Author: VNN Wealth

Picture this: You’re sipping a warm cup of coffee with your loved ones, knowing that a steady stream of income is flowing into your bank account. Even better if you don’t have to work for it.

This vision of financial independence is achievable through smart investments. You can generate a steady stream of income for your retirement or simply have passive income for your family.

Two of the popular options investors explore to generate regular income are:

1. Real estate investments for rental income
2. Income from mutual funds via systematic withdrawal plan (SWP)

In this blog, we will discuss both these options in more detail, exploring how they work, how much initial investment is required, and what their advantages and drawbacks are.

Generating Income Through Real Estate

Real estate investment involves purchasing a residential or commercial property. As it’s a tangible asset, you own it in a physical form.

In order to generate consistent income from it, you ideally have to rent out your property with a long-term lease agreement.

The rental income depends upon many factors such as rental yield in the area, property’s condition, and market demand.

Generating Income Through Mutual Funds

Mutual funds are a collection of stocks, bonds, gold, and international equity. You can invest in mutual funds that align with your risk appetite and financial goals.

The ideal way to generate income from mutual funds is to invest for a long horizon, let the money compound, and then start a systematic withdrawal plan. A Systematic Withdrawal Plan (SWP) allows you to set an amount and frequency at which you’d like to receive income. The fund units worth the amount you’ve chosen will be sold and the amount will be transferred to your savings account.

Now, we will compare real estate vs mutual funds for monthly income against various parameters.

Real Estate vs Mutual Funds for Monthly Income: Detailed Comparison

Let’s take an example: Vikas wants to generate INR. 50,000 monthly income. He’s exploring both the options- rental income and SWP. Let’s help him figure out what makes more sense…

1. Initial Capital Requirement

Real Estate

Your initial investment will vary based on the location, type of real estate property, size, amenities, etc. The rental income depends upon the rental yield in the area. In India, the residential rental yield ranges from 2 to 4%. Here’s a snapshot of the rental yield in different cities in India.

City	Rental Yield
Delhi NCR	2.79%
Bangalore	3.45%
Mumbai	2.44%
Ahmedabad	3.22%
Chennai	3.10%
Hyderabad	3.16%
Pune	3.09%
Kolkata	3.96%

Let’s take 3% for the sake of understanding.

For Vikas to generate an income of INR 50,000 from residential real estate, he’ll have to purchase a house worth 2 crores.

Property value = Annual rental income (50000 x 12) / rental yield (0.03- converted into decimal) = 600000/0.03= 2 crores

Now let’s say Vikas pays a 20% downpayment, which is 40 lakhs, he’ll have to take a home loan for the remaining amount i.e. 1.6 crores.

With an 8% home loan rate and 20 years of tenure, his EMI becomes 1,33,830. Even if he generates a rental income of INR 50,000, he will still have an expense of INR. 83,830.

On top of that, Vikas will have to pay the cost of home ownership. Brokerage (1-2% of the total value), stamp duty (4-7%), registration fee (1%), parking space (~10k/month), maintenance charges (varies as per location and amenities), etc.

Mutual Funds

On the flip side, Vikas will only have to invest 50 lakhs in mutual funds to generate INR. 50,000 monthly income.

Mutual funds deliver superior returns compared to real estate. For the sake of calculations, it’s better to be conservative. So we’ll take 12% p.a. as the average return on your mutual fund investment over a longer horizon.

Investment amount = Annual income (50,000 x 12= 6 lakhs) / 0.12= 50 lakhs

The same income can be drawn from mutual funds via SWP by investing only 50 lakhs instead of 2 crores. Plus, while you withdraw monthly 50K, your remaining amount keeps compounding, so you can keep withdrawing 50K/month for the next 20 years, at least.

With mutual funds, Vikas has an option to invest a small amount via SIP to gradually build his wealth.

Monthly SIP Amount	Average Return p.a.	Investment Horizon	Wealth Accumulated
20,000	12%	20 years	1,99,82,958

Total Wealth Accumulated in Mutual Funds	Average Return p.a.	Monthly Regular Income via SWP	Years of Regular Income
1,99,82,958	12%	1,00,000	20

This example is only for the sake of understanding. Parameters like initial investment amount, investment horizon, and average rate of return may change the calculations.

2. Risk and Return Profile

Real Estate

Real estate investment is usually less risky than mutual funds. Market fluctuations have little impact on real estate. However, you may also face a risk of vacancy, tenant default, holdover tenancy, legal disputes, maintenance issues, etc. Additionally, there’s a chance of depreciation in property value during the economic slowdown.

Real estate delivers potential returns from rental income and property value appreciation. You can expect about 8% to 10% p.a. average return on real estate investment in 10 years. It varies depending on the city, property conditions, economic conditions, etc.

Mutual Funds

Mutual funds have a certain risk associated with them based on the category and market movements. You can invest in mutual funds based on your risk appetite and financial objectives. Take our risk profiling quiz to understand the equity and debt exposure suitable for you.

The return on your mutual fund portfolio depends upon the type of scheme, investment horizon, market conditions, etc. Mutual funds deliver superior returns in a longer horizon despite market volatility. You can expect 12% p.a. average returns in 10 years. You can even generate 2% to 5% returns over and above average if you periodically review your portfolio and optimize it to generate benchmark-beating returns.

