This article shows the steps NRIs can take to easily manage their family’s finances in India.
How can NRIs easily manage their parents’ finances in India?
07 Apr 2022 - Contact Sayan Sircar
13 mins read
This article shows the steps NRIs can take to easily manage their family’s finances in India.
Table of Contents
- How to set up investments
- Rules on gifting to family members in India
- Setting up the infrastructure
- Pre-requisites to be completed
- Contribution to family expenses by the children
- Dealing with existing assets
- Dealing with new assets
How to set up investments
This article will cover cases where NRIs can ensure that their parents in India have regular income with the least possible setup and maintenance hassles, simple taxation and low to no activities needed in the physical world by focusing on online transactions that can be managed from overseas.
We will focus on simplicity, ease of maintenance and safety for these investments. We will avoid situations that involve running around by elders like:
- continuous bank visits to perform KYC and other activities
- filling, submitting and depositing Form 15G/15H offline
- dealing with real estate properties, renters, agreement signing, and related hassles
We will explore the following options:
- RBI issued government bonds (Gilts) that pay guaranteed coupons every six months
- Pension plans
- Debt and equity mutual funds
- NRE FD
- dividend-paying stocks
Rules on gifting to family members in India
To gift by NRI to a resident of India, we must distinguish between relatives and non-relatives. Gifts to relatives are tax-free, and for non-relatives, there will be gift tax. The following are considered relatives relative to the individual NRI who is gifting the assets, while anyone not covered below are non-relatives:
- parents, step-parents, grandparents
- children and their spouses, step-children
- grandchildren and their spouse
- siblings and their spouses, step-siblings
To avoid hassles and maintain a clear record for tax purposes, please create a gift deed for gifts exceeding ₹50,000 in value to both relatives and non-relatives.
Setting up the infrastructure
NRIs need one or more Non-Resident Ordinary (NRO) bank accounts to be set up. This account is used for any income and investments in India. The features and uses are:
- interest earned is taxable in India at current slab rates. The benefit of the Double Taxation Avoidance Agreement (DTAA) is available with most countries so that you do not pay tax twice
- you can send both interest and principal out of India, but the principal must be within $1 million. A CA must certify that you have paid taxes on this income
- you can make deposits in foreign currency and INR, and withdrawals is in INR
- joint accounts are allowed with another NRI or a resident
- funds can be transferred to only another NRO account and not to an NRE account
- this account is used to receive income from interest, FD, rent, stock and MF dividend, and proceeds from selling real estate, stocks and mutual funds
- can be used for stock and MF investing
In this case, set up the NRO account(s) jointly with your parents for them to receive the money you plan to send them for their expenses. Alternatively, since there is no gift tax for transferring to parents, you can transfer money to the resident accounts of the parents as well.
We prefer the joint account approach since the NRI is the primary holder:
- there are no hassles of Form 15G/15H to be submitted by the parents
- the parents don’t have to worry about tax filing and TDS
- there is no concept of “life-proof” to be provided like required for pension schemes
We cannot change the situation if the parents already have a government pension or the assets that they manage themselves. We are also not advocating that the parents transfer any assets to the NRI children just for simplicity of managing.
Pre-requisites to be completed
Before creating a retirement corpus ensure that these are in place:
- an emergency fund with 6-12 months of expenses
- a sinking fund for insurance payments (health, car) and recurring known expenses (building maintenance, holiday travel etc.)
- a health insurance policy for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up. This will be expensive but essential in case such a policy is not already in place
- no high-interest debt like credit card or personal loans. An outstanding home loan should be paid off at the point of retirement using the retiral benefits
Contribution to family expenses by the children
Dealing with existing assets
We will give some examples for managing existing assets in India in a simple way that reduces the effort needed in India to maintain them:
- Government or other pensions: Existing pensioners should use the Jeevan Pramaan website to provide life proofs online instead of visiting the concerned offices
- Rented properties: To buy/sell or sign the rent agreement for property in India, a specific Power Of Attorney (POA) may be given to a trusted family member to transact on the owner’s behalf. A POA holder has the authority to only sign on behalf of the property holder, and the original owner still receives the rent/sale proceeds of the property in their personal account. The POA does not become the owner of the property
- Bank deposits: As soon as April comes, the flurry of giving Form 15G/15H starts. This exercise can be a hassle for elders since it is difficult for them to do online, or PSU banks require branch visits for simple tasks. In such cases, you can let the TDS get deducted and use a CA to file tax returns to get a refund if applicable. The cycle of TDS-Refund-TDS will stabilise after a year
- Shares and mutual funds: switch to simple index funds and suitable debt funds instead of direct stocks and high-cost active funds to lower the effort in tracking them. The easiest option will be to consolidate everything into a single large AMC with the same folio for equity and debt funds
- SCSS/PMVVY/POMIS: these may be continued if there are already in place but need not be renewed in favour of the options below
Dealing with new assets
The purpose of making these investments is only to take care of parents and their expenses in India. These investments are not for the NRI’s own goals like retirement or children’s education.
Direct remittance to the NRE account is the standard practice of sending money to India. You may hold NRE accounts jointly with a resident relative but only in former or survivor mode. You can set up a standing instruction to transfer funds from our foreign account to your Indian NRE account to fund it regularly. You should transfer what is needed every quarter or six months.
