Home >Money >Calculators >RBI raises limit, invest or spend more abroad

In its sixth bi-monthly monetary policy statement on 3 February 2015, the Reserve Bank of India (RBI) doubled the Liberalised Remittance Scheme (LRS) for resident individuals to $250,000.

Under LRS, resident individuals are allowed to remit a certain amount of money during a financial year to another country. This money can be used to pay expenses related to travelling, medical treatment or studying. Apart from this, the remitted amount can also be invested in shares, debt instruments, and be used to buy immovable properties in overseas market. Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.

The limit under LRS was reduced to $75,000 from $200,000 in 2013 as a macro prudential measure to curtail foreign exchange outflow and support the rupee. According to RBI data, outward remittances under LRS in financial year 2013-14 was $1,093.9 million. This is now likely to go up, as had happened when the limit was raised to $125,000 in June 2014 from $75,000.

The most recent change by RBI is based on its review of the external outlook and as a further exercise in macro prudence.

Investing options

There are different overseas avenues in which one can invest—shares, mutual funds, debt instruments, immovable property, and others. Do these make investment sense in the present scenario?

“One should look at investing in overseas markets as it helps in currency diversification," said Feroze Azeez, director and head—investment products, Anand Rathi Private Wealth.

However, investment in overseas market is not common and very few people remit money for investments. RBI data indicates that most people remit money as gift, maintenance of close relatives or for education abroad. Of the total remittance in FY14, 55% was directed towards these three purposes; 15% was for investment in equity and debt instruments; and 5% for immovable properties.

If one has to invest in an overseas market, said Azeez, “it has to be equity. Investors should use platforms that allow investment in funds in different markets. Real estate does not make sense as investors will not be able to leverage."

Weighing realty

Some feel that investing in overseas real estate market is a good way to diversify the risk in a portfolio. Suresh Sadagopan, a Mumbai-based financial planner, said: “Real estate investment abroad is a diversification away from India, and in that sense, it is good. But it’s best suited for high net worth and savvy investors; it’s not for everyone."

Buying property abroad is “for those who have the objective, the utility as well as reason to invest," said Gulam Zia, executive director, Knight Frank India. Why you are buying abroad, is an important question to answer. “Typically, people buy properties in countries where they have business interest, children studying there or relatives," said Anshuman Magazine, chairman and managing director, CBRE South Asia Pvt. Ltd.

Investing in real estate is difficult, and one should have proper knowledge of the property market of the destination country or the city. Besides that, understanding of the local market is also important.

While investing in an overseas real estate market you not only expose yourself to the risk associated in that country’s realty market but also to currency risk. “Investing in a mature market is different from doing so in the Indian real estate market. India is an emerging market where we see continuous flow of new investors and buyers, whereas in mature markets, liquidity is a big concern as new buyers are very limited,"said Magazine.

In terms of returns, the domestic market is expected to deliver better than overseas markets. “Generally, 14-15% returns per annum is what an investor should expect from a real estate investment, which is out of the question in mature real estate markets," said Zia.

Moreover, even though the LRS limit has been raised, buying property in prominent global cities is difficult. “Indians mostly buy properties in London, Singapore and the UAE (United Arab Emirates). But property ticket size is bigger in London and Singapore, and even though one can consider investing in the UAE, market risk is higher there," said Zia.

Beyond returns

So before you get ready to invest in an international market, make sure you understand the associated risk. Compare the returns potential in India and the other country. Also, look at the tax implications on the returns before you decide to invest. It might be that you have to pay tax on the income earned in both the countries, which will further dent your returns.

(Rajesh Kumar contributed to the story).

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