India Residex House Price Index vs Nifty 50 (2014 to 2024)

Residex has grown by 47.4% between 2014 to 2024, whereas Nifty has grown by 301.2%. Evidently, you’ll make better returns from mutual funds compared to real estate.

3. Liquidity and Accessibility

Real Estate

Real estate investments are less liquid compared to mutual funds. The property sale takes a lot of time. You’ll have to go through the hassle of property transfer paperwork and the cost associated with it. Plus, you may not get the price that you’re looking for. It’s not as easy as redeeming mutual fund units. You have to go out, sit through the negotiations, and handle the transactions.

Additionally, you have to spend a lot of time finding a good property. It requires evaluating the location in person before making a decision. It’s not easily accessible. So if you ever need funds for an emergency, real estate is not reliable.

Mutual Funds

Mutual funds are highly liquid and accessible online. You can invest and withdraw anytime you want. There’s no lock-in period except for ELSS mutual funds which carry a 3-year lock-in period for the purpose of tax-saving.

Otherwise, you have all the freedom and flexibility to decide the time and amount of investment/withdrawal. When you plan to start an SWP to withdraw income from mutual funds, you can automate the withdrawal amount, frequency, and date. The funds will start flowing into your bank account as per your preferences.

Plus, partial withdrawal is possible in the case of mutual funds which is not an option in real estate. In case of emergencies, you can sell some units of mutual funds, whereas, you cannot sell half your house.

4. Management and Maintenance

Real Estate

Managing and maintaining real estate property requires a lot of your attention. It’s a never-ending loop of ensuring the property is clean and functional. Following up with tenants and making sure they’re following society’s regulations. In some cases, tenants may not leave the property, causing a dispute. Be it residential or commercial, real estate investments demand your time and attention at all times.

Mutual Funds

Apart from periodic monitoring, you don’t have to look into managing your funds. Mutual fund houses have dedicated fund managers who are experts in handling all the transactions. Fund managers make decisions on the stocks to include in a scheme to leverage market opportunities. All you have to do is invest and let your money compound over the years. Once you achieve your financial goal, you can start/stop SWP anytime as per your income requirements.

5. Inflation Protection

The inflation rate in India is around 6 to 7%. The rate of inflation affects your effective return on investment.

Considering the above data:

	Avg Return p.a.	Inflation	Effective Return
Real Estate	8 to 10%	6%	2 to 4%
Mutual Funds	12 to 15%	6%	6 to 9%

In the case of rental income, you can increase the rent by 5 to 8% every year. However, your post-tax returns taking inflation into account cannot beat mutual funds. Mutual funds have the potential to deliver benchmark-beating, inflation-beating returns.

Here are some examples of funds from three different categories outperforming the index:

Nippon India Small Cap 10Y Return Against Nifty Smallcap 250

	Fund NAV	Index Closing Value
10 Jan 2014	12.22	6278.90
12 Jan 2024	141.13	20906.40
Growth	1055.4%	232.9%
CAGR	28.4%	12.8%

ICICI Prudential Bluechip Fund 10Y Return Against Nifty 100

	Fund NAV	Index Closing Value
15 Jan 2014	20.52	6171.25
15 Jan 2024	98.83	21508.85
Growth	381.7%	248.4%
CAGR	17.2%	13.2%

Quant Multi Asset Fund 10Y Return Against S&P BSE 200 & Short Term Bond Fund Index & iCOMDEX Composite Index

	Fund NAV	Index Closing Value
16 Jan 2014	20.05	6241.85
15 Jan 2024	117.55	21441.35
Growth	486.4%	243.5%
CAGR	19.4%	13.0%

As you can see, these funds have beat their respective benchmark. The chances of earning more than the average returns are possible with mutual funds.

6. Tax Implications and Exemptions

Real Estate

1. Rental income is taxed as per the investor’s tax slab.

2. If you sell your property after 24 months, you will have to pay long-term capital gain tax. As per budget 2024, you can either opt for old taxation or new taxation, whichever attracts lower tax for you. As per the old tax rule, the long-term capital gains will attract a 20% tax with an indexation benefit. The new tax rule does not offer an indexation tax rule but the long-term gains will be taxed at 12.5%. You can get an exemption on capital gain tax by investing in 54EC bonds within 6 months of property sale/transfer.

3. You can claim an exemption on interest paid on a home loan up to a maximum of 2 lakhs under section 24. In the case of a let-out property, you can claim an exemption against the entire interest paid.

Mutual Funds

For equity-oriented mutual funds:
Short term capital gain tax of 20% will be applicable on funds withdrawn within 12 months of investment.
Long-term capital gain tax of 12.5% above 1.25 lakhs will be applicable on funds withdrawn after 12 months.

For debt-oriented funds
Both short and long-term capital gains will be taxed as per the investor’s tax slab.
You can claim exemption against ELSS mutual fund investment of up to 1.5 lakhs under section 80C of the IT Act.

Real Estate vs Mutual Funds: Quick Snapshot

	Real Estate	Mutual Funds
Asset type	Tangible. Physical property.	Intangible. Units of mutual funds that are a combination of stocks and bonds.
Initial Investment Amount	Higher	Lower
Return on Investment	Rental income, price appreciation Average 8 to 10% p.a.	Capital gains and dividends. Average 12 to 15% p.a.
Liquidity	Low	High
Risk	Market slowdown, tenant default, legal disputes, maintenance, vacancy issues, etc.	Market performance
Management and Maintainance	High and costly	Professional management by fund houses. Low maintenance.

