An NRI can invest in India through two different routes: one is the “automatic route,” where no government approvals are required, and the other is the “government route,” where an NRI needs to take approval from the government before making an investment. And it will specify whether it can be repatriated or not. Repatriation refers to a condition when the amount can be transferred to the source.
Some of the investment options are government securities, mutual funds, bonds, certificate of deposits, stocks, ETF, money market mutual funds, real estate property-Residential and commercial, company deposits etc.
But for money to be parked for short term or long-term investments, an NRI needs to have any one of three following types of banks accounts:
Non-Resident Ordinary Rupee Account (NRO)
This account is not suitable if you want to transfer Indian earnings abroad freely as it has USD 1 million limit .It also needs tax paid certificate from CA (CPA) before repatriation. Foreign funds can also be deposited in this account. The interest earned through this account is liable to be taxed in India. The interest is subject to income tax deduction at source at 30%, plus 4% cess. It should primarily be used for depositing/managing your earnings in India and managing local expenses.
Non-Resident External Rupee Account (NRE)
In this type of account, your funds in foreign currency are converted into Indian rupees and the rate prevailing at the time of conversion is applicable. Funds in the NRE account as well as the principal amount and interest are completely reparable. You can open an NRE savings, recurring or fixed deposit account. Interest earned has no TDS and is tax free.
Foreign Currency Non-Resident Bank Deposits (FCNR)
These are term deposit or fixed deposit accounts, where you can deposit your money in foreign currency. This account can help you avoid the fluctuations in the exchange rate. The account can be opened jointly with an Indian resident. The deposits must be made for a minimum maturity period of one year and maximum maturity period of 5 years. The interest earned under this account is tax free
NRI Fixed Income Investment Opportunities
National Pension Scheme – This enables the policyholder to save towards creating a corpus and also lets him open an annuity post retirement. The amount accumulated at the time of maturity is completely tax-exempt. Investing in NPS can be considered as safe investing in PPF and bank FDs. You can invest in NPS if you are aged between 18 and 60 years. NPS offers attractive returns.
Fixed Deposits – An NRE fixed deposit or an FCNR account is preferable. You can earn up to 5.0 % return on an NRE fixed deposit.
Certificates of Deposit (CDs) – This is a non-negotiable money market instrument issued in D'emat form or as promissory notes. It has a maturity of not less than 7 days and not more than 1 year. CDs are much like time deposits, except they tend to be more liquid.
Bonds and Non-Convertible Debentures (NCDs): Investors are eligible to receive fixed interest on such bonds. Such bonds can be issued by a company or government institutions seeking long-term investments.
Mutual Funds – Mutual funds can be both equity as well as debt mutual funds. Debt funds basically invest in fixed income securities, which include government securities, treasury bills, corporate bonds, money market instruments and more. The one major advantage with debt mutual funds is that it is managed by experienced fund managers. Also, these are fairly liquid. You can withdraw money as and when you want and you will receive the same in your bank account in about 3-4 business days. These funds provide safety of capital. While returns are low, given the safety of capital, they are preferred over equity mutual funds in the short term. For mid-term, investing in hybrid funds is advisable, which includes both debt and equity investments. To invest in Mutual funds, an NRI needs to have any of the 2 bank accounts i.e. NRE & NRO. The investment has to be made in Indian currency and not in foreign currency. The investment amount can be directly debited from NRE/NRO accounts. NRI has to give a rupee cheque or draft from his NRE/NRO Account. At redemption, the amount shall be paid in Indian currency either through cheque or directly credited to investor account.
Mutual Funds Taxation
Taxation of equity-oriented MFs
Long term capital gains on units held for more than 12 months are taxed at 10%, without indexation benefit. Long term capital gains up to Rs. 1 lakh are not taxed.
Short term capital gains on units held for 12 months or less are taxed at a flat rate of 15%.
Taxation of Debt MFs
· Long term capital gains on Debt MFs units held for more than 36 months or three years are taxed at 20% after providing for indexation.