The issue with this approach is exchange rate fluctuations will make it difficult to predict how much will end up in the target account in INR for future transactions. Generally the more the number of remittances you make, there will more charges. Bank account to bank account transfers are low cost while if you pay via a credit or debit card, the fees will be higher.
Since regular remittance has a dependency on having an active income, we will also explore options that are more fit-and-forget in line with the theme of this article.
Priority: Very high
NRIs have an option of buying an RBI issued long term bond that pays half-yearly coupons and gives back the principal at the end of the period. This is via RBI’s Retail Direct Scheme or via brokers like Zerodha. You can think of this as a very long term FD with interest payments every six months. These bonds are available with maturities from 91 days to 40 years and investments may range from ₹10,000 to ₹2 crores per PAN.
The biggest benefit of this scheme is that due to the government of India guarantee on coupon payments and return of principal, there is no dependency on the NRI child’s own finances after the bond is purchased. In case there is a disruption of income due to health issues, immigration or job loss, your parent’s income will continue. The interest payments that they will receive are fixed and will not increase over time with inflation.
It will be prudent to hold these bonds in a joint mode with your parents so that transmission, in case of their demise, is hassle-free.
NRIs will have to use their NRO account for investing in and for receiving interest from RBI/Gilt bonds.
For example, if you buy a 2062, 7% coupon bond at ₹106 by investing ₹50 lakhs, then you get:
- notional value of the bond purchased = 100 * 50/106 = ₹47.17 lakhs
- interest payment every six months = 0.5 * 7% * ₹47.17 lakhs = ₹1.65 lakhs (this is taxable) and comes without TDS into the bank account
- ₹47.17 lakhs come back in 2062 in the bank account when the bond matures without any TDS or capital gains tax
- this bond gives an income of 2 * 1.65 lakh * (1-30%) [assuming 30% tax rate] = ₹2.3L/year or approximately ₹19,250/month. Splitting the investment in the name of both parents will reduce the tax impact
You can spread out buying the bond over a few months to allow income every few months like this:
The example above shows two bonds purchased three months apart, allowing interest payments every three months.
You can use this formula to calculate monthly income from bond price and coupon rate:
Monthly income = 100 * Coupon * Investment / Price / 12 * (1 - TaxRate)
Here, investment = 50 lakhs, price = 106, tax = 30%, coupon = 7% and hence the monthly income = 100 * 0.07 * 50,00,000 / 106 / 12 * (1 - 0.3) = ₹19,250
Steps to follow:
- choose how long you need this income to be there based on the expected lifespan. For example, if you expect your parents to be alive until say mid 2050s, then choose a 2060 maturity bond
- calculate the income based on the current bond price and coupon rate for the 2060 bond based on the formula above
- if more income is needed a few years later due to prices increasing in India, then buy a new bond to generate additional income
- buy bonds in each parent’s name to minimise the loss due to taxes. If the taxable income per head is below ₹5L/year per parent, using the benefit of Section 87A, then this income will jump from ₹19,250 (4.6% yield) to ₹27,500 (6.6% yield)
- RBI direct bond account can be opened and maintained online or alternatively use brokers like Zerodha
The concept of RBI bonds is explained in detail here: How to use the RBI Retail Direct Scheme to get guaranteed income?
Pension plans that generate a fixed income for life may be an option for someone looking for an excellent fit-and-forget solution. You can gift the money to your parents and let them take a pension plan in their name. The annuity rate should be compared with the RBI bond return before purchasing.
There are a few problems:
- returns post-tax may be low
- 1.8% GST is levied on the premium paid. This means that you pay 1.8 lakhs extra per crore of premium when you purchase the policy
- the requirement of giving life certificate every year
Tax free NRE FDs
Unlike NRO FDs, which have 30% TDS, the interest on NRE FDs are tax free and can be used to generate an income for parents. The issue with this approach vs buying RBI bonds, is two-fold:
- FDs are available for up to 10 years while RBI bonds are available for longer duration
- As the Indian economy matures, interest rates will continue to fall. Newer FDs will be created at lower rates while the return from RBI bonds are fixed over the life of the bond
NRIs should not invest in mutual funds in India solely for the purpose of income generation for parents. Mutual funds require a degree of active management that may not be possible all the time sitting in a foreign country. If active maintenance is possible, a combination of equity and debt funds, as per this post on choosing mutual funds, may be followed. If active management is not possible, then mutual funds should be avoided.
High dividend-paying stocks
Priority: Very low
We do not recommend that NRIs invest in direct stocks in India due to the research and tracking overhead involved. However, since stock dividends have the potential for providing inflation-indexed returns, NRIs may consider if they are comfortable with the extra effort needed.
Read more here on choosing dividend-paying stocks: How to plan for retirement/FIRE using dividend income?
These options should be avoided at all costs:
- NPS: this scheme is unsuitable for the purpose since the money is locked until the investor turns 60
- Bonds apart from government bonds: an individual investor does not have the means to gauge the risks associated with corporate bonds or NCDs of any issuer. Do not chase yields by investing in state government or state agency bonds or corporate NCDs. The only reason their interest rate is higher than FDs is due to their disproportionately high risk
- Debt mutual funds which invest outside central government bonds or have large exposure to interest rate risk
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