Which Option Should One Choose for Monthly Income: Real Estate or Mutual Fund?

Real estate has always been a popular investment option in India. Even today if you ask your parents or grandparents, they’ll advise you to invest in real estate. Their advice comes from an era when mutual funds weren’t regulated. The UTI mastershare fraud had broken people’s trust in mutual funds. Therefore, they preferred physical assets such as gold, real estate, cash savings, etc. Plus there’s a sentimental value attached to buying a property, mostly because it seems safer. You own a tangible property and control everything around it. And sure, if you’re insistent on buying a home to secure your family’s future, to have a place to call your own, you can definitely consider buying one.

But for the sake of generating income, mutual funds are better suited. Now SEBI regulates mutual funds to ensure investors’ money is safeguarded. You can invest as per your risk appetite, decide the amount and frequency, and let the fund managers handle the fund’s growth while your money compounds.

The clear winner here is the systematic withdrawal plan.

Conclusion

Investors often consider purchasing property to generate passive income without assessing their overall portfolio. However, mutual funds are clearly more feasible to generate regular income. The initial capital required to invest in mutual funds is significantly lower than in real estate. Plus, the cost of home ownership, the time and energy required to maintain the property, the slow growth, and low liquidity make real estate less appealing.

Mutual funds are highly liquid. You can start investing a small amount by SIP and accumulate wealth over the years. When you’re ready to withdraw income, you can easily set up an SWP online. Unlike real estate, mutual funds have the potential to deliver benchmark-beating, inflation-beating returns if you truly diversify your portfolio and periodically optimize it.

Ready to Generate Regular Income?

Take a risk profiling quiz and review your portfolio today. Learn more about the Systematic withdrawal plan from our experts and revamp your portfolio to generate monthly income.

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A volatile market is like a roller coaster. Your portfolio rides through the dynamic financial markets, experiencing thrilling peaks, sudden twists, and unexpected turns. Those rapid highs and nerve-racking lows can be unsettling. The anxiety and uncertainty about the future can lead to portfolio destructive actions.

But…

Market movements are inevitable. Even the most seasoned investors cannot accurately time the market every single time. The only solution to achieve financial security in a volatile market is to have a solid investment strategy. In this blog, we will provide actionable steps to achieve financial security in the ever-changing landscape of financial markets.

Understanding Market Volatility

Market volatility is the degree to which the prices of financial assets change over a period of time. Numerous factors affect market movements such as:

1. Shift in the supply and demand.
2. Economic conditions, GDP growth rate, inflation rate.
3. Political instabilities, elections.
4. Geopolitical events like wars, and international conflicts.
5. Changes in government policies.
6. Natural disasters and pandemics.

Let’s take an example of COVID-19. Nifty fifty dropped by ~18.65% between Feb 28 to April 9, 2020. However, Nifty 50 experienced a boost of 124% from April 2020 to Oct 2021.

As you can see in the Nifty 50 chart below, the market rallied up soon after every crisis.

Elections are another example of sudden market movements. The stock market goes through a bull run leading up to the market and corrects during/after the elections. The average returns a year before and a month before the elections are 29.1% and 6% respectively. You can observe the impact of elections on the stock market here.

Events like these can trigger panic-selling or impulse-buying, destroying your investment strategy. It is important to stick to your strategy despite the market volatility. That way, you can still achieve your financial goals in time without worrying about short-term pitfalls.

Now let’s dive into a step-by-step guide to maintain a strong investment strategy to achieve financial security.

Step 1: Assess Your Current Financial Situation

The first and very crucial step before putting together an investment plan is to evaluate your financial health. Here’s a simple check-list:

Review your assets and liabilities

Regularly monitor your assets such as savings across all bank accounts, your investments in stocks, mutual funds, FDs, real estate, etc. Keep track of your expenses and liabilities like mortgages and loans.

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Calculate your annual income

Derive your annual income based on your salary and income received from your investments in the form of interest, dividends, rental income, capital gains, etc. Keep all your financial statements in handy for accuracy.

Analyze your expenses

You can use simple tools like Excel to analyze your monthly expenses. Nowadays, bank applications also provide a spend analyzer feature. You can download the report to understand your expenses in various categories.

Putting together your finances will help you construct a plan. You can consider hiring a financial advisor to navigate the complexities of finances. Experts at VNN Wealth are always just a call away.

Step 2: Ensure Portfolio Diversification

A diverse portfolio is the key to lowering the risk of market volatility. It involves spreading your investments across various asset classes to balance your portfolio. Once you know how much money you want to invest, you can explore instruments that align with your risk profile. Take a risk profiling quiz to know the percentage of equity and debt you must hold in your portfolio.

Different Ways to Diversify Your Portfolio

Asset Class Diversification: Invest across different asset classes such as stocks, bonds, real estate, gold, etc. To begin with, you can invest in multi-asset funds that offer instant diversification. For example, ICICI prudential multi-asset fund.

