In one of my previous blogs, I provided basic definitions of who is a Non-Resident Indian (NRI), Resident & Not Ordinary Resident (RNOR), Resident Indian (RI), Person of Indian Origin (PIO), and Overseas Citizenship of India (OCI). I also mentioned about differences in NRI from the Income Tax definition and Foreign Exchange Management Act (FEMA). I promised that sometime in the future I will discuss investing for NRIs. So, here I am covering some more definitions and providing my perspective on whether or not you should invest in India.
I have NRIs contacting me and asking whether they are allowed to invest and what they should be aware of. Before answering this question, let me first give my thoughts on why NRIs should (or should not) Invest in India. One key aspect to look at is your future plans. Are you looking at eventually returning to India for good and plan your retirement in India? Then you must plan towards having enough corpus considering India’s inflation rate and not that of your home country. You would surely not want to run out of your corpus when you return. Also, the other aspect to look at would be the exchange rate between the two countries, while investing and redemption of the money.
You could invest in the country where you are working. There may be certain countries that might also be offering similar or better interest rates and returns compared to India. However, makes sure you consider the safety and return of your capital while you are investing along with tax to be paid.
Now let us get to the most important question. Yes, NRIs can invest in mutual funds in India. Though it cannot be said for all countries where an NRI may be based. There are certain countries in India’s negative list from where investments are not accepted, while countries like the US & Canada could have restrictions due to the Passive foreign investment company (PFIC) norms and Foreign Account Tax Compliance Act (FATCA) restrictions.
NRIs do not need to take any permission from SEBI or RBI to invest in India. However, they need to provide some more information in their FATCA like country of tax residence, tax identification number from that country, country of birth, country of citizenship. Depending on regulations, India may need to provide that information to their local countries and therefore this information is collected.
First let us understanding the difference.
1. Non-Resident External (NRE): It is a rupee denominated account. Simply put, this is the earnings an NRI earns abroad and wants to invest in India. This can therefore be repatriated as and when needed, through online back to the home currency. No questions asked! The interest in an NRE account is tax free for NRIs.
2. Non-Resident Ordinary (NRO): It is also a rupee-denominated account but for earning earned in India like fixed deposits, rental income, etc. Since this income is earned in India, the repatriation differs since the Government of India wants to ensure that any taxes arising of the same is paid in India before the amount can be transferred. So, one needs to get forms 15 CA & 15 CB signed by a qualified Chartered Accountant (CA) who certifies the same. Then it can be repatriated subject to overall limits as prescribed by the Government (currently $ 1 million). The interest in this bank account is taxable as per normal taxation rules in India.
You can transfer your funds from your NRE account to NRO, but not vice-versa for obvious reasons. No one other than you can deposit any amount to your NRE account!
3. Foreign Currency Non-Resident Account (FCNR): This is another type of account that is available. This is denominated in most of the leading foreign currencies of the World. The interest is tax-free, though the bank interest rate would be significantly lower in these as compared to the NRE interest rates. Recommended for those who do not want to take exchange rate risks especially if the funds are needed in the short term.
Mutual funds are good investment vehicles for NRIs to invest in India. They have significant advantages over other investment products.
The procedure for NRIs is similar to the one followed by residents.
This is a requirement from SEBI. One-time documentation is required to invest in mutual funds. Along with the KYC document, photocopies of documents (self-attested) are required: PAN card, Passport, Overseas, India Address, and POI (if available).
KYC can be completed easily by providing these documents to your mutual fund distributor by courier or you can submit them yourselves at the office of CAMS or K Finkart (formerly Karvy), in your city, next time when you are in India. As mentioned earlier, FATCA is also another document which is required to be submitted.
Once submitted, it could take up to 2 to 3 weeks for your KYC to get registered. Intimation is provided by e mail or SMS, but you can also check it at the various agencies which administer the KYC. Some of the prominent ones are www.cvlkra.com and www.camskra.com
There is not much change in the process. You first need to update your KYC as an NRI and have your FATCA verified. In most countries, you can invest in the funds you were investing in India. But if you are a US or Canada resident, then there could be certain restrictions. If the AMCs in which you were investing is allowed, then you can continue to do so after updating the above documents, else you can keep your existing investments as it is, but new investments need to be done only in those which are allowed. Also, as an NRI, you would now be subject to Tax Deducted at Source (TDS), unlike as a Resident Indian the onus is on you to be responsible for the taxation.
When an NRI redeems the money from the mutual funds, the amount is credited back to the bank account after deduction of the applicable taxes, known as Tax Deducted at Source (TDS). One point to clarify that NRIs do not need to pay taxes in both the countries – other their origin & India. India has signed the Double Taxation Avoidance Treaty (DTAA) with most countries. As an example, India has signed DTAA with the US. You can claim tax relief in the US, if you have already paid taxes in India. If the tax in the other country is higher than what is paid in India, then as an NRI, you only need to pay the differential to your home country. Please do consult your tax advisor for specific tax advice based on your respective circumstances.
Short-term capital gains from equity-oriented investments are subject to a TDS of 15% (excluding cess), while long term equity capital gains (greater than one-year holding) are subject to 10% taxation (excluding cess) after providing an initial exemption of Rs 1 lakh of capital gains exemption in a financial year.
Non-equity oriented investments (such as debt funds) are subject to TDS of 30% for short-term capital gains (less than 3 years holding). Long-term gains are subject to 20% post indexation (excluding cess). NRIs, unlike resident individuals, do not have the option to adjust their capital gains (either long-term or short term) against the basic exemption limit of Rs 2.5 lakh. Hence, you cannot claim the TDS back.
1. Bank NRE Deposits: As mentioned earlier, the interest is tax free for NRIs.
2. Real Estate: Lot of NRIs invest in real estate, but this investment is subject to various issues like clarity of title deed, large money required for investment, and complexities in capital gains calculations, to name a few.
3. Insurance Policies: Various types of insurance policies like ULIP, term, traditional like an endowment. Financial Radiance believes that, if there is a need for insurance, then term insurance is the best type of insurance. We can help you in getting the policy online for some countries (subject to tele-medicals). These term insurance policies would be valid globally.
4. Direct Equity: NRIs need a Portfolio Investment Scheme (PIS) account and can then invest in direct equity in India. Or can invest in Portfolio Management Schemes (PMS) which could have a higher risk and higher costs.
5. Other Products: NRIs can also invest in Bonds, National Pension Scheme (NPS) and Public Provident Fund (PPF). There could be some restrictions like PPF existing account opened while in India can only be continued till maturity but cannot extend an account or open a fresh account. Also, there could be other constraints like only India citizens (not PIO or OCI) who could be eligible to start an NPS account.
Financial Radiance caters to investments also for NRIs. You can find more information. The execution is done online through a platform seamless with no need for submitting any hard copy documentation. The funds can be tracked by NRIs through an App which is provided to them or through this website. If need be investment access can also be provided.
Financial Radiance also provides attorney consultancy for immigration to other countries (through a tie-up) and also helps in investing in global markets – stock markets or in real estate or setting up a business. To know more about our services you can visit our website.
For more information, you can contact us and we will provide customized guidance depending on your requirement.