Mistakes NRIs Make While Investing in India

Being a Non-Resident Indian (NRI) living overseas, you might want to invest in India and take advantage of its growing economy. However, handling the challenges of NRI investments in India can be a hectic task, specifically when you have a busy schedule and stay thousands of miles away from your home country.

Additionally, they are also required to certify that their Indian investments comply with the tax laws. Sometimes, when managing all these things unknowingly, NRIs make some mistakes that further affect their investments. Further, to help you avoid the most common blunders, in this blow we have but the top mistakes NRI make while investing in India. So read on and know about them. 

Top Mistakes NRIs Make While Investing in India:

Here is the list of the top common mistakes that 4 out of 5 NRIs generally make while investing in India.

Not Updating the Resident Accounts

This is the most common and costly mistake NRIs make. Moved overseas six months or a year ago, or maybe even three years ago, but still have your Indian savings accounts. Here is the issue. Once you become an NRI, RBI guidelines under FEMA regulations clearly mention that an NRI cannot operate their resident savings account. Every transaction you made through that savings account violates the Indian law. 

Further, you may also need to pay a penalty of up to INR 2,00,000 for continuing to use your resident savings accounts. Additionally, your mutual fund investments can also get frozen, and your demat account gets flagged.

So, to avoid the mentioned circumstances, it is advisable that once your residential status changes to NRI, within 30 days, you convert your savings account to an NRI bank account. For this, you have two options: an NRE account for depositing foreign income or an NRO account for managing income earned in India. Also, convert your demat account to an NRO Demat account and update your KYC information with your overseas address, visa details, and more. 

Over-Relying on Real Estate & Making Hasty Property Decisions

One of the most common mistakes NRIs make is generally investing a huge amount in real estate. While it is true that having your own property provides you with a sense of satisfaction and security. However, it is also vital to have a balance in your investment portfolio. It is because an uneven proportion of real estate results in high maintenance costs, low rental income, and a clunky sales process, all of which impact your financial goals.

Further, in India, purchasing property needs thorough persistence, while some NRIs, without considering the essential factors, such as the track record of the builder, end up taking hasty decisions. It is vital to do your proper research and take the proper type while investing in real estate, or it may result in making costly mistakes. 

Ignoring Indian Tax Rules, TDS, DTAA & Repatriation Limits

NRIs often ignore the tax implications associated with their investments both in India and their resident country. For instance, making premature withdrawals from their 401(k) retirement plan in the US attracts taxes and penalties. Moreover, countries not signing a Double Taxation Avoidance Agreement (DTAA) with India lead to paying taxes twice on the same income for NRIs. Considering this, being aware of the tax rules of both countries saves you from unexpected tax burdens. 

Additionally, for NRIs, Tax Deducted at Source (TDS) is different for NRIs. So, while investing in India, be aware of the higher TDS rates imposed on your investments, rental income, and more, and plan your finances accordingly.

Further, FEMA (Foreign Exchange Management Act) manages everything financially you do as an NRI in India. Under this, here are the violations generally made by NRIs:

• Purchasing Agricultural Land: It is well-known to everyone that NRIs are not allowed to buy agricultural or any type of plantation property in India. You can have inherited agricultural land, but you cannot buy it. 
• Trading without a PIS Account: If you want to purchase Indian stocks, you need to have a Portfolio Investment Scheme (PIS) account. Being an NRI, you cannot use a regular account. Additionally, only delivery-based trades are allowed for NRI; no intraday trades are allowed. 
• Exceeding Repatriation Limit: From your NRE account, you can repatriate any amount without any limits. However, from your NRO account in a financial year, you cannot repatriate more than $1 million. Many NRIs often ignore this and then face the issues.
• Currency or Commodity Derivatives Trading: NRIs are prohibited from doing this. So, being an NRI, do not try to trade in futures and options in commodity exchanges or currency markets. 

