Generali Worldwide reaches out to 14m-plus Indian diaspora
People born in India account for the largest single group of expatriates, numbering more than 14 million worldwide. Below, Glenn McIllroy, technical sales manager for Generali Worldwide Insurance, reveals how advisers can help their Indian clients to make the most of their years abroad
The World Bank estimates that in 2016, the total number of individuals living in a country that is different to their place of birth will, for the first time, exceed 250 million.
To put this in context, a country with a population of 250 million would be the fifth largest country in the world, sitting just behind the US and Indonesia in population size.
It would also be a wealthy country: the World Bank estimates that the global expatriate population holds in excess of US$500bn in annual savings.
For those in the business of international financial services, therefore, there has never before been such a diverse community of expatriates in need of assistance, and thus, so much potential and opportunity for the cross-border financial services industry to apply itself to.
NRIs ‘largest sub-set’
Within this “long tail” nation of expatriates, spread, mesh-like, around the globe, the Indian community is the largest sub-set, in terms of total numbers. More than 14 million individuals originally born somewhere on the Indian subcontinent are currently estimated to be living in a country other than the one in which they were born.
Indian expatriates also top the list of emigrants with a third level or “tertiary” education. And if, as many experts do, you equate educational attainment to earnings potential, it shows that many non-resident Indians around the world are in a great position to capitalise on their enhanced earning potential, to build solid financial futures for themselves and their families.
Like all expatriates, Indian expats share a common set of financial considerations, which need to be carefully navigated.
And these considerations, experts say, need to be set against a mind-set which could, at least initially, be influenced by the traditional ways that savings and investments are established in the individual’s home country.
If an individual from this community is able to embrace the new environment that they find themselves in, this “progressiveness” can, experts familiar with such individuals say, present opportunities to them to manage their wealth in a more efficient way than they might otherwise do.
Before we look at the investment opportunities for the expatriate Indian population, we need to look at the tax position Indian expatriates may find themselves in when they leave India – as well as if, or when, they return to India, following a period of non-Indian tax residency.
The tax liability and tax position of an Indian expatriate are key considerations that are likely to influence any financial decision making while they’re abroad.
The Indian tax system categorises Individuals into three groups, which determine an individual’s exposure to Indian tax. They are:
1. Resident and Ordinarily Resident (OR)
2. Resident but Not Ordinarily Resident (NOR)
3. Non Resident (NR)
The following rules should be followed to determine the tax residency status of an Indian expatriate:
An individual is resident in India during a financial year (1st April to 31st March) if they satisfy either of the following conditions:
a. The individual is present in India in that financial year for 182 days or more, or
b. Within the four previous financial years, the individual has been present in India for 365 days or more, and has been present in India for a period of 60 days* or more in the current financial year.
If an individual’s does not satisfy either of the conditions in Rule 1, they will be considered NR.
If, however, an individual is considered resident, the individual will need to further classify their tax status. To do this, the following rule can be applied to determine the individual’s tax position.
An individual who is a resident is deemed NOR in India if they:
a. have been an NR of India for nine out of ten years preceding the current financial year, or
b. have been present in India for 729 days or less, accumulated, during the seven years preceding that year.
If a resident individual does not satisfy any of the conditions of Rule 2, the individual is considered OR.
The following flowchart will help with the categorisation of Indian tax status.
*182 days for an Indian citizen or a person of Indian origin who is visiting India.
Why does this matter?
Categorising tax residency in India is important, as it determines which income and gains are taxable in India. Each category of residency has its own exposure to Indian tax:
Residents (OR) are subject to tax on their worldwide income and gains. However, a tax credit is provided for taxes paid abroad. This credit cannot exceed the Indian tax payable.
Non-residents (NR) are liable to tax in India on their Indian source income, and on income received or deemed to be received in India. The non-Indian source income of non-residents is generally exempt from Indian income tax.
Not ordinarily residents (NOR) are subject to the same treatment as non-residents, except that income accruing or arising outside India is also chargeable to tax in India if it is derived from business controlled in India, or a profession set up in India.So what are some of the key considerations based on this categorisation?
If an individual is living outside India, and is categorised as a non-resident for Indian tax purposes, they will only pay tax on their India- source income and gains.
Therefore, any India-based savings and investments will be subject to Indian tax, no matter where the individual is resident.
So, for those living in a jurisdiction that is more tax efficient for them than India, they should consider placing future investments in products domiciled outside of India, as they will not be subject to any Indian tax liability.
By taking this step, it ensures that the income and gains they make from saving and investing outside of India is only taxed in the jurisdiction in which the individual is tax resident (if any) and taxed in the jurisdiction of the investment (if any).
So, for example, an investment-linked life assurance plan issued from a tax efficient jurisdiction, such as Guernsey, purchased by an individual resident in a low tax jurisdiction, will ensure investments have a great opportunity to grow, prior to withdrawals being made from the plan – as the assets underlying the plan can roll-up gross (subject to little or no tax) while they remain within the plan.
It can also be quite difficult to maintain investments in India if the individual is getting paid in a currency other than the Indian rupee, because of fluctuations in exchange rates. For example, it is now more than 50%** more expensive than it was five years ago to fund an Indian Rupee based investment from a US dollar account.
Returning to India – planning ahead
If an Indian expat should return to India and satisfy the conditions to become ordinarily resident in India once again, then, as we have learned, they would be subject to taxation on their worldwide income and gains.
It is therefore important for those who expect to return to India one day and become resident there again to plan for that time, by utilising financial products that will allow them to be as tax efficient as possible on their return.
Again, if we take the example of the investment-linked life assurance plan, domiciled in a jurisdiction like Guernsey, it would allow such an individual to create an efficient home for their non-Indian source wealth, as it does not generate any taxable income or gains until benefits are taken from the plan – therefore not exposing the individual to any Indian tax until the time of withdrawal.
On becoming resident in India again, the individual can also make use of the residency rules as, depending on circumstances, it is possible to be physically resident in India for up to two years without becoming Ordinarily Resident.
If the individual meets the criteria to be classified as Not Ordinarily Resident (NOR) it means they would not be subject to Indian tax on income or gains generated outside India.
Therefore, the NOR Indian can create income, or realise gains, during this two-year period from a financial product domiciled outside India, free of any Indian tax considerations.
Additionally, an investment-linked life assurance plan can be divided into a number of separate but identical individual “sub-contracts”, which can be assigned in part or entirely to different individuals.
The assignment, when made as a gift – i.e., when not for consideration – is not taxable in India, if the gift is made to a family member. This can prove beneficial in such scenarios as funding children’s further education at home or abroad.
A parent can assign individual sub-contracts to their adult children to cover education costs and, instead of the parent being liable to tax in India, the child can surrender the assigned sub-contract(s), and pay tax where they are resident. Typically, as a student, this will be at a lower rate than that of their parents.
The Indian expatriate populations, like so many others around the world, face many unique financial issues. But, if they choose the correct investment vehicle, they can find great opportunity to provide a secure financial future for themselves and their family wherever they end up.
**Based on the difference in value between the US dollar and the Indian rupee mid-market rates at close on 08/04/2011 and 08/04/2016
(This article first appeared in the May issue of International Investment.)