Gift a monthly income! A number of Non Resident Indians (NRIs) that we at Personalfn interact with have a desire to provide regular income for their parents and/or other family members back in India. Some wish to provide regular financial support to a charitable cause. In this note we discuss several ways in which you can fulfill your desire, with minimal investment of time! Let’s take an example. You are an NRI based in say the Middle East. Your parents reside in India; they are dependent on you for meeting their expenses to the extent of about Rs 40,000 pm (Rs 480,000 per year). How do you provide for this?
# Annual return There are two possible solutions. One, that allows the capital that is invested to be repatriated in the future; and two, where the capital is transferred/gifted to the resident Indian parents in which case repatriation is not possible. In the second solution, there are two options depending on whether the NRI’s parents are senior citizens or not. First, let’s discuss the solution which allows for repatriation. For an NRI who wishes to invest funds on a repatriable basis, the investment options are limited. In fact, with a view to generate regular income, there are only two options – NRE deposits and Monthly Income Plans (mutual funds). Indeed, returns from MIPs tend to be volatile over the short-term and therefore it may be wise to opt for a quarterly dividend option as opposed to a monthly dividend option. Over a period of time, MIPs will more than make up for the volatility by generating higher returns. Our recommendation – go in for well managed MIPs that have no more than 20% of their funds invested in the stock markets. Our solution suggests that the NRI in our case study will need to invest slightly over Rs 8 m to generate the targeted income. Indeed, the income on his investments will not be constant every month but over a year one can expect him to meet the target of generating the desired annual income. The income (from dividend / interest) will be credited to the NRI’s designated bank account; the same will then need to be transferred to the account of the parents at regular intervals. As it will turn out, this is the most inefficient solution from NRI’s perspective; both in terms of returns as well as the inconvenience of transferring the funds at regular intervals. However, if repatriation is a factor that cannot be compromised with, this is what one will have to go for. It is important to note that Small Savings Schemes (including Post Office Monthly Income Scheme and National Savings Certificate) and 8% Savings (Taxable) Bonds (earlier called Relief Bonds) are no longer available to NRIs as an investment option. Otherwise, some of these post office schemes would have definitely formed a part of any solution that is aimed at generating regular income. If repatriation were not an issue, the investment options increase dramatically. In this scenario, the money can be gifted to the parents (blood relatives, and therefore no tax incidence) who can then in turn invest the funds. As Resident Indians they can also invest in the very attractive Small Savings / Post office schemes. In this solution, we consider two options – where the parents are senior citizens and another where they are not. In case the parents are not senior citizens, they are exempt from tax on income upto Rs 235,000 pa (Rs 100,000 for the father; Rs 135,000 for the mother). This is an important input from the perspective of building a tax efficient portfolio. The first scheme we consider is the Post Office Monthly Income Scheme (POMIS), which offers an attractive return of 8% pa, payable monthly (and a 10% bonus on maturity). The only drawback in this scheme is that there is a limit to what a couple can invest – Rs 600,000. The other assured return instrument is the Relief Bond, which pays an interest of 8% pa, on a half-yearly basis. The allocation to this scheme is made to the extent the tax free income limit is not exhausted (Rs 235,000 less the interest income from the POMIS). The rest of the allocation is made to the MIPs.
# Annual return In this option, the desired annual income is generated with a much lower capital investment. The yield of this portfolio is 7.4% pa, as compared to 6.1% pa in the ‘repatriable’ solution. In case the parents are senior citizens, there are still more investment options available. Moreover, the exemption limit for taxable income rises to Rs 360,000 for the couple, giving an opportunity to make the most of the assured return government savings schemes. The highest weightage in a portfolio for senior citizens must go to the Senior Citizens Savings Scheme (SCSC), which offers a very attractive return of 9% pa. There is a cap of Rs 1,500,000 investment per senior citizen, allowing us to allocate the full Rs 3,000,000 to this scheme. Here too the Relief bond allocation is to the extent the tax free income limit is not exceeded (Rs 370,000 less the interest income from the SCSC). Rest of the funds are parked in MIPs.
# Annual return The yield of this portfolio is 8.2%, which is far better than the earlier two solutions. Of course, the main reason for this being the very attractive return being offered by the SCSC. Indeed, a solution for generating a monthly income has to be customised to the needs and profile of each individual. The solutions discussed in this article simply suggest an approach to attaining an objective of gifting a monthly income. Moreover, the tax implications could possibly be far more complicated than what we have taken them to be. Disclaimer – These solutions should be discussed with your financial planner and customised to suit your needs and profile.
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