Being an NRI & moving abroad for employment is one of the most cherished dreams of most of our country’s citizens. No doubt it takes a lot of persistent effort to achieve your dream of working abroad. Once you have settled down in a foreign country, the next concern would be about planning for your life goals and investing to achieve them. With the Indians’ savings rate being one of the highest in the world, as a Non-Resident Indian (NRI), you would be looking for good NRI investment options in your country of residence or India. The emerging Indian economy attracts investments from the world over, from wealthy individual investors to foreign institutions, which take advantage of the high growth environment. Read further to understand the options available for NRI Investments in India.
Investing in India would serve a dual purpose for you as an NRI – better growth prospects for your investments and the emotional gratification of helping your home country to grow and develop further. The Indian government has rolled out rules and regulations favoring smooth inflow of investments from NRIs. If you make any investments in India, which are not repatriable, they are considered as domestic investments and Foreign Direct Investments (FDI) cap is not applicable. The businesses which receive such investments benefit from this rule as there is no cap on the investments received and also you as an NRI, can invest in profitable companies without the 10% cap of the paid-up capital of the company.
Before we elaborate on the NRI investment options available in India, it is important for you to understand how you qualify as an NRI:
If you have stayed abroad for more than 182 days in a financial year, you are classified as an NRI for that particular financial year. If you have taken citizenship of a foreign country, you are classified as a Person of Indian (PIO) origin. However, for all tax purposes and Foreign Exchange and Management Act (FEMA) rules, NRIs and PIOs are considered the same.
Even before you start to invest in any of the asset categories in India, securing a PAN (Permanent Account Number) is mandatory. You also have to undergo a one-time Know Your Customer (KYC) process, to which you are bound to declare your residency and citizenship details. You are permitted to invest in most of the asset classes like real estate, direct equities, mutual funds, bonds, government securities, National Pension Scheme (NPS), Term Deposits, etc. in India but not permitted to invest in Public Provident Fund (PPF) and Post Office deposits. For all investment purposes, you have to open a Savings/Transaction account in a bank to carry out all the financial transactions. There are three categories of bank accounts for NRIs, namely:
1. Non-Resident External (NRE) Accounts
This is one of the preferred NRI Investments in India. NRE accounts can be either Savings, Current or Term Deposit account. The funds to this Indian Rupee account must be mandatorily credited through your earnings abroad. You can quickly repatriate the funds received in this account without any limitation. Also, the interest earned on the funds in this account is tax-free in India.
2. Non-Resident Ordinary (NRO) Accounts
NRO accounts are Rupee accounts which can either be Savings, Term Deposit, Recurring Deposit or Current accounts. These accounts offer limited repatriation per annum. If you have any income in India, it has to be compulsorily received in an NRO account. The interest earned on NRO accounts is taxable in India.
3. Foreign Currency Non-Resident (FCNR) Accounts
This is only a term deposit account in which you can deposit foreign currency for a particular term. The funds in these accounts can be fully repatriated, and the interest earned on it is tax-free in India.
Let us analyse various investment options available in India from an NRI’s perspective.
1. Real Estate
This is one of the most popular choices NRI Investments in India. As an NRI, you are allowed to invest only in residential and commercial properties and cannot purchase agricultural land, farmland or plantations. However, you can own such properties provided you received it as a gift, or as an inheritance and the sale proceeds have to be mandatorily received in NRO accounts, to which repatriation restrictions apply.
2. Direct Equities
You can invest directly in the Indian stock market by opening a Portfolio Investment Scheme (PIS). A separate NRE/NRO savings account corresponding to the PIS, a dematerialized (demat) account with a depository participant and a trading account with a broker registered with the Stock Exchange Board of India (SEBI) has to be opened, to trade and hold equities in India. You are permitted to hold only one PIS account in India. However, there is a restriction imposed by the Reserve Bank of India (RBI) on the maximum limit of a company’s stock that an NRI can hold, which is 10% of the paid-up capital of the company. You are also not allowed to do intra-day trading and short selling of stocks. Though the taxation rules for capital gains are same for NRIs and residents, the tax on the gains is deducted at source (TDS) for NRIS, by the brokerage at 100% of the total tax liability.
3. Mutual Funds (MFs)
NRIs can invest in all categories of Mutual Funds like Equity Funds, Debt Funds, Balanced Funds, Liquid Funds, etc. Unlike direct equities, MFs do not need a PIS account for the purchase. Though investing in MFs looks simple and easier compared to direct stocks, it is important for you to understand the risk profile and investment strategy of a fund before investing. By SEBI regulations, all MFs grade the schemes, according to their risk profiles as Low, Moderately Low, Moderate, Moderately High, and High.
