Savings in India

[EdisonRaj]

Hello,

I want to know if I can save for my son (he is US citizen) in India for his future/college apart from buying a property. 529 plans are yielding much here .. what ever money we put it remains the same. Is there a good plan in the Post Office or LIC or any banks? Please advise.

[Desi]

How old is your son? Where do you anticipate that he will need his education money? In USA, India or elsewhere? Is it fair to assume that you and your son both are located in USA currently? Do you plan to R2I, if so when?

Answers to above are relevant to provide a suggestion with a good understanding of the background.

[EdisonRaj]

Thank you. We are in USA now. Panning to R2I after 4-5 years. We are thinking that he will do his bachelor's in India and if he wants he can do his masters here. I started a 529 3 years back and made only 200 USD gain so far... where as some of my friends bought properties in india and they say the value had gone way up.. I agree...but at the sametime they are saying the property boom is over ..atleast in chennai and banglore.... so I am trying to see what is the best thing to do? any input is highly appreciated.

[Desi]

Thank you. We are in USA now. Panning to R2I after 4-5 years. We are thinking that he will do his bachelor's in India and if he wants he can do his masters here. I started a 529 3 years back and made only 200 USD gain so far... where as some of my friends bought properties in india and they say the value had gone way up.. I agree...but at the sametime they are saying the property boom is over ..atleast in chennai and banglore.... so I am trying to see what is the best thing to do? any input is highly appreciated.[/quote]

If your son is going to go for education in India, then 529 plan is of no use. The 529 plan withdrawals have to be used for only eligible institutions to get their tax exempt status on earnings.

If your son goes for schooling in India, the institutions there are not eligible and your 529 earnings will not only be taxed but will have a 10% penalty on earnings portion when you withdraw.

Chasing booms is not a good way to say for a goal that may only be 5 to 15 years away (I don't know how much away it is since you never provided your son's age).

The proper way to save is to assess the money needed, when it would be needed, develop an AAP based on number of years left to goal, and based on future earnings / savings. Then ratchet down the AAP every year.

Next is to determine, where to invest and in whose name. I would suggest that the bulk of this money be saved and invested in India with a small portion invested in USA.

The AAP would consist of fixed income and equities. For the fixed income portion look at Fixed deposits in India. Whether you choose debt funds with a growth option depend upon in whose name the investment is and if that person is willing to give up USC / GC status if they have it. A USC / GC would be subject to onerous PFIC taxes on foreign investments in Passive Finance companies. Hence for fixed income Fixed deposits may be a good choice. There are some threads that discuss how a USC/GC can invest in debt funds while managing PFIC issues - you may want to search that thread and read.

The equity portion of AAP needs to be distributed between India and rest of the world. The rest of the world investments can be made in USA in Vanguard Mutual funds such as VTSMX and VFWIX. The India equity investments can be achieved in two ways for a USC / GC. Direct investments in a distribution of stocks in India. This is not easy as it requires diversification and differeing amount of investment in many stocks and the method is not conducive to dollar cost averaging. The other approach is to invest in USA in MINDX.

As to non USC / GC, they can buy equity funds in India directly with growth option.

Of course, one other way is that if a trusted grandparent is a non USC/GC, then invest in that person's name with the child or parent as nominee (even this carries a risk related to PFIC which can be minimized by selling and buying every 15 months the equity funds if there are no to low costs associated with such, which is the case given that no load is charged when funds are directly purchased nowadays in India).

[dink]

Hi Desi,

What is the PFIC risk that you talk of, when investing in grand parents name?

Thanks
dink