By: Tavaga Research
Over the past couple of decades, India has transformed its economic landscape forced upon it by the balance of payment crises in the 90s. Today, the subcontinent continues to remain an attractive destination for investors, given the optimism that surrounds its future growth potential and attractive returns on investments. This has piqued non-resident Indians’ (NRIs) interest in the Indian financial markets.
However, when it comes to NRI’s money matters in India, there is tremendous uncertainty. Add to this, the rules and regulations under the Foreign Exchange Management Act (FEMA) and tighter tax rules under the Income Tax (IT) Act. This article tries to help NRIs navigate this apparently daunting task and manage their investments wisely.
Who’s Who?
To many Indians, any individual that spends considerable time abroad gets the non-resident Indian (NRI) tag. For instance, a brother with an Indian passport studying the UK for the past couple of years becomes an NRI, and so does an aunt with Australian citizenship for several decades.
However, since dual citizenship is not allowed in India, there is a difference between the two. Broadly speaking, an NRI is any citizen ordinarily residing outside India with an Indian passport. On the other hand, a foreign citizen with Indian roots or connections is considered an OCI (Overseas Citizen of India).
So, in the above example, the aunt is an OCI, while the brother is an NRI. There was another category Person of Indian Origin (PIO) that was subsumed with OCI in 2015. While the law distinguished between an NRI and an OCI, however, both these categories are largely subject to the same rules regarding what is allowed and what is not, regarding their money, banking, and investments in India.
Best investment options for NRI in India
For NRIs and OCIs, the no-go investment area is limited. First and foremost, these individuals are not allowed to invest in small saving schemes such as National Saving Certificate (NSC), Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), Sukanya Samriddhi Yojana, and other post office saving schemes.
That seems to be an unkind cut, given that several of these schemes offer a combination of attractive, tax-efficient returns and without any risk. The governments intend, it seems, to reserves these social security schemes for resident Indians.
In addition, NRIs and OCIs are not allowed to buy agricultural land, farmhouses, or plantations. However, if they bought such properties while being a resident Indian, they can continue to hold them even after you become an NRI or an OCI. Non-residents (NRI & OCI) can also inherit or receive such properties as a gift from relatives, but new purchases are not allowed.
Sovereign gold bonds issued by the Reserve Bank of India (RBI) are also off the list for NRI investment in India, however, if these bonds were acquired as an Indian resident, then they can be held until maturity or redemption.
Non-residents (NRI & OCI) can deploy their money across a host of products as an investment including but not limited to bank deposits, company deposits, stocks, bonds, debentures, government securities, exchange-traded funds (ETFs), mutual funds, insurance products, real estate including residential and commercial property, derivatives etc.
Even the Bharat Bond issue was open for non-residents. OCI’s, until recently, were not allowed to invest in the national pension scheme (NPS) Tier 1. But now, a circular allows them to do so, at par with NRIs. Also, while there may not be a regulatory bar, some investment providers, may not allow non-residents to invest in their products.
How and where to invest?
Bank deposits
There are three primary forms of bank accounts that can be opened by non-residents in India. These include:
- Non-Resident External (NRE) Account
- Non-Resident Ordinary (NRO) Account
- Foreign Currency Non-Resident (FCNR) Account
NRE accounts are operated by non-residents (NRI & OCI) with the intention of depositing their foreign earning and/or savings in Indian rupees. The account can be maintained in the form of a current, savings, recurring, or fixed deposit account, and are designated as Non-Resident Rupee Account. The ease with which funds can be deposited and repatriated from this account makes NRE accounts a preferred option to park funds in India. Also, the interest earned on these accounts is exempt from taxation in India.
NRO accounts are generally preferred in cases where NRIs plan to deposit only the income sourced within India such as from rent, pension, dividends, etc. Repatriation from the NRO account is permitted up to USD 1 million per year through the automatic route. For amounts exceeding USD 1 million an approval from the Reserve Bank of India (RBI) is mandatory.
It is important to mention here that unlike the NRE account, interest earned in the NRO account is taxable in India. The interest income is added to the total income and taxed at the applicable tax slab rate.
FCNR account is designated in foreign currency, implying that funds in this account can be maintained in any permitted currency that is convertible freely and inter-alia includes US dollar, Euro, pound sterling, Canadian dollar, Australian dollar, etc. FCNR accounts, therefore, provide ease of repatriation of funds as they are deposited in the designated foreign currency, and protect against the fluctuations in foreign exchange.
Importantly, FCNR accounts can only be maintained in the form of a term deposit for various maturities ranging from 1 year to 5 years. Also, the principle and the interest earned on these deposits are tax-free only until the person maintains the NRI status.
NRI investemt in stock market
Equity investments – Can NRI invest in shares?
