It would be best for NRIs to avoid such schemes . In fact, the very offer of such a scheme indicates that the developer is probably in a tight corner financially. To avoid the risks that such schemes carry, NRIs should instead invest in a developer who has a strong track record and has the financial wherewithal to complete his project.

NRIs should also avoid investing in the soft launch of a commercial project. Developers offer a discount of 7-10% to investors who invest in their project at this early stage. This is the stage when the developer may not have completed the acquisition of land or acquired the permissions for developing the project. Due to the high risk involved, NRIs should avoid investing at this stage as well.

NRIs should also avoid investing in the soft launch of a commercial project. Developers offer a discount of 7-10% to investors who invest in their project at this early stage. This is the stage when the developer may not have completed the acquisition of land or acquired the permissions for developing the project. Due to the high risk involved, NRIs should avoid investing at this stage as well.

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NRIs need to give serious thought to estate planning to ensure that the wealth they have accumulated through a lifetime’s hard work gets transferred smoothly to their heirs. The challenges in estate planning are greater for NRIs since they are likely to have assets in two geographies: India and the country of their residence. They, therefore, need to navigate the succession laws of two countries.

The challenges in estate planning are greater for NRIs since they are likely to have assets in two geographies: India and the country of their residence.

 

 

 

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Image Source: propertyupdate.com.au

 

Write a Will

The most important point to keep in mind is to write a Will. For NRIs it is advisable to write a separate Will for their assets in India and another one for their assets in their country of residence. In the absence of a Will, the assets get distributed among heirs according to the succession laws of the country. In India the law of succession depends upon the religion you belong to. A person must write a Will if he wants his wishes to take precedence over the inheritance laws.

For NRIs it is advisable to write a separate Will for their assets in India and another one for their assets in their country of residence.

Know the difference in inheritance laws

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Image Source:jamiat.org.za

NRIs must acquaint themselves with the succession laws of the country where they reside. In the UAE, for instance, two laws are applicable in the matter of succession: Personal Affairs Law No. 28 of 2005 and the UAE Civil Code. If a person of any religion dies intestate (without leaving a Will), his assets will be distributed according to Sharia laws. The Personal Affairs Law No. 28 of 2005 allows non-Muslim expatriates living in the UAE to opt to use the law of their own countries to distribute their assets in the UAE. However, the UAE Civil Code says that the law of the home country of expatriates will apply only to determine how movable assets are distributed. Regarding immovable property, Article 17 (5) of the code states that “the law of the UAE shall apply to Wills made by aliens in disposing of their real property located in the state”.

In the UAE, for instance, two laws are applicable in the matter of succession: Personal Affairs Law No. 28 of 2005 and the UAE Civil Code.

US-based NRIs should be aware that if they receive inheritance from a non-US based person whose value exceeds a certain amount in a given calendar year, they have to file information in this regard with the Internal Revenue Service (IRS). Inheriting property in India could also give rise to inheritance tax liability in the US. US-based NRIs should consult a tax advisor if they receive assets in India that are worth a lot of money.

US-based NRIs should be aware that if they receive inheritance from a non-US based person whose value exceeds a certain amount in a given calendar year, they have to file information in this regard with the Internal Revenue Service (IRS). Inheriting property in India could also give rise to inheritance tax liability in the US.

If US-based NRIs receive assets in India which subsequently start generating income, they will need to pay tax in the US on that income. There are also very strict rules for US taxpayers regarding declaring the existence of foreign accounts. They need to file an FBAR (foreign bank and foreign account) report every year. If they have inherited a bank account or an investment account, they need to report it, even if they plan to close the account shortly. Failing to do so can invite severe penalties.

Inheritance of real estate in India

While there are restrictions on the types of property that NRIs can buy in India (they are not permitted to buy agricultural land, plantation or farm property), there is no restriction on the type of property they can inherit. Both resident Indians and NRIs can bequeath a property in India to an NRI. The only condition is that the property should have been purchased in adherence to FEMA (Foreign Exchange Management Act) guidelines.

While there are restrictions on the types of property that NRIs can buy in India (they are not permitted to buy agricultural land, plantation or farm property), there is no restriction on the type of property they can inherit.

NRIs do not need to pay any inheritance tax in India on the real estate they have inherited. They will first have to get the title of the inherited property transferred in their name. If a Will exists, their right to the property cannot be disputed. But if no Will exists the NRI will have to get a succession certificate from a court. The ownership documents of the property must also be available. Next, the NRI will have to get the mutation of revenue records done, so that his name gets entered in the books of the development authority as the owner of the property. The NRI will also have to get his name recorded in the municipal records. The services of a local lawyer or a professional agency may have to be used to get the title transferred. Power of attorney may have to be given for this purpose.3

NRIs do not need to pay any inheritance tax in India on the real estate they have inherited.

Once the title has been transferred, the NRI can choose to rent or sell the property. If he decides to rent it, 30% TDS will be deducted on rental income. He will also be entitled to 30% deduction on the rental income (for maintenance of the property). If the NRI is also liable for taxation on this income in their country of residence, he should try to avail of the benefit of double taxation avoidance agreement (DTAA).

If he decides to rent it, 30% TDS will be deducted on rental income. He will also be entitled to 30% deduction on the rental income (for maintenance of the property)

If the NRI decides to sell the property, he will be liable to tax. If three years have passed since the date of purchase, he will be liable to long-term capital gains tax at the rate of 20% with indexation. In case of inherited property, the date and cost of purchase for the purpose of computing the holding period and the cost of purchase is taken to be the date and cost to the original owner.

In case of inherited property, the date and cost of purchase for the purpose of computing the holding period and the cost of purchase is taken to be the date and cost to the original owner.

If the NRI sells before three years, short-term capital gains tax will be incurred. Here the gains will be taxed depending on the tax slab to which the NRI belongs.

NRIs can get exempted from payment of capital gains tax by reinvesting the capital gains either in another property or in tax-exempt bonds.

For repatriation of the money obtained from sale of house, it has to be first deposited in an NRO account. Up to US$ 1 million can be repatriated in a financial year from this account.

For repatriation of the money obtained from sale of house, it has to be first deposited in an NRO account. Up to US$ 1 million can be repatriated in a financial year from this account.

NRIs should pay attention to the income tax implications of the sale of inherited property in their country of residence. Some countries tax their residents irrespective of where the capital gains have originated from, while others provide total or partial exemption on capital gains earned outside their geography.

Inheritance of financial assets

When NRIs inherit financial assets, they may have to sell some of them immediately as they are not allowed to invest in certain assets, such as National Savings Certificates (NSC), Senior Citizens Saving Scheme (SCSS), Post Office time deposits, and PPF (which they can’t open or extend but can hold the current one till maturity). Next, they must decide whether they want to hold these assets or sell them. If an NRI leaves his financial assets in India, he will have to manage them and also file annual income tax returns in India, and may also have to declare that income in his country of residence. If he decides to repatriate the money, again he can do so up to $ 1 million in a financial year. He must also provide documentary proof that he is the lawful inheritor of those assets.

Estate planning could also include the use of trusts in certain cases, and the use of financial guardians for dependants. It is critical to think through each of these items carefully as a part of your estate and succession plan.

When NRIs inherit financial assets, they may have to sell some of them immediately as they are not allowed to invest in certain assets, such as National Savings Certificates (NSC), Senior Citizens Saving Scheme (SCSS), Post Office time deposits, and PPF (which they can’t open or extend but can hold the current one till maturity).

 

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