One Year FI Update | FI in India

Aug 28, 2022

Hey good people! I'm back with a whole lot of updates after a year of FI in India. As always, I'll be going over things in detail. I turned 37 this August.

Below is the link if you’d like a recap of my “Return to India” series…

Nuts N' Bolts

Return To India Series (Part 1)

There's no shortage of posts online with people asking how much one needs for FIRE (Financial Independence / Retiring Early) in India and then responders throwing around random numbers that range from practical to downright stupid. Very few people take the trouble to present an honest account of their FI journey…

4 years ago · CubicleDog

For those in hurry, here's the TLDR of this post…

Basic living expenses (kid's education, accomodation, essential supplies, domestic help, utilities) averaging about Rs. 50K a month.
Very happy with FIRE and enjoying our leisurely private lives.
Not very happy with Bangalore's infrastructure, traffic, air quality, etc. Missing the quiet suburban life and outdoor recreation. I'm beginning to doubt if I’m cool with living in Bangalore long term!

Getting on with my updates now...

Expenses

I don't wanna be a loser that obsesses over spending budgets and tracks every last penny spent. Getting the big picture right is more important to me than closely tracking tiny expenses. With that said, below is the breakdown of expenses we incurred in the last 1.5 years. I did not track it throughout the year, just looked it all up now for the sake of this post.

For those interested in a more detailed breakdown of our expenses, here's a screenshot (Link).

We haven't bought a car yet because our family had an extra car that was sitting unused. That's a big one-time expense we haven't had to incur yet. So if you exclude the one time expenses, our recurring yearly expenses should easily be well under Rs. 10 lac a year. Even if we double our expenses to Rs. 20 lac a year with a fancier lifestyle and vacations, that would still keep us at around $25,000 a year. Assuming a withdrawal rate of 3%, that's sustainable with our current net worth. I feel secure about our finances as I write this.

We started out in India with Rs. 30 lac in our bank account and we've used up Rs. 20 lac so far. We have another 10 lac to burn through before I have to tap into our funds in the US.

Paytm Fixed Deposit

Instead of letting our money in India sit in a savings account earning 2.5% interest rate, I opened up a fixed deposit account with Paytm Payments bank and threw in Rs. 10 lac there. This money earns 5.5% interest per year and I can break the deposit anytime penalty-free. Since this is money I need near-term, it can earn more interest in an FD than a savings account, and FD is safer than putting it in a market-risk bound instrument.

Paytm FD is convenient as you can set up an account all through your phone app, without ever having to visit a branch. Any boomer shop that makes me run around town filling paper forms and making endless photocopies of my adhar and pan card gets my longest finger. I like doing my finances sitting on my bed.

US Financial Accounts Consolidation

We had brokerage accounts in Fidelity, Etrade, Vanguard and Robinhood. To simplify account management, I consolidated all our accounts into Fidelity. This required transferring our holdings in other accounts "in-kind" into Fidelity. You initiate this transfer by placing a request in Fidelity and they take care of the rest. Most brokerages charge an account transfer-out fee of about $75. However, you can later file for a reimbursement with your target brokerage. Fidelity reimbursed me for all transfers.

You might want to do this before reporting your non-resident status to your brokerages. Once they update your file to non-resident, a bunch of restrictions are placed on your account. Here's the letter of restrictions Fidelity sent me after I submitted my W-8BEN (Link).

Reporting Non-Resident Status to US Financial Institutions (Form W-8BEN)

We returned to India in April 2021. That made us US residents for tax purposes for the full year. So I did not report our change of address to any brokerage until 2022 rolled around. I had a friend's US address on file during 2021.

Once you become a US non-resident, you report that to your brokerages by submitting form W-8BEN. Consolidating all your accounts into one like I did in the previous section makes your life easier because then you don't have to submit five different W-8BENs to your five different brokerages.

RNOR Tax Status In India

On returning to India after a long time abroad, you're granted a special tax resident status called RNOR (Resident/Not Ordinarily Resident). In my case, I get to be RNOR for two financial years (FY 21-22 and FY 22-23). While an RNOR, you don't pay India taxes for income earned abroad. This opens up two opportunities:

Liquidate your investments abroad and bring them in to India with no India tax obligations.
Reset your cost basis on US stock investments and lock in all your profits without having to pay capital gains tax to either the US or India. This way you continue to stay invested in the US markets, and drastically bring down your future capital gains tax obligations when you eventually sell. More on this below. (This is my preferred choice.)

Resetting Cost Basis

The US doesn't impose capital gains tax on non-residents. And India doesn't tax income earned abroad while you are RNOR. This gives you a window of opportunity to completely eliminate tax obligations on the unrealized capital gains you've made so far. All you have to do is to sell your profitable stock holdings, and then buy the same stock back or any other stock of your choosing. Here's more information. (Note - I have not consulted the Galactic Advisors or have any ties with them.)