Geographic Diversification: Introduce geographic diversification by investing in international investments. You can explore mutual funds with exposure to international stocks. For example, Motilal Oswal Nasdaq 100 Fund of Fund, SBI International Access – US Equity Fund of Fund. Or buy direct stocks of international companies such as Amazon, NVIDIA, Facebook, Google, Apple, and Netflix.

Sectoral Diversification: Diversify your investments across various sectors such as the solar energy sector, technology, healthcare, pharma, Auto, Cement, Telecom, Financials, etc. You can consider investing in sector-specific mutual funds such as Nippon India Banking and Financial Services Fund, and Franklin India Technology Fund.

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Importance of Asset Class Diversification

Take a moment to examine the table below.

[Data Source: Bloomberg]

As you can see, every asset class goes through its own ups and downs in changing economic conditions. For example in 2022, gold performed better than equity but the scenario was reversed in 2021. A proper asset allocation is crucial to avoid dependency on a single asset class. That way, the poor performance of one asset class can be overcome by other well-performing asset classes.

Step 3: Build an Emergency Fund

While your investments grow over the years, an emergency fund is your safety net. It offers financial security amid volatile market. Instead of panic-selling your investments during market volatility, give them time to grow. You can rely on your emergency fund for the time being.

How much should you save in an emergency fund?

Aim to save a year’s worth of emergency savings in an easily accessible account. Calculate your monthly expenses and multiply the amount by 12. That amount covers your living expenses for a year. Keep it on standby to utilize for an absolute emergency.

Strategies for building and maintaining an emergency fund

Set a goal

Having a specific goal helps you stay on track. Define a specific amount each month to put aside. Alternatively, you can dedicate a lump sum amount that you won’t be utilizing anytime soon. Ensure you have 6-12 months of expenses sorted at all times.

Create a system

Many investors prefer keeping an emergency fund in a savings account. While there’s nothing wrong with it, it’s not sustainable. You might end up using those funds due to easy access.

Instead, park your money in liquid funds like Aditya BSL Liquid Fund, Bandhan Liquid Fund or short-duration debt funds such as Mirae Asset Ultra Short Duration Fund, and ICICI Prudential Ultra Short Term. Debt funds generally offer better interest rates than savings accounts. Plus, you won’t withdraw these funds as easily as you would from your savings account.

Below is a snapshot of different categories of debt funds with current yield and tenure.

Keep track of your emergency fund

Make sure you keep tracking your emergency fund. Whether you choose to automate your contributions or manually transfer funds, periodically monitor your progress.

Step 4: Regularly Review and Adjust Your Financial Plan

Economic conditions and financial markets always change. Therefore, you must periodically review your portfolio to align it with the changing market conditions.

Key factors for regular portfolio review:

Tracking Investment Performance: Regularly track your portfolio’s performance to ensure your investments align with your financial goals. Identify poor-performing investments and replace them with high-yield instruments.
Evaluate Your Risk Profile: Your risk tolerance may change over time. As your expenses and financial situation evolve, you must re-evaluate your risk profile.
Financial Goals and Timeline: Your financial goals such as retirement, children’s education, buying a house, etc. may change with time. Therefore, reviewing your financial goals and adjusting the timeline of your investment is a necessity.

Step 5: Seek Professional Financial Advice

Having a professional financial advisor by your side can significantly fast-track your financial goals. An expert can help you build a benchmark-beating portfolio while navigating through the volatile markets.

Here’s what a professional financial expert can offer:

Personalized Investment Strategies: You can get your portfolio reviewed by an expert. A financial advisor can outline an investment plan catering to your financial goals and risk tolerance. This includes identifying poor-performing investments, readjusting your current investments, and optimizing your portfolio for better post-tax returns.
Risk Management: Risk on your investments is never zero. However, an expert can help you mitigate that risk through portfolio diversification. Investing across various asset classes is crucial to ensure financial security during volatile market.
Tax Optimization: You cannot avoid taxes but you can certainly reduce your tax liability. A dedicated financial advisor will suggest suitable tax-saving instruments to minimize tax liability and maximize post-tax returns.
Exclusive Investment Opportunities: A financial advisor can bring exclusive investment opportunities to the table. For example, unlisted shares. A lot of investors are unaware of such opportunities. Below are some of the unlisted stock opportunities we opened up for our clients, delivering excellent returns.

Long-Term Financial Planning: A long-term financial plan lowers the short-term risk of a volatile market and amplifies your wealth. A financial advisor can help you plan and achieve long-term financial goals such as retirement planning, estate planning, legacy building, etc.
Tip: Choose a financial advisor with relevant experience, proper licenses, and a good reputation.

Step 6: Maintain a Long-Term Perspective

Growth demands time. You cannot expect your money to grow overnight. To achieve your financial goals, you have to think long-term. Don’t focus on the short-term loss, focus on the long-term growth. Note that every market crash is followed by a market rally. What you invest today is bound to grow in five years.

Build a long-term financial mindset by:

Setting clear goals and sticking to them: Setting goals is not enough. You have to stick to them to let the strategy play out in your favor. Prefer goal-based investing so that you don’t have to think about short-term decline in your portfolio.

Keep your emotions in check: Fear and greed can lead to either panic-selling during a market crash or impulse buying during a market rally. Both of which can crumble down your overall portfolio. Don’t check your portfolio movements every day. It’ll only make you anxious. Follow your investment strategy with discipline and you’ll achieve your goals in a defined time.

