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Retirement is when you stop living at work and start working at living!

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Retirement is not merely a goal but it’s a journey. There is more to it beyond merely planning for a desired sum as your retirement corpus.

Now that you are retired and you have an accumulated corpus with you, you have to plan wisely in order to sustain the sum till the end.

Expense management

The starting point of your exercise will be to have an expense pattern which you broadly have to stick to. There are many changes which will occur in your expense pattern now that you are retired.

Your retirement expenses will also have phases. Initially in your60s you may see a certain type of expenses going up. For example travel expenses. Now that you have all the time for yourself and your spouse, you may wish to go for multiple vacations –  either domestic or international. Another expense that may increase could be group memberships. You may join a hobby group or a club of your choice. Also it will take some time for your lifestyle to undergo a change so your lifestyle expenses may not change much in the first few years. Later on with age your choices and preferences may change. For instance you may no longer prefer restaurants as often, as you used to prefer at one point in time.

As you move towards your 70s your medical expenses may increase. Your medical costs will go up due to need for regular checkups and dependence on medicines. Health insurance and critical insurance do not cover your costs after a certain age. Even if they do, the cost is very high as the premiums increase with age. Therefore having a health care provision for your retirement is critical.

Plan for a regular and tax efficient stream of income

Another major change is that you will no longer receive any regular salary or business income.

Now that you have an accumulated sum, you have to plan your investments in a manner so that you can have a regular and a tax efficient stream of income. Do not be overly aggressive or overly conservative. Whilst the exact investment strategy may vary from person to person, the focus should be to maintain and grow at least a part of your existing wealth.

On the asset allocation front you have to move a portion of your investments into debt/fixed income instruments, and allocate a limited portion towards equity.

In order to have a regular stream of income you can start a Systematic Withdrawal Plan (SWP) from your existing set of mutual fund investments.  Opting for a dividend payout option could attract Dividend Distribution Tax, especially for non equity oriented funds. Therefore, SWPs can work well. Also dividendscould be irregular at times depending on dividend paying history of the fund but in an SWP you can choose a fix amount that you wish to withdraw.

You can also invest in the senior citizen savings scheme as it provides a better rate of interest amount compared to other small savings scheme options.Do remember that small savings rates have gone down and will be altered on quarterly basis going forward.

You can also look at Bank FDs. These provide an additional 0.25% to 0.50% extra rate to senior citizens which varies from bank to bank. Company FDs can be a slightly riskier option as compared to bank FDs.

If you have a self occupied property which you feel is no more needed since you kids have moved out and it’s only you and your spouse who need to stay, you might consider selling it and buying two smaller properties. One you can use as self occupied and other you can use to let out to avail regular rental income. Do consider the capital gains tax angle to it.

Make a will

It is a very important step. This makes transfer of wealth to your future generation smooth and hassle free.

Also have a nominee attached to all your investments and insurance so that there is succession challenges are reduced. Also make sure that someone knows where all you wealth and investments are lying so that your family does not have to struggle to get what you have left behind for them.

Have a Happy Retirement!

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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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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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NRI final

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Most NRIs typically have assets both in their country of residence and in India. These are typically a mix of both financial and real assets. Managing the assets in India can pose a number of challenges due to the fact that NRIs live thousands of kilometres away and visit the country after long gaps. These should be kept in mind whilst managing your personal finances. Here are a few tips they can use.

Avail of DTAA: If you live in a geography with which India has a double taxation avoidance agreement (DTAA), then you will typically be taxed at the lower of the two rates (the rates applicable according to the Income Tax Act in India and the DTAA rate) on, say, interest income on your bank deposits in India. But to avail of DTAA you will have to submit a tax residency certificate (TRC) verified by the government of the country in which you reside and Form 10F. You will also have to submit a self-declaration cum indemnity form, self-attested copy of PAN card, and a copy of your passport and visa. These documents have to be submitted every year. Unless you submit these documents in advance, the bank will deduct tax on interest income at the highest tax rate in India.

To avail of DTAA you will have to submit a tax residency certificate (TRC) verified by the government of the country in which you reside and Form 10F.

Don’t omit to file tax return: NRIs need to file tax return in India if their income here exceeds the basic exemption limit. You also need to file tax return if the tax deducted at source (TDS) exceeds the tax payable and you wish to claim a refund, or you have a loss that you want to carry forward.

Salary received in India or salary for services provided in India, rental income from property, capital gains on sale of assets in India and interest from deposits will all be taxable in India. Any income that you earn outside India is not taxable in India if you are an NRI.

NRIs need to file tax return in India if their income here exceeds the basic exemption limit. You also need to file tax return if the tax deducted at source (TDS) exceeds the tax payable and you wish to claim a refund, or you have a loss that you want to carry forward.

Be practical about asset selection: Like their resident brethren, NRIs too have an inordinate fondness for investing in real estate. Before you do so, however, give thought to how the property will be looked after and maintained. Avoid investing in a plot as it is most vulnerable to encroachment. Even the maintenance of an apartment can sometimes prove burdensome. While facility management is fairly common overseas —you can entrust the maintenance of your apartment to a professional agency, that is not very common in India.. You may have to depend on an individual to act as caretaker. This person must be reliable. If you lock up the apartment for years together, its condition will invariably deteriorate. In this context, investing in financial assets provides a more hassle-free alternative, even if it may not provide the same emotional satisfaction as investing in real estate.