Things to keep in mind here:

Be very careful about making absolutely sure that you are a US non-resident + India RNOR when you do this.
On reporting non-resident status to your brokerages, they place restrictions on your account. Fidelity now doesn't allow me to buy index mutual funds. So, I can sell my VTSAX and FSKAX shares held in Fidelity but I can't buy them back. So I'm now buying VTI instead, the ETF equivalent of VTSAX.
Spread out this process over time so very large transactions from abroad don't mistakenly get flagged as fradulent transactions by your brokerage. I'm not sure if this is even a concern. Maybe it's not but I'm just playing it safe.
Importantly, don't sell your investments that are at loss and buy them back. That achieves nothing and would become a wash-sale.

Although I understand I'm an insignificant little fish among Fidelity's client pool of multi-millionaires, I'm still nervous about applying this method to our $1+ million worth of shares. I get to be RNOR in India until March 31, 2023. So I'll spread out this task evenly over the coming months until my RNOR status runs out.

I also need to look into whether resetting cost basis makes sense for retirement accounts like IRAs. The US doesn't impose capital gains tax on future IRA withdrawals so no concerns there. I haven't read up on how India taxes IRA withdrawals. If it taxes capital gains instead of treating withdrawn money as ordinary income, I'll have to reset cost basis in my IRAs as well while I'm RNOR.

Traditional To Roth IRA Conversion

With only 3 months of salaried income in 2021, we fell under the 12% tax bracket for US tax year 2021. I ran some numbers to compute how much money I can convert from traditional IRA to Roth, while still staying within the 12% bracket for 2021. I ended up moving $41,000 and associated earnings from traditional to Roth IRA.

The conversion process with my Fidelity IRA accounts was simple and entirely online. You specify the principal amount in Traditional IRA you want to convert to Roth and they compute the associated earnings and roll the total amount over. For this conversion to apply for a given tax year, the deadline for the conversion is December 31 of that year.

I need to look into whether doing another conversion for US tax year 2022 and one more for 2023 makes sense, while I'm still RNOR in India. This way, I don't need to worry about India tax implications arising from such conversions. I don't yet know what the US tax implications for conversions are for non-residents. Something to look into in the coming weeks.

NRE/NRO Account Conversion

It isn't very clear at what point after returning to India you have to convert your Indian non-resident accounts to resident accounts. Some recommend doing it soon after returning to India. Others say you can continue to maintain non-resident accounts as long as you are in RNOR status. I was undecided for nearly six months and then finally decided to convert my NRE account to a resident account.

Note that most bank employees are terribly ignorant and misinformed about rules concerning NRE accounts. My SBI branch manager misguided me saying they can't convert my account until I've stayed in India for one full financial year. I believed him at the time and went back home. Then on further reading, it was clear to me that he's mis-stating facts and I raised a complaint online on the bank portal. That got their attention and they swiftly completed the conversion task.

Despite this little episode, I've been happy with the services of SBI. Their online banking portal is solid and I've never encountered downtime.

Son's Schooling

Our son started pre-nursery in June 2021 at the age of 2.7 years. We could have delayed his school by another year but he was getting increasingly bored at home and we were getting tired keeping him engaged. We've admitted him to the pre-school "KLE The Banyan". The school expenses come upto 1.5 lac rupees a year.

I'm not a believer in the generally held opinion that more expensive schooling equates to better education. I simply can't relate to people that say they'll have to shell out Rs. 1 lac per month for "top-notch" schools in India. Maybe such claims hold true for higher education but I feel strongly against super-fancy schooling during the kids' younger years. I'm averse to the typical Indian mindset of obsessing over competitiveness and prestige. I couldn't care less if my son's school doesn't offer pretentious programs such as horse riding, archery, French or whatever else it is that the fancier schools offer. My son getting to enjoy a happy, stress-free, fun-filled childhood is far more important to me. He's having a good time at his school, loves his friends and teachers and is learning a lot in a no-pressure environment. There's plenty of emphasis on skills beyond plain academics. We're very happy with his school.

I'm done with my logistical updates for this year. In my next post, I'll talk about how life in Bangalore has been in general, our social experiences, thoughts about future and other odds and ends.

I could be painting an inaccurate picture for you here, dear reader. If you're beginning to think that we've been having a great time and it's all been nothing but pure bliss for me and my family, I'll have to let you know that that is not the full story. Our private life has been awesome no doubt. We feel blessed with easy availability of domestic help (that we pay well and treat with respect and kindness), a strong social circle with the extended family, and a slow paced, relaxed life with complete control of our time.

But I'm not very happy with big-city life in Bangalore and dearly miss the quiet suburbs, wide open spaces, and outdoor recreation that I cherised so much in the US. I'm craving to live in a peaceful neighboorhood that's closer to the mountains and lakes. I'm wondering if Bangalore is a good choice for us to live long term.

More on these thoughts in my future posts!

Until next time,
- Dog

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