Don’t try to time the market: It is impossible to time the market as it won’t always work in your favor. You could end up getting it wrong more times than right. Instead, seek guidance from your financial advisor on navigating market volatility.

Conclusion

Achieving financial security in a volatile market is possible with a robust investment strategy and disciplined approach. Assess your financial situation and set achievable goals. Ensure your investment portfolio is truly diverse by investing across various asset classes and sectors. The right mix of assets avoids dependency on a single class.

As you execute your investment strategy, don’t forget to establish a safety net. Set aside a year’s worth of expenses as your emergency funds in an easily accessible account or in liquid funds. The emergency fund will prevent the need for panic-selling during emergencies, allowing your investments to grow.

Prioritize long-term growth rather than short-term volatility. Stick to your strategy and periodically review your portfolio to re-align it with your financial goals. That way, you can surpass short-term volatility and come out on the other side with a solid portfolio.

Seeking Financial Guidance?

Every investor’s risk appetite and financial preferences are different. Therefore a single strategy to achieve financial security in the volatile market cannot fit all. VNN Wealth can provide you with a comprehensive portfolio analysis and a personalized investment strategy catering to your financial goals. Visit our website to explore financial products. You can also browse our blogs for insights into the world of finance.

Book a consultation call today.

When it comes to tax-efficient investment instruments, ELSS and ULIP are two of the popular options. Both Equity-Linked Saving Schemes and Unit-Linked Insurance Plans offer dual benefits of investment and tax deductions.

However, both products cater to different financial goals. Let’s break down the key features of ELSS and ULIP to help you choose the right tax-saving instrument.

ELSS vs ULIP: Detailed Comparison

What is ELSS?

Equity-Linked Saving Scheme (ELSS) is a type of mutual fund that invests at least 80% of the total assets in equity or equity-related instruments. With 3 years of lock-in period. These funds offer tax deductions of up to INR. 1,50,000 under section 80C of the IT Act.

What is ULIP?

Unit-Linked Insurance Plan (ULIP) is a combination of investment and insurance. Part of your premium goes towards investment and the other part towards insurance. ULIP investments can be either equity-oriented, debt-oriented, or both (balanced funds). You can choose the ULIP investment type based on your financial preferences and risk appetite. With a 5-year lock-in period, the ULIP premium also offers a tax deduction of up to INR. 1,50,000 under section 80C of the Income Tax Act.

Key Differences Between ELSS and ULIP

1. Investment Objective

ULIP offers life insurance along with an opportunity to grow your money in the market. ELSS, on the other hand, does not offer insurance benefits. ELSS funds and the investment portion of ULIPs are market-linked. Therefore, you get to invest and grow your money in a fund of your choice for the long term.

2. Lock-In Period

ELSS mutual funds only have a 3-year lock-in period. It is the shortest among all the tax-saving instruments eligible under section 80C of the IT Act. Please note that if you’re investing in ELSS via SIP, each installment will carry its own lock-in period. You can withdraw the installments that have completed the lock-in.

ULIP, on the other hand, has a 5-year lock-in period, making it less liquid than ELSS.

3. Flexibility to Switch Funds

ULIP allows you to change your investment strategy by switching between ULIP funds. That way, you can realign your investment strategy with your current financial goals.

Since ELSS is a mutual fund, switching strategy is not an option. However, you can redeem the funds after 3 years and invest in a different ELSS fund as per your preferences.

4. Return on Investment

Being equity-oriented, returns on ELSS funds often outperform returns on other tax-saving instruments. These funds are subject to market fluctuations, however, you can expect decent growth in three years of the lock-in period.

In the case of ULIP, part of your investment goes towards life insurance. Therefore, you only get returns on the remaining amount invested in the market. The associated risk depends upon the scheme strategy that you choose.

The overall returns on ELSS and ULIP depend upon the performance of the underlying assets.

5. Charges

ELSS, like any other fund, has charges such as exit load, and expense ratio. Charges on ELSS funds are lower compared to ULIP.

ULIP schemes involve charges such as premium allocation charges, policy administration charges, mortality charges, fund management charges, and surrender charges.

While ELSS charges are always written in the factsheet, ULIP charges may not be as transparent. It is always advised to review the charges behind any investment instrument to understand the cost of investment and how it’ll affect overall returns.

6. Tax Benefits

Both schemes offer tax deductions of up to INR. 1,50,000 under section 80C of the IT Act. ULIP additionally offers tax exemption on the return under section 10(10D) of the IT Act.

Redeeming ELSS mutual funds after 3 years of lock-in period attracts Long-term capital gain tax of 12.5% above INR 1.25 lakhs.

ELSS vs ULIP: Quick Snapshot of Key Features

Features	ELSS	ULIP
Investment Objective	Equity oriented	Insurance + Investment (Equity, or debt, or both)
Lock-In Period	3 years	5 Years
Flexibility to Switch Strategy	Not Available	Available
Return on Investment	Depends on the performance of the underlying assets, usually more than ULIP as the entire money goes towards equity investments.	Depends on the performance of the underlying assets, usually less than ELSS as the portion of the investment goes towards life cover.
Charges	Exit load and expense ratio are applicable. Transparent Charges.	Premium allocation charges, policy administration charges, mortality charges, fund management charges, and surrender charges are applicable. Lack of transparency in charges.
Tax Benefits	Tax deduction of INR. 1,50,000 under section 80C of the IT Act.	Tax deduction of INR. 1,50,000 under section 80C of the IT Act. Tax-free return upon maturity under section 10(10D) of the IT Act.