Investing in financial assets provides a more hassle-free alternative, even if it may not provide the same emotional satisfaction

final power of att

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Use power of attorney, but judiciously: While NRIs can handle many transactions online, some require their presence. In such cases, it may become essential to appoint an agent to act on their behalf. By giving a power of attorney (PoA), you can empower someone to do so. A general PoA allows a person to undertake all transactions on your behalf. A special/specific PoA, on the other hand, empowers the person to act only in a specified matter. While granting a PoA is useful, it can also be dangerous as there is a risk of these powers being misused. Remember that you will be responsible for any liability arising from your agent’s actions. Avoid giving a general PoA as this increases the scope for misuse. The PoA should be given only to someone who can be trusted absolutely.

In the field of real estate, PoA can be used to lease property, collect rent, sell the property, etc. In the financial markets, PoA can be given to someone to buy and sell stocks, bonds and other securities. In banking, PoA can be given to someone to deposit or withdraw money from the account. Your agent can even sign your tax returns, insurance forms, etc on your behalf.

While granting a PoA is useful, it can also be dangerous as there is a risk of these powers being misused. Remember that you will be responsible for any liability arising from your agent’s actions. Avoid giving a general PoA as this increases the scope for misuse. The PoA should be given only to someone who can be trusted absolutely.

estate planning

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Don’t ignore estate planning: NRIs are as guilty as resident Indians of not writing a will. In their case, the consequences of passing away without a will be even more onerous for their loved ones as the latter will have to deal with the jurisdictions of two countries. It may also mean that your assets may not be distributed in a manner that is to your liking. If you pass away without a will, the laws of succession of the country in which you reside could apply. In countries where Sharia laws apply, for instance, your male successors could have an advantage over female. The absence of a will also means a lot of paperwork, bureaucratic hassles and legal expenses for loved ones before they are able to gain control of your assets.

Remember that while there is no estate or inheritance tax in India, it does exist in many other countries and it could take away a sizable chunk of your wealth.

It may be a good idea to create a separate will for your assets in your country of residence and for your assets in India. After creating the will, inform the executor about where to find it. Also, create a list of your assets and share the information with your family.

It may be a good idea to create a separate will for your assets in your country of residence and for your assets in India. After creating the will, inform the executor about where to find it. Also, create a list of your assets and share the information with your family.

Use software to get single view of assets: The benefits of using aggregation software is that you will be able to know the value of all your assets at a single glance. You will also be able to see the date of purchase and sale of assets and the capital gain or loss made, quite easily. This is also critical for your family in case something happens to you.

Distance and dealing with the laws of two jurisdictions do make the NRI’s task of managing assets difficult. He can only do a competent job if he is aware of the challenges, informed about his options, and disciplined in execution. NRIs should be open to seeking professional expertise wherever needed.

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Fin resolutions that can change your life - The times of India - 30.12.2014-page-001

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Continuing with our series of addressing one of the biggest myths about managing money that is, managing money is all about returns on your investment. Whilst returns are no doubt an important component of managing money, we believe it is critical to take a more holistic view on finances. A quick recap on what we have already covered as to do items for quarter 1 and 2

January – Put it all together

February – Question what you really want your money to do for you

March –  Keep what matters, let the rest go

April – Plan for emergencies and contingencies

May – Put your risk control mechanisms in place

June – File your taxes correctly and diligently

July – Use technology to improve the management of your finances – There have been significant enhancements on monitoring and managing finances in the last few years. Technology benefits can be gained through your mobile phone, computer or tablet. From online information on taxes deducted on your account or tax refunds processed, to investing surpluses in your bank accounts to earn superiors returns, to alerts on specific transactions that have taken place on your accounts, to maintaining digital records of all your important documents, technology allows tracking and transaction on your finances far more easily than ever before. You should actively consider the use of a software that allows you to track all your finances and assets in a single place, so that your updated finances are available as and when required. You could check on solutions from your financial planner about the same.

AugustBuild a team of trusted advisors – Most individuals today need the services of a financial planner to oversee their overall finances, a tax advisor to file and manage their taxes on an ongoing basis and a legal advisor to guide them through matters related to succession and real estate. Whilst it is possible to work with each of the above professionals on a transaction by transaction basis, increased complexity and integration on all aspects of your finances requires you to build longer term relationships so that decisions on your overall finances are taken in a more holistic manner. Whilst it is always possible to find an advisor for a specific transaction, building a team that understands your world view is critical for success on an ongoing basis.

September – Build your succession plan – There may be multiple dependents on you – your spouse, your children, parents, a sibling or his family. If you need to support each of them differently, ensure that your finances are arranged in a manner that this can happen smoothly. Whilst a nomination is a good starting point, it is unfortunately not the solution to all your succession issues. First of all, remember you are never too young to die. Once you accept that reality, you can begin work to make a checklist of all your physical and financial assets, your thoughts on how you would like them divided ( remember that it is not easy to divide a physical asset like a house into half easily), and then putting it down on paper so that there is no possibility of an incorrect interpretation. Remember, the draft of someone else’s will is very unlikely to work for you, so get it customized to your requirements. 

I will complete this calendar in the next column. I look forward to hearing from you on what you believe is an ideal calendar for the fourth quarter of 2012. You can write to me with your wishlist on vishal@planaheadindia.com or by leaving your comments

This article was written by Vishal Dhawan, CFPCM 

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