To invest in secondary markets i.e., the stock of Indian companies on the stock exchange, non-residents need a demat account and must route their transactions through a Portfolio Investment Scheme (PIS) account, linked to the above mentioned, NRE and/or NRO account. Non-residents can open a PIS account with only one bank, and it should not be a joint account.
NRIs and OCIs can transact in securities from an RBI-approved list. Short-selling, intra-day trading, and non-delivery basis transactions are not allowed. All this because the Reserve Bank monitors the transaction of non-residents and other foreign investors in the capital markets to ensure that their stakes are within the prescribed limits.
Importantly, non-residents do not need a PIS account to invest in an IPO and later selling them. Shares bought by non-residents as an Indian resident can be held on a non-repatriation basis and can be sold without routing it through PIS. In addition, shares received as an inheritance can be held and sold on a non-repatriation basis without a PIS account.
Also, NRIs and OCIs can trade in the derivative markets using rupee funds held on a non-repatriation basis. Furthermore, they can also hold two separate trading accounts based on being NRE or NRO. In case of a non-resident becoming a resident, a new trading account needs to be opened.
Some key points to remember:
- An NRI can make an investment of up to 5% of the total paid-up capital of a company.
- An investment in an unlisted company by the NRI would be considered a foreign direct investment on a repatriation basis. This would be subject to stricter norms, restrictions by sector, and reporting requirements.
- In the event of a transfer of shares:
NRI investment in mutual fund
Unlike stock market transactions, it is easy for non-residents to buy and sell mutual funds schemes. They can do so without the need for a demat account or routing the money through the PIS route. NRIs and OCIs can buy from a gamut of mutual fund schemes including equity, non-equity, and others.
This can be done either through direct plans such as buying directly from the fund house portal or through an intermediary (regular plans). So to answer the question “Can NRI invest in SIP in India?” – The answer is yes, an investor can invest via SIPs or lump sum. However, to invest in mutual funds, it is essential to get a KYC (know your customer) compliance done. For direct investment, this might involve visiting the office of the fund house or the registrar.
It is a one-time process, though, and non-residents can then invest, even online, across several schemes and fund houses. Redemption of schemes can also happen online and the money will be credited to the account through which the investments were routed.
Although non-resident from most countries can invest easily in schemes across fund houses, those from the US and Canada could face hurdles due to FATCA compliance requirements.
The tax implications would be like those for equity investments.
Exchange-traded funds / Index funds:
NRIs are eligible to invest in ETFs on a repatriation and non-repatriation basis. These are low-cost, passive investment options that track the Sensex / Nifty. Gold ETFs can also be considered, which help diversify the portfolio and the associated risks. ETFs can be considered as high return – investment plans for NRI as well as low risk -investment options
Public Provident Fund (PPF) and National Pension Scheme (NPS):
The PPF scheme has a lock-in period of 15 years. Non-resident Indians cannot open a PPF account. However, if the resident becomes an NRI during the 15 years, he can continue to contribute to the fund, on a non-repatriation basis.
An NRI can open an NPS account. However, his account would be closed if there is a change in his citizenship.
NRI investment in real estate :
Non-Resident Indians and OCI cardholders have the option of investing in commercial and residential real estate. Such investments have a good chance of appreciating in a few years. This investment could be in the form of a purchase, as a gift from a resident of India, or from a relative who is an NRI / OCI cardholder. In addition, it could also be inherited from a resident in and outside India.
The payment towards the purchase of these investments can be made from their NRE / NRO / FCNR accounts, but not by traveler’s cheques or foreign currency notes. In case of sale of properly, remittance in excess of $1 million per financial year require specific approvals to be taken from the RBI, unless the purchase was made with the help of remittances from outside the country, repatriation of sale proceeds can be done freely.
Non-convertible debentures, government securities, and bonds:
NRIs can invest in Non-convertible debentures (or corporate FDs), government securities & treasury bills and bonds. Options available to them without any limitations are in the form of Capital Gains bonds issued by REC and NHAI, which have a three-year lock in period. Furthermore, 5-year, 10-year, and 30-year government bonds are also available as investment opportunities.
The advantage of investing in bonds is that although they carry some credit risk, those issued by the government have a lower default risk attached to them. Similarly, the earnings from these bonds can be easily repatriated.
For corporate FDs, the funds should be deposited from an NRO bank account only.
Why NRI should invest in India?
All in all, the Indian economy is predicted to grow at the rate of 11.5% in FY 2021 as per the IMF. Furthermore, Indian banks offer a higher rate of return on fixed deposits compared to those in other in much-developed countries.
Even from the perspective of diversification of investment geographically, investing in India can be a good option for NRIs. This could also be beneficial for those NRIs considering moving to India after their retirement, thus becoming a part of their retirement planning.
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