NRI Investment Options in India – What is allowed and what is not
NRI (Non- Resident Indian) investments in India has risen manifold during recent years as thousands of Indians move abroad for various reasons. Indians who move abroad may decide to settle in the foreign country or may decide to come back at retirement age.
Many NRIs wish to invest in India as they see an excellent opportunity in investing in a growing economy for better profits. The Indian government has made the rules and regulations simpler for NRIs to direct their investments to India. To attract move investments to India, the Indian government considers all non-repatriable investments from NRIs and OCIs (Overseas Citizen of India) as domestic investments and not subject to any Foreign Direct Investment cap.
Before delving into what NRI investment options are available, it is important to understand what NRI and OCI signifies and how the rules and regulations differ for them.
- If a person is an Indian citizen and has stayed abroad for more than 183 days in a Financial Year, then for all tax purposes, the person is classified as an NRI.
- If a person is a foreign national and was an Indian citizen previously or the person is a child or grandchild or great-grandchild of an Overseas Citizen or the person has either both or one of the parents as an Overseas Citizen, that person can be classified as Overseas Citizen of India (OCI).
For all practical purposes, the rules and regulations applicable for OCIs and NRIs are same. NRI investment regulations in India mandate that an NRI investor should declare the citizenship and residency details in KYC (Know Your Customer) before proceeding to invest in any financial instrument.
There are three types of bank account that can be opened for NRI investments:
- NRE or Non-Resident External Accounts – This can be a Savings, Current, Term Deposit or Recurring Deposit account and has to be maintained in Indian Rupees only. The interest earned from these accounts are not taxable in India.
- NRO or Non-Resident Ordinary Accounts – This Rupee account is mainly for managing the Indian income of the NRIs if any. This offers limited repatriation annually and the interest earned on this is taxable in India.
- FCNR or Foreign Currency Non-Resident Accounts – This is a term deposit account that can be used to deposit foreign currency for the desired The interest earned on these is tax-free in India and fully repatriable.
For all NRI investment options available in India, an NRI or an OCI has to make the investments through either of the above-mentioned accounts.
Below are the Indian investment options for NRIs available:
- Mutual Funds: For NRI investors to invest in Indian Mutual Funds, the investment has to be in Indian Rupees from the account options available. On redemption, the value determined will be credited to the account specified. The KYC should clearly mention the residency status before investing. The tax on the capital gains on redemption is same as that of residents but the tax is deducted at source (TDS).
The Short-Term Capital Gains (STCG) is taxed at 15% for Equity Funds and at Income Tax slab rate for Debt Funds. The Long-Term Capital Gains (LTCG) is not taxable for Equity Funds and taxed at 10% with indexation and 20% without indexation for Debt Funds.
- Direct Equity: Reserve Bank of India (RBI) has made provision for NRI investors to invest in equities directly through Portfolio Investment Scheme (PIS). An NRI investor has to take permission under PIS to be able to trade or hold equities in India on a repatriable or non-repatriable basis. The NRI investor has to open a dematerialized account (demat account in short) for holding the equities and a trading account with a SEBI (Stock Exchange Board of India) recognized broker. Only one PIS account can be opened by an NRI investor. Also, the list of stocks in which the NRIs can trade is published by RBI. NRIs are also not allowed to do intra-day trading and short selling in India. The maximum limit of a particular stock that can be held by an NRI investor is 10% of the paid-up capital of the company.
The Short-Term Capital Gains (STCG) is taxed at 15% for Direct Equity and the Long-Term Capital Gains (LTCG) is tax-free for Equity.
- Company Bonds and Government Securities: NRI investors are eligible to invest in government securities and bonds issued by private companies. These bonds earn a fixed rate of interest and if invested through an FCNR account or an NRE account, the interest earned can be repatriated. The taxability of these bonds depends on whether they have been marked as tax-free at the time of issue. If the NRI investor invests in a taxable bond, the interest earned if credited to an NRE account is not taxable in India.
- Fixed Deposits (FDs) or Certificate of Deposits (CDs): NRIs investors can subscribe to FDs of banks and CDs issued by private companies. The term FD and CD are practically the same – they accept deposits for a specified term and pay higher interest rate than bank savings accounts. NRI investors can subscribe to CDs on a repatriable basis.
- National Pension Scheme (NPS): This scheme is a popular NRI investment option open only to NRIs and not OCIs implying that the scheme is open to Indian citizens only. Any NRI investors within the age limit from 18-60 years can open an NPS account and contribute through NRE or NRO accounts. An NRI investor can choose to contribute to either equity funds, debt funds or government securities funds. There are two types of Pension accounts:
- Tier 1 Account – In this account, the accumulated corpus can be withdrawn only at retirement. At maturity, 40% of the corpus can be withdrawn tax-free and the remaining 60% has to be mandatorily used to purchase an annuity.
- Tier 2 Account – This account does not have any restrictions or penalty on withdrawal. However, the withdrawn amount will be taxed according to the applicable Capital Gains Tax.
- Real Estate: This is another popular investment option of NRIs in spite of having low liquidity. Both NRIs and OCIs can invest in residential and commercial real estate in India. However, NRI investors are not allowed to buy agricultural land, plantations or farm houses. An NRI is allowed to own these restricted properties provided it is received as a gift or as an inheritance. The sale of any properties by NRIs, have certain restrictions for repatriation under FEMA (Foreign Exchange Management Act).
Investment Options not allowed for NRIs/OCIs:
- Public Provident Fund (PPF): PPF is a 15 years’ tenure government scheme with an option to further extend the tenure by blocks of 5 years. This investment option is available only to Indian citizens who are residents for tax purpose. If a person becomes an NRI or OCI after opening a PPF account, contributions are accepted from NRE or NRO account till maturity but the tenure cannot be extended beyond 15 years. The interest earned is tax-free in India but may be taxable if the country of residence of the NRI depending on the local tax laws.
- Post Office Savings Schemes: Investment options in India for NRIs does not include Post Office Saving Schemes like National Savings Certificate (NSC), Monthly Income Scheme (MIS), Senior Citizen Savings Schemes and Post Office Term and Recurring Deposits.
Important Points for NRI investors:
- NRIs are liable to pay taxes on the income earned in India. The taxable income can be capital gains from the sale of a property or shares of mutual fund units or salary received in India.
- Tax is deducted at source for NRIs for any payments made to them including the redemption of mutual funds, the sale of equities or sale of a property.
- There are some restrictions for NRIs who are residents or citizens of USA and Canada, for investing in Indian mutual funds. An NRI investor should check if there is eligibility to invest in a particular scheme.
- If TDS is deducted in India, an NRI can check if there is a Double Taxation Avoidance Agreement between India and the country of residence to avoid paying taxes twice on the same income.