As an Indian staying overseas, if you want to take advantage of the high growth prospects back at home, you can do so by investing in different options available in Indian Financial Markets by following some simple steps. But before we go ahead and understand the various options, procedures and Tax Aspects of the investments, let’s understand who according to the Indian law is a non-resident Indian. So before looking at best investment options for NRI’s let’s get clear on some terminologies.
NRI or Non-Resident Indian – Meaning and Definition
NRI – has two important definitions determining his residential status – the primary one coined under the Foreign Exchange Management Act, 1999 – [FEMA] and the other coined under the Income Tax Act,1961.[IT Act] .
More than Non-resident status, the laws define who is a resident more clearly. So let’s understand:
Who is resident as per FEMA?
According to the Foreign Exchange Management Act (Fema), 1999, “an NRI is a person resident outside India who is either a citizen of India or a person of Indian origin (PIO).”
“Person resident outside India” is defined indirectly to mean a person who is not resident in India. “Person resident in India” is a person residing in India for more than 182 days in the Preceding Financial Year.
PIO means a citizen of any country other than Bangladesh or Pakistan,
- who at any time held Indian Passport, or
- who or either of whose parents or any of the grandparents was a citizen of India under Constitution of India or under Indian Citizenship Act, 1955, or
- who is a spouse of an Indian citizen or spouse of the person referred to in 1 and 2 above
As per FEMA, a person is considered to be resident if he stays for equal to or more than 183 days in India during the preceding financial year“Financial year” though not defined but considered by convention to be 1st April to 31st March.Recently RBI has clarified that students studying abroad also be treated as NRIs under FEMA and accordingly be eligible for foreign investments and NRE/FCNR accounts.
Who is resident per Income Tax Act definition?
Under Section 6, The Income Tax Act of 1961 defines a resident as follows:
A person is a resident who has stayed equal to more than 182 days of the current financial year in India or if he stayed in India for 60 days or more in the previous financial year and 365 days or more in four years before that financial year under consideration.
Contradictions between FEMA and Income Tax Act on NRI definition
While Income Tax Act considers only the number of days in or outside India for defining resident, FEMA considers ‘the intention’ to stay outside India as well to determine if you’re a resident.
NOW, reading the definitions of ‘resident’ under both the laws herein, it can be interpreted that NRI means:
i). an Indian Citizen residing outside India as also
ii). a Foreign Citizen of Indian origin residing outside India.
- Who held an Indian Passport at any time, or
- who himself or his father or grandfather was a citizen of India.
Whose stay in India does not exceed 181 days in the current financial year which commences on 1st April and ends on 31st March or for less than 60 days in a previous financial year and less than 365 days in four years before that financial year under consideration is an NRI.
There is one more class that is slightly different from Resident and NRI. They’re called ‘Resident and Not Ordinary Resident'(RNOR). You classify as an RNOR citizen if you satisfy understated requirements:
- The person has been an NRI for last 9 out of 10 years OR
- The person has lived in India for less than 730 days in preceding 7years.
The purpose of RNOR category?
RNOR citizen has to pay tax only on income generated in India. The foreign income earned by that person is exempt from tax. It is primarily used by returning NRIs.A person can be classified as an RNOR for usually 2 years after their permanent relocation to India. In some cases, if they travel intermittently abroad and based on the date of relocation, it may be for 3 financial years. Returning NRIs must use this RNOR status to set things in order and get ready to be taxed as Indian citizens in future.
Not just individuals, the Income Tax Act also defines the residency status for companies, associations, and HUF.Let’s understand NRI from that perspective:
NRI definition for companies and HUF
Any HUF, company, the association will be treated as ‘non-resident’ when the control & management of the concerned entity is situated outside India for the whole financial year. This means any company registered and managed outside India will be considered non-resident.
“Overseas Corporate Body” (OCB) is another term used in relation with NRI which means a Company, Partnership Firm, Society etc. wherein 60 % or more ownership lies with NRIs or a Trust wherein 60 % or more financial interest is irrevocably held by NRIs.
After having an understanding of the term ‘NRI’ now, let’s move to the formalities and procedures that NRIs have to follow to be able to invest in India.
HOW TO GET STARTED?