Debt mutual funds and schemes that hold lesser than 65% of their total portfolio in equities also follow these taxation rules.
· Short term capital gains on units held for 36 months or less are added to the income of the individual and taxed as per the applicable slab rate.
NRIs are also eligible to invest directly in the stock market under the Portfolio Investment scheme (PINS) of RBI. An NRI has to take permission under PINS scheme for purchasing and selling shares in India. NRIs need to open a D'mat account and brokerage account with SEBI registered brokerage firm. An NRI can transact through a stock broker only.
So, being an NRI if you want to trade in equity market, you need to have:
Ø A bank account – NRE or NRO Account.
Ø A trading account – with a SEBI authorized broker.
Ø A D'mat account – To hold shares.
An approval under the PIS is required for trading in the stock market. Only one PIS Account per individual is allowed. Also, NRIs cannot trade in all the Indian stocks. RBI publishes the list of stocks that are eligible for NRIs.
But, NRIs are not allowed to do intra-day trading or Short selling in India. Hence, NRIs can only trade on delivery basis. NRIs need to own the stocks before they want to sell it.
Real estate sector:
Investing in the real estate sector has been a traditional and an all-time favorite method of investing for most of the NRIs. Indians leave their country and become NRIs but having a home or property back in your own country is considered as a priced possession. In addition to financial appreciation, it gives you a sense of emotional security as well. Real estate sector is considered as a lucrative investment option for NRIs. As an NRI, you can purchase both residential and commercial properties. There is no restriction on the no. of properties owned but you cannot buy agricultural lands, farm house or plantations. Although, you can have ownership of agricultural land through inheritance or gift. However, selling of property comes with some restrictions by FEMA, especially in case of repatriation transactions (currently limited to $ 1 million without approval). So, you need to plan things well in advance with respect to legal documentation and procedures at the time of purchase/sale.
Carry Trade: A carry trade is a strategy that involves borrowing at a low-interest rate (in USA or Europe) and investing in an asset that provides a higher rate of return (like in India). A carry trade is typically based on borrowing in a low-interest rate currency and converting the borrowed amount into another currency and your expectation is that your returns will be much higher after considering Interest that you pay and currency depreciation. Currently, Dollar is weakening and Indian Rupee is stable or slightly appreciating.
Important points to be considered while investing:
1. Being an NRI, you are liable to pay taxes on the income you have earned in India, file Income Tax Return. You have to offer this income in your home country’s tax returns and get tax credits as per local rules.
2. Taxable income can be in the form of salary earned in India, capital gain on sale of investments like property, shares, securities etc.
3. Certain mutual fund houses may not accept deposits from NRIs based in USA/Canada. You should check with respective fund houses/asset management companies before investing.
4. NRIs can avoid double taxation i.e. same income shall not be taxed in two different countries. For this, you need to check for the DTAA or Double Taxation Avoidance Agreement in between the countries.
5. NRIs are not allowed to make certain investments like Investment in PPF, NSC, Post office saving scheme, Senior citizen scheme.
Reasons Why an NRI Should Invest in India
1. Prepare for Retirement: As part of Retirement Plan, you may like to look at India as an option open due to geopolitical uncertainties.
2. Get better Returns: Whatever you invest will grow according to the interest rate or growth rate on your NRI investment in India. NRIs believe in long term India Growth story of sustainable growth for longer time frame. India provides Interest Income of 6%-8%, which is still much higher than meager Interest they earn in USA & Europe even after discounting for currency depreciation.
3. Send Money to Family: You may want to invest in NRI investment options in India as you’ll have more income to spend in India to support your parents and other family members.
4. Build Financial Assets: Investing in Financial Assets helps to grow your financial wealth as part of your own plan as India offers very attractive returns because of inherent growth potential of Indian Economy. The best investment for NRI in India will help to grow your financial assets the fastest.
2. Your Passport & Visa
3. Your Foreign Tax Id
4. Local address proof
5. Local telephone number (can be of your relative) to receive OTPs.