Mutual Fund Schemes are classified as Open-Ended, Close-Ended and Interval schemes, at the topmost level. Depending on the investment philosophy and nature, the MF schemes are further classified into Equity Funds, Debt Funds, and Hybrid Funds at the highest level. Depending on the investment strategy, they are classified as Sector Funds, Contra Funds, Index Funds, etc. You can invest across any of these MF schemes from an NRE or an NRO account, but the repatriation rules will vary depending on whether investments were made from NRE or NRO account. The tax on the capital gains on MF schemes varies according to the type of schemes and the holding period of the MF units.
There are some limitations for NRIs residing in the US and Canada to invest in Indian MFs due to the strict FATCA rules which mandate all the fund houses to report to the US government, a comprehensive detail of all transactions of US citizens including NRIs on a regular basis. Even though some of the fund houses have started accepting investments from US/Canada NRIs with some additional conditions, It’s not advisable for them to invest in Indian MF. The eight Asset Management Company (AMC) or the fund houses which currently accept investments from US and Canada based NRIs are:
- ICICI Prudential Mutual Fund
- SBI Mutual Fund
- UTI Mutual Fund
- Birla Sun Life Mutual Fund
- Sundaram Mutual Fund
- L&T Mutual Fund
- PPFAS Mutual Fund
- DHFL Pramerica Mutual Fund
4. Government Securities
Bonds and Non-Convertible Debentures (NCDs): Government Securities are issued by the Government of India and carry very low risk. Bonds are issued by private companies and Public Sector Units (PSUs) to raise capital and carry various degrees of risk depending on their credit worthiness. NCDs are secured debt issued by corporations with the backing of its assets. You are permitted to invest in any of these debt instruments, from funds in either NRE or NRO accounts. The interest earned from these instruments is taxable if it is credited to an NRO account and is tax-free if credited to an NRE account. However, if the bond is marked as tax-free during the issue, the interest earned in tax-free in India. NCDs and bonds are highly liquid as they can be traded on stock exchanges also.
5. National Pension Scheme (NPS)
You can subscribe to this scheme if you have retained your Indian citizenship and planned to retire in India. This is a good option among the available options in NRI Investments in India for retirement planning,
NPS is a cost-effective, government-backed retirement savings plan which comes under the EET (Exempt-Exempt-Tax) tax structure. It implies that all contributions and accrued capital gains are exempt from tax, but the withdrawal is subject to tax. You can contribute to NPS from both NRE and NRO accounts, but the pension has to be received in India only and cannot be repatriated.
NPS offers three different accounts, each tailored to a different risk profile. They are – Equity (E) for high risk, Corporate Bonds (C) for moderate risk and Government Securities (G) for low risk. You should choose the ratio of allocation of your contributions between these choices, else an auto choice is made depending on your age. Also, there are two sub-accounts provided in NPS – Tier 1 account and Tier 2 accounts.
a. Tier 1 account – The contributions you make to this account are locked till retirement and post-retirement, if you are at 60 years, up to 60% of the corpus accumulated is allowed to be withdrawn and is tax exempt. The remaining 40% has to utilised compulsorily to buy an annuity, but the income received from the annuity is taxable.
b. Tier 2 account – This is similar to a regular savings and investment option. You can make unlimited withdrawals from this account without penalty.
6. Fixed Deposits/Term Deposits
In FDs, your money is locked in for a pre-agreed term and interest rate. However, there might be a provision for premature withdrawal with a penalty. Term Deposits are offered mostly by Banks, Non-Banking Finance Companies (NBFCs) and in some case, private companies also, which is popularly known as Certificate of Deposit (CD). Interest earned on an NRE account is tax-free in India and that earned on an NRO account is taxable. The total tax applicable for the interest earned on an NRO account is deducted at source, and the balance is credited to the NRO account. In case your income in India is less than Rs.2,50,000, you can claim a refund of the deducted tax by filing a tax return. Deposits in an NRE account can be repatriated without any limit, whereas those from an NRO account are restricted to a total of 1 million USD per annum.
As an NRI, you are eligible for tax exemptions on certain investments and capital gains, in India. However, the same might be taxable in the country of your residence. You have to take a prudent decision by understanding the tax laws in India as well as in the country of your residence, before investing here. Also, if you are income in India is higher than the minimum exemption limit, you have to pay taxes in India and file tax returns compulsorily. Your investment decisions should also consider your life goals as well as the repatriation restrictions on investments in India.