Maximizing Property Sale Proceeds: A Guide for NRIs
For NRIs, selling property in India is a big financial decision that comes with important tax implications. Recently, new tax regulations have made it even more critical to have a smart investment plan. In this blog, we’ll explore how NRIs can optimize their property sale proceeds through three key investment strategies.
Now, let’s move on to business with a case study and a few real-world investment lessons!
The New Tax Landscape for NRIs
Suppose you sold a property in India for ₹2 crores, which you purchased 14 years ago for ₹80 lakhs. The capital gain would be ₹1.2 crores. Earlier, NRIs were able to avail the indexation benefit to reduce their tax burden. Now, the Indian government has imposed a flat rate of 12.5% on capital gain for NRIs, removing the indexation benefit.
This implies that you would need to pay ₹15 lakhs as tax on your capital gains. You pay the tax and have ₹1.85 crores left to invest. Now the question arises: How do you maximize it?
Three Investment Strategies to Maximize Returns
- Capital Gains Bonds and NRE Fixed Deposits One way to invest your property sale proceeds is to allocate part of it to capital gains bonds. Although you’ve already paid the capital gains tax, these bonds offer a safe investment option with no additional tax on interest.
Suppose you invest ₹50 lakhs in capital gains bonds, which return 5% per annum. This will provide you with ₹2.5 lakhs per annum. You can invest the balance ₹1.35 crores in NRE Fixed Deposits at 7%, providing you with another ₹10.5 lakhs per annum.
Together, you would be earning nearly ₹13 lakhs per annum with safety and good returns.
- Pure NRE Fixed Deposit Strategy If you wish to go in for a simple and secure investment technique, you could invest all ₹1.85 crores in NRE Fixed Deposits. On a return of 7%, your income per year, after taxation, would be roughly ₹13 lakhs. It’s a risk-free method, and one backed by the surety of reputed banks lagging behind.
- Mutual Fund Strategy For those willing to take higher risk for the possibility of higher returns, mutual funds are available. If you invest ₹1.85 crores in a diversified mutual fund portfolio with a conservative estimate of a 12% return, your possible annual return, assuming a 12.5% long-term capital gains tax on equity, can be ₹23 lakhs.
But this approach carries market risk, yet it can give much more returns than fixed deposits or bonds.
A Balanced Approach for Both Growth and Security
You do not need to follow one approach. In fact, a combination of all three approaches in a hybrid approach can give security as well as growth. For instance, you may invest 60% in NRE Fixed Deposits to receive regular income and 40% in mutual funds for long-term growth.
As a real-life example, we have designed a portfolio in which 40% was put into NRE Fixed Deposits, 40% into mutual funds, and 20% into government securities. This portfolio gave both income on a regular basis as well as the possibility of capital appreciation.
The Power of Long-Term Investment
When comparing these strategies, one must plan in the long run. With the power of compounding, the return difference can be enormous. In 10 years, a hybrid strategy might gain nearly ₹1.2 crores over a pure fixed deposit strategy!
With a wise investment choice that favors your financial interests, you can make your house sale a wealth-building experience.
Conclusion
For investing sale proceeds of property, NRIs have a wide range of choices based on their investment requirements, risk profile, and income needs. If you are comfortable with the security of fixed deposits or ready to look for better returns in the form of mutual funds, the thought is to select an option based on your needs.
Remember: Diversification is the secret of safeguarding and increasing your money in the long run. After recent changes brought about by amendments in tax law, it’s the ideal moment to revisit your investment plan and optimize your earnings from selling property.
FAQs
- What’s the new tax rate on capital gains for NRIs?
Ans- NRIs are subjected to a standardized 12.5% rate of capital gains tax on selling property, minus indexation benefits. - What are capital gains bonds?
Ans- They are tax-free interest bonds and a safe method of investing the proceeds of your sale of property. - Can I invest my entire proceeds in NRE Fixed Deposits?
Ans- Yes, you can invest your entire proceeds in NRE Fixed Deposits, which provide a safe return with no tax on interest. - Are mutual funds safe for NRIs?
Ans- Mutual funds involve risk of the market but greater possibilities of return. Diversifying reduces risk. - How can I achieve growth while ensuring the safety of my investments?
Ans- A combination of NRE Fixed Deposits, mutual funds, and bonds has a balance of safety, return, and growth. - What’s the interest paid on capital gains bonds?
Ans- Capital gains bonds yield about 5% these days, though the rate does shift. - Do bonds allow me to avoid capital gains tax if I invest in them?
Ans- No, with recent amendments, you cannot exclude paying capital gains tax, but you can continue to invest in bonds for tax-free interest. - What is the long-term benefit of mutual funds?
Ans- Mutual funds are able to give compounding growth over the years, which could lead to much higher returns than fixed deposits. - How do NRE Fixed Deposits work?
Ans- NRE Fixed Deposits enable NRIs to earn interest on Indian deposits without tax on interest earned. - Can I divide my proceeds among multiple investments?
Ans- You can divide your money among several options, i.e., NRE Fixed Deposits, mutual funds, and bonds, for fulfilling return as well as risk requirements.
Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.