ELSS vs ULIP: Which Product Should You Choose?

ELSS mutual funds are ideal for investors seeking tax deductions and have moderate to high-risk appetite. These funds invest predominantly in equity instruments. Therefore, the risk could be comparatively higher, but the returns would be superior.

ULIP is ideal for investors who, apart from tax deductions and wealth creation, also want life cover. ULIP scheme divides your investment into life insurance and market investments. You need to factor in the various costs associated with the ULIP before investing

Ultimately, the choice is yours based on your financial goals.

You can always reach out to experts at VNN Wealth for more information. Book your appointment today!

Navigating through the ITR process might seem overwhelming, especially for NRIs earning income both in and outside India. As per SBNRI’s survey, 73% of NRIs from the USA, UK, and Canada are trying to file ITR. Filing ITR for NRIs includes managing your tax liabilities in your current country of residence and India. Don’t worry, this step-by-step guide will simplify the process for you. Sit back and go through each point carefully to fulfill your tax obligations.

Let’s get started…

An 8-Step Guide to Filing ITR for NRIs

NRIs/PIOs/OCIs must file an ITR in India if their total annual income is more than 2.5 lakhs as per the old tax regime or 3 lakhs as per the new tax regime. Here’s everything you need to know before filing an ITR.

Step 1: Understand Your Residential Status

The primary step is to confirm your residential status. As per the Income Tax Act 1961 guidelines, you are an NRI if:

1. You have stayed in India for less than 182 days during the financial year.
2. Or, You have stayed in India for less than 365 days during the preceding four years and less than 60 days in the relevant financial year.
If you visit India during the year, the 60-day rule mentioned in point 2 will be replaced by 182 days. The same is applicable if you leave India as a crew member or for employment.
Finance Act 2020 Updates:
The 60-day rule mentioned in point 2 changes to 120 days for Indian citizens or people of Indian origin with an income of 15 lakh excluding foreign income. It also states that if an Indian citizen earns more than ₹15 lakh (excluding foreign income) and is not taxed in any other country, they will be considered a Resident in India.

Step 2: Form 26AS to Reconcile Taxes and Income

Form 26AS is an annual tax credit statement that holds information such as tax deducted at the source, tax collected at the source, etc. You can easily view/download Form 26AS on the income tax portal to analyze your financial activities.

Step 3: Calculate Your Tax Liability

In this step, you have to determine your tax liability on your income earned in India. The income includes salary, interest from FDs and bank accounts, rental income.

NRIs will have to pay tax in India for capital gains earned from stocks, mutual funds, etc. The tax rate depends on the type of instrument and the duration of the investment.

While filing your taxable income, you can also opt for various deductions with your tax-saving instruments. For example, you can claim a deduction of up to 1.5 lakhs under section 80C of the IT act against ELSS mutual funds, Tax Saver FD, Public Provident Fund account, etc. You can invest in various tax-saving instruments to reduce your taxable income in a current financial year.

Step 4: Claim Double Taxation Relief

This is a very crucial step while filing ITR for NRIs. Depending on your residential status, you are obliged to pay tax in India on global income. Fortunately, India has signed a treaty with more than 85 countries to help NRIs avoid paying double taxation.

The Double Taxation Avoidance Agreement (DTAA) offers three methods:

1. Get tax credit against the tax paid in the resident country and claim it in India while filing ITR.
2. Certain types of income are eligible for exemptions. You can obtain a Tax Residence Certificate to qualify for the exemption.
3. You can also opt for the deduction method which allows you to deduct taxes paid in the foreign country.

Step 5: Select the Accurate ITR Form to Fill

Individuals with NRI status must fill out either an ITR-2 or ITR-3 form.

ITR-2 is applicable for residents or NRIs not having income under the head Profits and Gains of Business or Profession.

ITR-3 is applicable for residents or NRIs who have income under the headings of profits and gains of business or profession.

Make sure you fill out accurate details of your income and exemptions. Refer to the in-detail manual of filing ITR provided by the income tax portal.

Step 6: Provide Your Bank Details

You must provide a bank account to receive a tax refund (if any). You can either provide an Indian bank account or a foreign bank account as per your situation.

Step 7: Provide Your Asset and Liability Details

You are required to declare all your assets (movable and immovable) and liabilities if your total earnings exceed INR. 50 lakhs. In this step of ITR filing for NRIs, you must report all your assets and liabilities.

Step 8: Verification of Your ITR

After a roller coaster of filing ITR, you can upload your NRI income tax return. Cross-check all the information before submitting the form. Make sure to verify the form within 120 days. Please note that your ITR will be marked as invalid if you fail to verify it within 120 days.

Important Documents to Keep in Handy While Filing ITR for NRIs

1. Passport to prove the duration of your stay in and outside India.
2. Overseas employment contract (if any).
3. All your financial statements, including your investments.
4. Form 26AS for annual tax statements.
5. TDS certificates.