All investments made by NRIs have to be in local currency, that is, the rupee. Therefore, an NRI needs to open one of the three bank accounts which are different from each other based on the source of the fund and purpose:
Non-resident external rupee (NRE) account: An NRE account is a rupee account from which money can be sent back to the country of your residence. The account can be opened with money from abroad or local funds.
Non-resident ordinary rupee (NRO) account: An NRO account is a non-repatriable rupee account. NRO account is used for crediting local income earned in India like rent or dividend income.
Foreign currency non-resident account (FCNR) An FCNR account is similar to the NRE account, except for the fact that the funds are held in a foreign currency. This is used to avoid exchange rate fluctuations as the money held in the account is in Dollars, Euros, the British Pound or another foreign currency. However, the interest rates on this account are lower than NRE and NRO accounts but any interest you earn on an NRE or FCNR deposit is tax-free in India. However, you may be taxed in the country of your residence.
The amount that is be invested can be directly debited from an NRE/NRO account or received by inward remittances through normal banking channels. An NRI needs to give a rupee cheque or draft from his NRE/NRO account. He can also send a rupee cheque/draft issued by an exchange house abroad drawn on its correspondent bank in India. If the investment is made through cheques or drafts, the investor should attach with the application form a foreign inward remittance certificate (FIRC) or a letter issued by the bank confirming the sources of funds. FIRC is a proof of payment received by the individual from outside the country in a foreign currency. It is issued by the bank where you have the account to receive the funds.
Other know-your-customer (KYC )documents such as Permanent Account Number and address proof are also to be submitted, just as in the case of resident investors. In the case of NRI, Submission of passport copy is mandatory and permanent or correspondence address must be an overseas address (mandatory).
Clarity of Financial Goals
Your investment should always be goal driven. You as an NRI needs to have clarity in mind as to why he wants to invest in India. So, factors :the best options of investing your money can be decided once you consider the ffactors:
- Your finance goals – You are planning to meet your short term/long term goals.
- Your risk horizon – You want to take no risk, low risk, moderate or high risk.
- Investment period – You want to invest for a shorter period or a longer period.
- Investment amount – How much amount you can practically afford to invest out of your entire savings?
Once you make yourself clear about the above points, you can move ahead to build your Finance portfolio which depends on the length of your investment period and appetite for volatility. Broadly defining here as:
Very short term – A few days/weeks/months: Bank Fixed deposits, Liquid/Ultra Short Term Funds
Short Term – 1 to 3 years: Short Term Debt Funds
Medium term – 4 to 7 Years: Combination of Debt and Equity Funds with Debt portion being higher
Long Term – 8 to 14 Years: Combination of Debt and Equity Funds with Equity portion being higher
Very Long Term – 15 years or more: Equity Funds
If your objective is to grow long-term wealth then you can go for Higher equity proportions in your portfolio.If the goal is to meet the financial obligation in medium to long term ( 5 yrs+) then a combination of debt and Equity works well. If retirement fund is your objective then secure options are better for you.
Every individual is different and has different financial needs.However, diversifying your funds to get good returns based on your risk appetite and period of investment and adding a variety to your financial portfolio is the best way to move forwards towards achieving your financial goals.
Best Investment options for NRIs
1. National Pension scheme (NPS):
NPS is a good investment opportunity for NRIs who are planning to shift to India after retirement.
- Open to any NRI, between 18-60 years.
- Complying with KYC norms.
- PIOs/ OCIs are not eligible.
Source of Contributions in NPS
- NRE Account
- NRO Account
Contributions in NPS
- Minimum Contribution at the time of account opening – Rs.500
- Minimum amount per contribution – Rs.500
- Minimum contribution – Rs. 6000/- per annum
Salient Features of Investment Choices
- Portfolio is adequately diversified across financial securities
- a judicious mix of investment instruments and asset classes like Equity (E), Corporate Bonds (C) and /or Government Securities (G) ensures minimal impact on the returns on subscribers contributions even if there is a market downturn
- The individual subscriber has a choice of selecting investment mix (E, C, G), as per his/her risk appetite.
Salient Features of Fund Management Schemes
- Active Choice: NRI would decide asset classes in which the contributed funds are to be invested and their respective proportions.