Investing Without Proper Research or Relying on Advice

NRIs, without doing proper research and analysis, often get attracted to Indian business opportunities. This further leads to potential losses and misguided investments. So, before participating in a business venture, make sure you have done proper research, consulted with a professional, and checked the market conditions. 

Additionally, when you are short on time, it is good to ask your family, friends, or bank relationship manager. However, sometimes their suggestion might not match your unique financial goals and needs. Instead, you should consider taking help from an expert financial planner who knows about NRI investments and create a personalized investment plan for you. 

Further, estate planning is also a good option for keeping your financial legacy safe. Being an NRI with assets in several countries, to certify an easy transfer of your wealth, it is vital to have an estate plan in place Poor Portfolio Diversification & Over-Dependence on Fixed Income Investment

Relying on unsuitable or biased investment advice results in poor portfolio diversification. It is important to understand your financial objectives and needs and accordingly select the correct investment options. In this, working with an expert financial planner assists you in making the right decisions. Also helps in avoiding investment traps that result in potential losses and misguided investments.

Further, generally, fixed income securities, because of their returns, are stated as secure investment options. However, these investments are not risk-free. The true worth of these assets is depreciated by currency exchange and inflation. Fixed deposit securities are debt securities. Making investments in them results in facing risk of default. In extreme circumstances, there is a potential of not getting interest or principal payment.

Hence, to deal with financial contingencies and volatility, NRIs should have a diversified investment portfolio. 

Delaying Investments & Not Defining Clear Financial Goals

When you invest early and for a long period, it is when the compounding works the best. However, some NRIs do not invest in India till they return to the country. This further results in reduced returns and missed investment opportunities. It is vital to take advantage of the growth potential of India by managing your Indian investment even while staying abroad. 

Further, not having clear financial goals also creates an impact on the investment decisions of NRIs. In this, let us be clear: making money is not a goal. That is a vague hope. Goal-based investing means knowing what you are investing for, when, and how much you need that money. Without this clarification, you end up investing in a random money collection that does not fulfill any purpose. 

For instance, you have a goal of buying a house. In five years, you want to buy a house of INR 80,00,000 in India. For aggressive equity exposure, to be honest, this timeline is too short. To fulfill your investment goal, you should invest in FDs and debt mutual funds with 20% in equity. Here, in this goal, you have a timeline, risk profile, and allocation strategy. 

Without having clear financial goals, NRIs end up generally putting everything in FDs or in stocks. Also end up selling that investments at the wrong time as they do not know what they are actually doing. Additionally, goal-based investments prevent you from making emotional decisions. For instance, markets crash at 20% but you have a retirement goal of 20 years, so you do not panic to sell, as you have enough recovery time. 

Key Documentation

Incomplete documentation is another key reason why NRI investment applications get delayed or rejected. Here is what NRIs actually need:

• For Opening an Account
  • Passport with all pages, including the empty ones
  • Work permit or visa from the resident country
  • PAN card with updated foreign address
  • Proof of overseas address (tenancy contract, utility bill, bank statement)
  • Income proof or employment letter
  • Recent passport-size colored photographs
  • Entry/exit stamps from the passport (requested sometimes)
• For Investments:
  • All the above-mentioned documents, plus
  • Depending on the investment Form 60/61
  • Last 3-6 months' bank statement
  • Power of Attorney (POA) if investments are managed by someone else
  • KYC documents for the demat account for NRIs and mutual funds
  • For specifically mutual funds, a foreign tax residency certificate 

These were some of the mistakes that NRIs should avoid while investing in India. 

Final Thoughts

Generally, it is challenging to manage finances across two different countries. It's a lot- currency risk, time zones, different tax systems, regulatory requirements, and documentation hassles. But with the right structure and proper financial planning, millions of NRIs are doing this successfully. Furthermore, to assist you with the points mentioned in the above blog, we have outlined the common mistakes that NRIs often make when investing in India. 

Additionally, if you need more information on it or are facing issues in choosing the right financial plan, connect with Savetaxs. We have a team of experts who can help in selecting the right investment plan. Additionally, they can also assist you with your tax obligations.