Conclusion

Filing ITR for NRIs isn’t as confusing as it appears. By following the above-mentioned steps, you can easily fill out the ITR form. Keeping your documents in handy will ease the process. Make sure you fill in accurate details. With the help of the Double Taxation Avoidance Agreement, it has become easier for NRIs to invest in Indian markets.

Explore the top 5 investment avenues in India for NRIs.

Paying tax in one country is daunting in itself, let alone in two. This is one of the primary concerns for NRIs every year while navigating finances in their country of residence and India. Thankfully, India has a Double Taxation Avoidance Agreement with 85+ countries. Non-resident Indians residing in these countries can avoid paying double taxes on their income.

In this article, we will delve into the Double Taxation Avoidance Agreement and how NRIs can benefit from it.

What is a Double Taxation Avoidance Agreement?

Double taxation occurs when an individual has to pay tax on their income in two countries- the country of residence and the home country. For example, a person working abroad also earns income in India via rent, interest on FDs, etc. In that case, he/she has to pay tax on that income twice, in both countries.

To offer double tax relief for Indians living abroad, India has signed a tax treaty with 85+ countries called the ‘Double Taxation Avoidance Agreement.’ With the help of DTAA NRIs, PIOs, and OCIs can seek exemption for tax they already paid in India while filing an ITR in their resident country.

Methods of Double Taxation Avoidance Agreement for NRIs

DTAA helps NRIs lower their tax liability using three methods:

1. Tax Credit

Non-resident Indians are eligible to utilize tax credits in their country of residence if they’ve paid tax on their income in India. Or, they can claim foreign tax credits to lower their tax liability in India. Let’s say you’re living in the US and have earned $100,000 in salary. You’ll have to pay 22% i.e. $22,000 tax in the US. You’ve also earned INR 5,00,000 as rental income in India. As per the tax slabs in India, let’s assume you owe INR. 1,50,000 in tax. Assuming the currency exchange rate of INR. 85 per dollar, your combined global income will be: INR. 85,00,000 (US income) + INR. 5,00,000 (Rental income in India)= INR. 90,00,000. Your tax liability in India will be approximately INR. 27,00,000. However, you’ve already paid a tax worth INR. 18,70,000 in the US. Therefore, while paying tax in India, you can use foreign tax credits worth INR. 18,70,000 to avoid double taxation on foreign income.

2. Exemption

In the exemption method, you only have to pay tax in the country where you are working on certain types of income. You can obtain a Tax Residence Certificate which allows you to get tax exemption in India on incomes eligible under this method.

3. Deduction Method

This method allows you to claim taxes paid to the foreign government as a deduction.

Documents Required to Claim DTAA Benefits

1. Tax Residency Certificate (TRC): TRC is a crucial document issued by the tax authorities of your country of residence. This document verifies your residential status in the foreign country while filing ITR as NRI in India.

2. Form 10F: TRC may not offer all the information required to claim DTAA. In that case, you can fill the Form 10F online. It’s a self-declaration form to provide the additional information that the TRC lacks.

3. Form 67: NRIs can claim foreign tax credits by filling out Form 67. While paying the tax in India, NRIs can pay tax on global income using foreign tax credits. For example, you’ve received dividend income in the US and already paid tax on it. You can use those tax credits to pay tax on the same income in India.

4. You may also need additional documents such as a PAN card, Passport copy, and Visa copy to claim DTAA.

Note: The process to get relief on double taxation may vary based on your current country of residence. The tax rates and the exemption methods may also vary accordingly.

What Type of Income Comes Under DTAA?

As per the double taxation avoidance agreement, NRIs do not have to pay double tax on the following type of income:

1. Services provided in India.
2. Salary received in India.
3. House property located in India.
4. Capital gains on transfer of assets in India.
5. Fixed deposits in India.
6. Savings bank account in India.

Countries That Have Double Taxation Avoidance Agreement with India

India has DTAA with 85+ countries. The TDS rates for the few are mentioned below.

Country	TDS Rate
USA	15%
UK	15%
Canada	15%
Dubai	12.5%
Oman	10%
Singapore	15%
Malaysia	10%
Spain	10%
Australia	15%
Germany	10%

Conclusion

The aim behind signing the Double Taxation Avoidance Agreement (DTAA) was to provide double tax relief to NRIs/PIOs/OCIs. India has signed the DTAA with more than 85 countries, allowing NRIs to pay a fair tax on their income in two different countries. Non-resident Indians can claim tax exemptions using the combination of methods mentioned above. That way, they do not have to pay taxes twice on the same income.

DTAA has also made it easy for NRIs to invest in Indian markets without having to worry about taxes. NRIs can invest in mutual funds and various other avenues to build wealth in India.

If you’re an NRI seeking investment opportunities in India, contact VNN Wealth. Our experts will provide detailed insights into your investment portfolio. You may like to read a step-by-step guide to filing an ITR as an NRI.

India is the world’s 5th largest economy with a GDP of $3.9 trillion and will reach $5.1 trillion in 2027. (Source). By 2030, India is likely to surpass Japan and Germany to become the world’s 3rd largest economy. Evidently, the Indian economy is rapidly growing and so are the investment opportunities. While Indians are benefiting from these opportunities, NRIs (non-resident Indians) are not left behind. There’s a wide spectrum of investment options in India for NRIs. NRIs can comfortably invest in Indian markets and diversify their portfolio. Here’s everything you need to know.