- Auto choice: Default option under NPS, management of investment of funds is done automatically based on the age profile of the subscriber
- Every subscriber is given a Permanent Retirement Account Number (PRAN) Card with a unique 12-digit number.
- There are two available sub-accounts under the NPS account scheme:
- Tier – I accounts: Withdrawals are allowed for up to 25% of the borrowers own contribution. This is subject to the Withdrawal and Exit Regulations.
- Tier – II accounts: This account is allowed as an add-on to Tier – I accounts, as a savings facility. Withdrawals are permitted as and when the investor wishes from Tier – II accounts.
Exit & Withdrawal Rules
Upon attaining the age of 60 years
- Compulsory Annuitisation- minimum 40%,
- Lump sum withdrawal- maximum 60%,
- If Corpus< Rs. 2.00 Lac, complete withdrawal;
Exit from NPS before the age of 60 years
- Compulsory Annuitisation- minimum 80%;
- Lump sum withdrawal- maximum 20%;
- If Corpus< Rs.1.00 Lac, complete withdrawal
- The subscriber can stay invested in the NPS up to the age of 70 years. Fresh contributions are allowed during such a period of deferment; can defer the withdrawal of eligible lump sum amount till the age of 70 years. Annuity purchase can also be deferred for maximum period of 3 years at the time of exit
Upon Death of the Subscriber
- In such an unfortunate event, the option will be available to the nominee to receive 100% of the NPS pension wealth in a lump sum.
2. Mutual Funds:
Mutual Funds are an investment vehicle that collects funds from numerous investors and invests the proceeds in various financial instruments. If you want to enter into stock markets & don’t wish to take unnecessary risks then this is the viable option. Mutual Fund investment helps NRI investors to invest in a well-diversified portfolio of debt, equity and short-term securities. It is an ideal way investment if you want to diversify your risks & get good returns. A diverse portfolio reduces the risk factors & prevents you from complete loss of your investment.
For virtually every investing goal and every appetite for risk there is an appropriate type of mutual fund. While every fund involves some level of risk, that risk varies based on the type of fund in which you invest. Understanding the risks involved with investing and your own tolerance for risk—as well as your desire to involve yourself in the management of your investments—is key to helping you choose the fund or funds that best meet your investing needs.
- NRIs, PIOs/ OCIs are allowed to invest in all Indian mutual funds enabling them to indirectly participate in stock market.
- Complying with KYC norms.
Source of Contribution
3. Real Estate
Real estate sector is considered as a lucrative investment option for NRIs. The implementation of Real Estate Regulation Act (RERA) has been instrumental in bringing professionalism, standardization, and transparency in the real-estate sector. With RERA Bill in place NRI consumers will no longer have to deal with delayed possession, fluctuating prices and diversion of funds towards other projects – to name a few – instilling confidence in the Indian developers and the country’s real-estate sector. According to the regulations of FEMA and RBI, an NRI is permitted to make a specific investment in real estate.
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.
- You can transfer immovable property to any resident of India by sale.
- You can transfer any agricultural land, farm house or plantation land to any resident of India by gift.
- You can also transfer his residential or commercial property by means of gift to any person either residing in India or abroad or person of Indian origin.
Sources of Contribution
- According to RBI regulations, 20% of the value of the property must come from your personal resources, the rest can be financed from Indian banks in INR.
- The remittance of the amount for down payment can be done from the place of residence through normal banking channels, i.e., NRO/NRE account in India.
- The NRI has to repay his principal amount as well as interest part from that similar channel only.
Points to be considered at the time of purchase:
- Property name: The name of property should be clear from issues and the seller should have the required right to sell it, especially if it is inherited or any joint property.
- NDC: Always check that there will be no outstanding electricity/water bills or any other authority dues pending with the property. Take a no dues certificate from the seller at the time of purchase.
- Bank release letter: It is advisable to take the bank release letter from the concerned bank if the property had been mortgaged as security in any type of loan.
- Permits: The property of sale should have all approvals and permits from the civic authorities in terms of construction.
- Litigation: The house under consideration must be verified for any kind of pending litigation.
- As an NRI, you should go through the proper channels, either through a friend or relative to ensure the authenticity of the property.
