Investment options for Indian expats living in the US

Today, I will tackle a crucial question for NRIs living in the US: Where should you invest your hard-earned money? 

We will explore different investment options in India vs. the US, compare returns, and dive into whether it makes sense to invest in India, especially if you’re a naturalized US citizen. 

I am not a financial advisor or tax specialist, so please contact a professional if you need specific advice, this post is for general education purposes only.

I will also briefly touch on the legal formalities you will have to fulfill and the complications of transferring your investment returns between these two countries.

Investment Options in the US

The US offers robust investment options for NRIs:

• US Stock Market (S&P 500 Index): Historically, the S&P 500 has offered an average return of about 10% per year.
• US Bonds: US Treasury bonds are a secure option with yields currently ranging around 4-5%.
• Real Estate in the US: With property prices rising in certain areas, you can expect returns of 5-10% annually depending on the location.
• 401(k) or IRA: Tax-advantaged retirement accounts offer significant benefits, and the average return can range from 7-10% annually depending on the investments chosen.

Investment Options in India

There are several avenues for NRIs to invest in India. Let’s look at the most popular ones:

• Fixed Deposits (FDs): NRIs can open NRE or NRO FDs in Indian banks. These typically offer a 5-7% annual return. NRE FDs are tax-free in India, whereas NRO FDs are taxed at 30% on the interest earned.
• Mutual Funds: NRIs can invest in Indian equity, debt, or hybrid mutual funds. Equity funds have offered around 10-15% annual returns over the long term. However, capital gains on these investments are subject to taxation.
• Real Estate: Property investments are another option. In metro cities, real estate offers returns between 6-10% annually. However, rental income and property sale gains are taxable.
• Indian Stock Market: Direct investment in Indian stocks is possible through the Portfolio Investment Scheme (PIS). The potential returns are around 12-18% annually, but investing in individual stocks comes with significant risks.
• Government Bonds: These offer stable returns of around 7-8% annually, but any earnings will be taxed.

Should You Invest in India if You Don’t Plan to Return?

If you’re a naturalized US citizen and don’t plan on returning to India, you need to consider a few things:

• First is the Taxation Complexity: Investment income in India is taxable, and you’ll need to report it in both countries under FATCA, increasing your tax filing burden.
• The second factor is the Currency Risk: The Indian Rupee has historically depreciated against the US Dollar, which can reduce the value of your returns when converted back to USD.
• Thirdly, limit on how much you can bring to the US: If you earn returns on your investments in India, getting the money back to the US is possible but can be tricky. Indian banks have certain rules and limits on how much money you can send back. You can transfer up to $1 million annually from your NRO account (used for income earned in India). However, this process involves paperwork, such as proving the source of the funds, and you’ll need to follow Indian tax rules.
• Plus, you’ll need to pay taxes on this income in both countries.

Here is what I think based on the current data: If your goal is to stay in the US long-term, it may be more efficient to invest in US-based options that are simpler to manage, tax-efficient, and not subject to currency risk.

If you do plan to invest your money in India, there are some  Legal Formalities and Documentation you need for Investing in India

• First is NRE or NRO Account: You’ll need to open these accounts to hold and send funds. NRE accounts are tax-free, but NRO accounts are taxable.
• You will also need a PAN Card for tax reporting purposes in India.
• Foreign account tax compliance act or FATCA Compliance: if you are a US citizen, you’re required to report your foreign assets to the IRS.
• Lastly, you will need to meet KYC Requirements: which is the Know Your Customer (KYC) process, which includes providing proof of identity, address, and NRI status.

But how should your Investment Strategy change if You May Return to India (in the next 5-10 years)

If there’s a possibility you’ll return to India in 5-10 years, diversifying your portfolio between both countries makes sense.

And there are two options

• Indian FDs and Real Estate: These can be good for stable, long-term returns and will provide liquidity when you relocate.
• US Stock market: At the same time, you can continue investing in US equities to maintain your wealth growth in USD.

So, by having a balanced portfolio, you can adjust based on where you decide to live.