This article was first published on livemint.
Many of my Indian friends have invested in house property in India. Should I also do it?
Housing or real estate was a popular mode of investment for non-resident Indians (NRIs) till five years ago. High capital appreciation seen in the last decade along with monthly rental income had been an attraction towards investment in housing. Your friends might also have been excited by the social pride which owning home(s) brings in India. These factors contributed to home buying frenzy by NRIs so much so that they became the biggest target segment for builders.
However, the real estate market has given poor returns over the last 7-10 years depending on the micro-market. Housing prices have either fallen or remained flat in top cities, while the rentals have stagnated. Moreover, the prices are not expected to go up in the next 5 years, given the supply overhang. Before investing, you should remember that real estate is an illiquid investment. If you need to sell the property urgently, be prepared to sell at a discount of 10-20% over the market price. Also, investing in housing comes along with the hassle of maintaining the property. You must also ensure that the property does not lie vacant. Even if a property stays vacant for 2 months, you lose out significantly, while continuing to pay maintenance charges. The expenses to hire an agent to rent out or maintain your property diminish returns from your investment.
My bank manager has been asking me to invest in rupee-denominated bank deposits. Is it a good investment?
Rupee bank fixed deposits (FDs) have been a popular option of investing for NRIs. FD interest rates have fallen to 6% levels in the last 1 year diminishing their attractiveness. Income tax rules for NRI FDs differ from those for deposits by resident Indians. While no income tax is applicable to NRE (non-resident external) FD accounts, interest on NRO (non-resident ordinary) FDs is taxed at the individual’s marginal income tax rate in India. You should note that banks deduct tax deducted at source (TDS) at 30% on the interest earned from NRO FD. This also reduces the money available for reinvestment effectively lowering returns in the medium to long-term.