- You can also approach through property expos and seminars to choose a right property. A reputed developer can provide a clear title property free from a lawsuit. These developers will also take care of maintenance of the property after purchase as well.
- A word of caution should be taken by NRIs as these dealers may provide incorrect or misleading information regarding the property. Always cross check with a reliable source to save your investment.
- However, selling of property comes with some restrictions by FEMA (Foreign Exchange Management Act), especially in the case of repatriation transactions. So, you need to plan things well in advance by hiring a professional who will guide you with all the legal documentation and procedures at the time of purchase/sale.
- Under FEMA only $1 million can be repatriated each year if the initial investment was made from the rupee-denominated NRO account. However, if the investment was made through NRE or FCNR account, then the amount of initial investment can be repatriated without any cap at one go.
- However, out of the profits made, only $1 million can be repatriated each fiscal. The rest of the amount needs to be in the NRO account and/or invested in India. Again in the next fiscal, another $1 million can be repatriated.
- This is also subject to the restriction that an NRI can only repatriate sales proceeds of two residential properties in their lifetime which is over and above the $1 million limit for every fiscal.
- An NRI has to pay stamp duty as well as registration fees at the time of purchase. You are entitled to avail all sorts of benefits at par with Indian residents on the interest paid for the home loan.
- However, the tax process becomes different if the property is leased, as the amount of income received from such action comes under the head of income from property, therefore, the standard deduction is applicable as per the standard slab. In this case, the NRI will have to pay the applicable tax if he is residing in the country where worldwide income is taxable unless the country has Double Tax Avoidance Agreement with India.
- The advantage for an NRI is, the amount which is paid for the interest of home loan is deductible from NRI’s taxable income without any upper limit. The NRI is legally responsible for the payment of capital gains tax as prescribed under the Income Tax Act, in case he sells off the property
Alternately, to avoid all the efforts of doing the paperwork or taking care of the property, you can opt for a Real Estate Investment Trust (REIT) instead of purchasing a property. REITs, as the name suggests is a liquid way of investing in property. The benefit of the latter is that REITs are more liquid and less cumbersome. However, it depends on what your investment goal is. If you want an immovable property, which can even double up as your vacation residence, then direct investing would be a better option.
As an NRIs, you are eligible to invest directly in the stock market under the Portfolio Investment scheme (PINS) of RBI. An NRI can deal with only one bank at any point of time. PIS (Portfolio Investment Scheme) approval can be issued by only one bank. The maximum NRI Investment cannot go beyond 10% of the paid up capital of the Indian company and you will have to transact through a stock broker only.
So, being an NRI if you want to trade in the equity market, you need:
- A bank account – NRE or NRO Account.
- A trading account – with a SEBI authorized broker.
- A Demat 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, you cannot trade in all the Indian stocks.RBI publishes the list of stocks that are eligible for NRIs.
NRIs are not allowed to:
- Do intraday trading or
- Short selling in India.
Hence, NRIs can only trade on the delivery basis that means if you buy a stock today, you can only sell it after two days.
Subscription to IPOs
Shares issued through initial public offerings (IPOs) are not covered under he PIS. In the case of IPOs, it is the responsibility of the issuing company to inform the RBI the number of shares it is allotting to NRIs.However, NRIs need NRE/NRO accounts to subscribe to IPOs. The shares acquired through IPOs can also be sold without a PIS account. However, NRIs must furnish their bank details, besides the date of allotment and cost of acquisition of the shares to calculate the tax on any gains they may have made.
Investing in equity can be highly risky but at the same time provide handsome rewards. But one must be prepared to face losses as well. This requires you to study the markets, companies, and sectors or take professional help. The other alternative is to invest via mutual funds.
5. Fixed Deposits, Certificate of Deposits and Govt. Bonds
NRE fixed deposits are just like regular term deposits where NRIs use NRE accounts to open fixed deposits. These accounts can be opened with any bank without the permission of the RBI and are virtually tax-free.
To be eligible to open NRE fixed deposits, you need to have NRE accounts (any one NRE/NRO/FCNR).To open an NRE deposit you might need documents like your passport, a valid work visa, and address proof. You can easily open NRE fixed deposit via:
- Funds remitted from abroad with the help of official banking channels.