How can NRIs Invest in Indian Markets?

Non-resident Indians (NRIs) can invest in Indian markets by creating a Non-Resident Ordinary (NRO) or Non-Resident External (NRE) bank account. Having either of these accounts is mandatory to be able to transact in Indian currency.

Experts at VNN Wealth will guide you through the entire procedure, including KYC, after which you can start investing in the following options.

Smart Investment Options in India for NRIs

1. Mutual Funds

Mutual funds offer instant diversification to your investment portfolio. NRIs can invest in mutual funds via SIP or lumpsum, based on their financial goals and risk appetite. You can choose from equity mutual funds, debt funds, or hybrid mutual funds to balance risk-reward.

Equity funds are ideal for long-term investments. Debt funds offer a range of categories from short to long-term investments. Hybrid funds offer the best of both worlds. The rate of return on mutual funds depends upon the fund type and market movement.

Get in touch with experts at VNN Wealth for further guidance.

Note: Some Asset Management Companies (AMCs) may restrict NRIs from USA and Canada.

2. Alternative Investment Funds (AIF)

Alternative Investment Funds offer non-conventional investment options. NRIs can expand their portfolio beyond mutual funds by investing in AIF. AIFs have three categories: CAT I, CAT II, and CAT III. Each category provides diverse investment avenues such as private equity, venture capital, hedge funds, angel funds, etc. AIF CAT III is more popular among investors. You can contact VNN Wealth and our experts will walk you through the procedure.

Read more about AIFs.

3. Unlisted Shares (Pre-IPO Stocks)

Unlisted shares are gaining popularity among investors. NRIs can also buy shares of a company that hasn’t been listed yet. Unlisted stocks are traded off the market (Over-the-counter market). Therefore, it can be tricky to identify promising stocks.

VNN Wealth has handpicked unlisted shares with a good track record. These stocks are less volatile compared to the listed stocks as they’re not frequently traded.

Investing in unlisted shares unlocks the following benefits:
1. Guaranteed allocation if the company goes live on the stock exchange via IPO.
2. Pre-listing gains right before the company goes live.

NRIs can consider parking some of their funds in these shares to further diversify their portfolio.

4. Fixed Deposits

The good old FD is always worth looking into. While the return may not be as superior as the avenues listed above, it’s safe and can accumulate wealth over a period of time. NRIs prioritizing safer investments along with steady interest income can consider fixed deposits.

Here are three ways NRIs can create an FD:

1. Non-Resident Ordinary (NRO) Fixed Deposit allows you to invest your Indian income such as rental income, dividends, pension, etc.

2. Non-Resident External (NRE) Fixed Deposit converts your foreign currency into Indian currency to invest.

3. Foreign Currency Non-Resident (Banks) Fixed Deposit is a term deposit account. You can maintain and invest funds by transferring from your NRE account.

5. Portfolio Management Service (PMS)

Portfolio Management Service (PMS) provides tailor-made investments for HNIs. NRIs seeking personalized investments can also opt for PMS. A dedicated portfolio manager makes decisions on your behalf to optimize your investments & maximize returns. The minimum investment requirement for PMS is INR. 50,00,000. You will have to transfer the entire amount to the PMS house. Or, you can transfer your existing portfolio to the PMS house. If your portfolio is worth less than INR. 50 lakhs, you can invest the remaining funds by transferring the amount.

PMS helps you keep track of your stock, ESOP, and other asset holdings. The portfolio manager leverages market opportunities to deliver superior returns on your investments. You can directly communicate with the portfolio manager to gain insights. Read more about when is the right time to opt for PMS.

Taxation for NRIs

Taxation is an important factor to consider while investing. Tax rules for NRIs are similar to the Indian residents with slight exceptions.

The tax implications will depend upon the investment avenue and the investment horizon. The most important thing is to avoid double taxation. Make sure your country of residence has a Double Taxation Avoidance Treaty (DTAA) with India. You must also file The Foreign Account Tax Compliance Act (FATCA) self-declaration.

Also read- Mutual fund taxation for NRIs in India.

How Can NRIs Benefit From Investing in India?

1. NRIs with funds lying idle in India can invest without moving funds out of India. This will generate steady income for themselves or dependant parents in India.

2. NRIs returning with foreign assets can explore investment opportunities in Indian markets to amplify wealth.

3. NRIs planning to return to India after retirement can build a solid retirement plan by investing funds in various assets

Final Thoughts

India is likely to overtake Japan and Germany to become the 3rd-largest economy in the world. Sectors like Auto, Cement, Telecom, Financials, etc will significantly contribute to the growth. NRIs can explore plenty of investment options in India across various sectors and expand their portfolio.

A wide range of investment instruments, such as mutual funds, AIFs, unlisted shares, and FDs, are easily accessible. Savvy Non-resident Indian investors can also opt for Unlisted Shares/Pre-IPO to help generate that extra alpha on their portfolio. Make sure you evaluate your risk appetite and align your investments with your financial goals.

For more insights and guidance, contact VNN Wealth, and our experts will streamline your investments.