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Investment for Expats in India

Submitted: August 2013

In India, expats should be concerned with beating inflation and taxes to preserve the value of their savings. As a general rule, you shouldn’t keep your rupee banknotes and coins for long. Same thing for current accounts which don’t pay interest.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with inflation in India. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside India but you invest in any rupee assets, you are effectively making a currency bet.

Inflation in India

Indian inflation has historically been above 5%, and it has frequently poked its head slightly above the 10% mark. However, Indian policymakers are becoming increasingly unfavourable to double-digit inflation rates, and it wouldn’t be surprising to see inflation rates anchored closer to 5% in the future.

For more information on monetary policy, see Foreign Exchange for Expats in India.

Savings accounts

Indian savings accounts generally have an inflation-busting yield. Term deposits are more likely to attract a higher yield. Typically, yields on an easy-access savings account may exceed 6% whereas they can reach 9% on a 3-year term deposit.

Yields can shrink even lower if the central bank decides to lower the prime rate. Negative real interest rates have never been India’s policy as they are perceived to hit the poorest. Historically, real interest rates have exceeded 4%, but the recent downturn has forced them closer to zero.

Indian securities (costs)

Do consider carefully the applicable transaction costs if you wish to trade Indian securities. Here are the main costs you should be aware of:

  • Securities Transaction Tax (STT)
  • Broker’s commission fees (these can be as high as 0.5%)
  • Minimum commission fees
  • Any other applicable fees that may be charged by your broker.

For an overview of Indian stockbrokers, click here.

Securities Transaction Tax

STT is a feature of the Indian tax system, which is designed to partly replace capital gains tax. This is because STT is much easier to collect for the Indian Government.

STT is due on most transactions on an Indian Exchange. Thus, “off-market” transactions are not within the scope of STT. STT is due when you buy and when you sell a security.

From 1 June 2013, STT rates are as follows:


Security

STT rate on purchases (%)

STT rate on sales (%)

Deliverable securities

0.01

0.01

Non-deliverable securities (e.g. intraday transactions)

Nil

0.025

Derivatives

Nil

0.010

A special STT rate of 0.001% applies in respect of repurchases of ETF units.

Indian securities (overview)

Foreign nationals are generally free to invest in Indian securities due to recent relaxation of foreign investment rules.

Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, interest rates in India are high and they can go up if inflation rises, or down if the GDP growth is low enough to require monetary stimulus. See Foreign Exchange for Expats in India.

You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter. See Wealth Management for Expats in India.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

FX risks

A lot of money can be made on currency bets, but a lot of money can be lost as well. (see the introductory paragraphs for hidden currency bets when you are an expat)

India is an emerging country, and emerging economies are strongly subject to “hot money” flows. Hot money refers to money that frequently moves across borders in order to make profits on FX capital gains or interest rate differentials (carry trade strategies). In many cases, hot money flows involve borrowing a low-yield currency (USD, HKD, CHF or JPY) in order to invest in a high-yield currency. As most emerging countries have high-yield currencies, their currencies tend to appreciate steadily over a long period but they are potentially exposed to very sharp downturns (e.g. when developed countries tighten monetary policy). Major examples include, but are not limited to:

  • 1994 Mexican crisis
  • 1997 East Asian crisis
  • 1998 Russian crisis

As of 2013, emerging countries are generally much less vulnerable to hot money flows than they were 15 years ago. This is the result of economic resilience over the past decade.

In the case of India, hot money flows are more about interest rate differentials than expected FX capital gains. However, there is some capital gain potential if market participants believe the rupee is undervalued in real terms. See Foreign Exchange for Expats in India.

As an expatriate, you don’t necessarily want to be a speculator. Therefore, it is essential that you take some steps to reduce your FX exposure. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet.

Example

Ray is a Canadian citizen who has been posted to Mumbai for three years. He will return to Canada later on.

His net salary is ₹30,00,000 per year, but he intends to spend only ₹10,00,000 per year. He thinks it would be appropriate to save an additional ₹5,00,000 for a rainy day whilst he is in India.

Ray is effectively making a currency bet if he fails to convert 30,00,000*3 – 10,00,000*3 – 5,00,000 = ₹55,00,000 into Canadian dollars.

Alternatively, FX exposure can be reduced (or increased) through the purchase of relevant derivative products (e.g. FX options, swaps or forward contracts). Derivatives can be highly effective but they are quite complex, especially for individuals with little financial education. It is advisable to seek professional advice before taking action.

Overseas investments generally

If you wish to invest in overseas assets, there are a few points you need to check:

  • Financial transactions taxes
  • Inheritance tax considerations
  • Asset liquidity/money transfer restrictions See Money Transfers for Expats in India
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another)
  • Foreign withholding or income taxes
  • Yields available on foreign investments
  • Foreign currency exposure. See Foreign Exchange for Expats in India

Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle.

Taxation

The first thing to check is your residence status for tax purposes. See TAXATION – Overview of Tax Issues for Expats in India.

Your worldwide investment income is taxable in India if you are resident in India. If you are non-resident, you are liable to tax in India on your Indian-source income only. An education cess is also levied at a rate of 3% of any Indian tax due.

Different rules may apply for foreign-source investment income. For more information on investment taxation, see TAXATION – Investment Taxation for Expats in India.

 

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