- Through traveler’s cheque or foreign currency tenders.
- Transfer from existing NRE bank account.
Salient Features of NRE deposits:
- The NRE deposit offers flexible tenures that may range from 1 year to 10 years depending on the bank’s policies.
- They can be terminated prematurely at any time once they are opened however, there may be a penalty charged for premature withdrawals based on the bank’s rules.
- Money can be deposited in these account in Indian rupees even if it comes from an income earned outside India.
- Some banks offer overdraft facilities on the NRE deposits which allow for up to 90% overdrafts.
- Some banks may even allow you to take loans against an NRE deposits. The amount you can take will be defined by the bank’s policies.
- Certain banks will also offer auto-renewal facilities where the FD renews itself once it matures.
- Certain banks also allow you to open NRE deposits which are held jointly by you and another NRI.
- Some banks also have stipulations about what the minimum and maximum amounts you can deposit in these schemes, therefore, its best to consult your bank before deciding to remit the money.
- Some banks may even offer tax saver fixed deposits to NRI’s that allows them to claim tax benefits under section 80C of the IT Act.
Interest rates offered on NRE deposits
The interest earned on an NRE deposit depends on the duration for which the deposit is opened but it can easily be up to 8.5 % per annum or more, depending on the bank’s policy. As far as taxes on these deposits are concerned as of now interest earned on an NRE deposit is not taxable in India.
Benefits of NRE deposits
There are many benefits to having NRE fixed deposits in India. Some of these are:
- Earns an impressive interest.
- Since they can be closed prematurely, they offer ready funds for contingencies.
- With the overdraft and loan facilities, these deposits ensure you have money when you most need it.
- NRE deposits also offer nominations facilities that can be used to define a beneficiary for the maturity value of the deposit.
Govt. Bonds: Being an NRI, you have the freedom to invest in bonds and government securities. Investors get fixed returns on such bonds issued by companies or government institutions. If the purchase is done through NRE/FCNR accounts, the proceeds are easily repatriable to the country where you live.
Certificate of Deposits: NRIs also have the option to subscribe to Certificate of Deposits but on a repatriable basis. Certificate of Deposits is non-negotiable money market instruments issued in demand for or in the form of promissory notes. CDs yield a higher rate of interest as compared to bank deposits. There maturity period ranges from 7 days to 1 year and is best suited for people having short term financial goals.
6.Commodities /Gold ETF/ Forex
The precious metal (gold, platinum, silver, iron, aluminum, etc.) in the bulk form that is regularly traded in the commodity market. It’s very speculative affair. While opting for this you should be able to predict the daily volatility of the markets and digest the subsequent losses or gains. This is especially fruitful for reversing risks and protection against inflation when the market is favorable.
Though gold looks like a promising option to average Indian. But if you want to invest in a gold hassle free, than opt for Gold ETFs. Gold ETF provides returns in the form of capital/asset price appreciation only. You will not get any income stream such as dividend or interest. NRIs can invest in ETFs both on repatriation as well as non-repatriation basis.
Apart from investing, NRI’s can also trade Futures and Options intraday.
If you are an NRI investing in India, here is a list of Important points to be considered while investing:
- You will need to pay taxes that you have earned in India
- Taxable income can be in the form of salary earned in India, capital gain on the income you have earned in India.
- Tax is deducted at source for payments made to NRI’s.
- Certain mutual fund houses may not accept deposits from NRIs based in US/Canada. Please check with respective fund house/AMC companies before investing.
As an NRI living abroad, it definitely makes good financial sense to connect with your roots by making investments in India with its sustained impressive growth rate, domestic demand is driven economy and well-regulated financial markets.
Once you have established your objective, all you need is a right bank account and other documents which even a resident investor will require to submit. The options above are not mutually exclusive – so you can choose 3-4 or more investment options so that you have a balance across different asset classes.
Financial assets are much easier to handle from abroad – free from legal issues, possession & maintenance issues, require lower time and effort, and of course, don’t require you to handle “black” money. Also, most transactions can be done online from wherever you are, giving you significant control.
Investing in India provides you the potential to get superior returns in addition to assets in your home country which can work as a backup if you decide to relocate after a few years or otherwise.