NRI Archives - fisdom

Options for NRIs to invest in India – Part 2

An NRI has many avenues to invest. Out of that, we have already discussed the fixed income investment options like the various types of Bank Fixed Deposits, investment in Government Securities and Bonds, Certificate of Deposits and NPS. Now, we will discuss the other investment options with an element of risk with a higher return.

  • Mutual Funds: NRIs can invest in mutual funds only in Indian rupees (not in foreign currency). To invest one must have NRE or NRO accounts with a bank as the investment transactions are routed through these accounts. Mutual fund being the diversified product is always attractive investment choice for many NRIs. However, there are restrictions and limitations to this for the non-residents who are based in Canada and USA due to compliance requirements as per FATCA. Some of the fund houses in India do not allow US or Canada based NRIs on investing. Apart from this, NRIs are free to invest in mutual funds of any type in both repatriable and non-repatriable basis. Investment in mutual funds is to be done basis the risk profile. There is the variety of funds available to serve both short-term and long-term needs.

Tax implications are same for both NRI mutual fund investors and resident investors. However, the tax is deducted at source (TDS) for non-resident investors. Any long term gains (>1 year) on equity mutual funds do not attract any tax. Short term capital gains of equity mutual funds are taxed at the rate of 15%. In the case of debt funds, short-term capital gains (<36 months) are taxed as per the individual’s tax slab and long-term capital gains are taxed at 20% with indexation.

Investing in mutual funds, especially through a systematic investment plan, is a prudent action to build long-term wealth.

  • Direct Equity: Many of the NRIs wants to invest in Indian stocks market as they are familiar with Indian equity market and also its one of the emerging economy. Non-resident Indians can make the direct equity investment in India through Portfolio Investment Scheme (PINS). Permission from RBI through PINS account is compulsory for any NRI who is willing to trade in Indian stock market. As per RBI, only one PINS account can be held by NRI at a time as all the transactions are reported through this account as per the regulations of FEMA (Foreign Exchange Management Act). Basically, a non-resident should have a PINS account, an NRE or NRO bank account, Demat and trading account to transact in the equity market in India. Moreover, NRI can invest in the only eligible list of stocks as published by RBI. Also, NRIs are not allowed to do short selling and intraday trading. Investment in equity involves risk and fetches good return for the longer duration.

Tax treatment for NRIs investing in direct equity is same as that of resident individuals. However, the tax is deducted at source (TDS) for non-resident investors. There is no tax on long-term capital gains in equity. And, short-term capital gains are taxed at 15%.

However, investing directly in equity can be a double-edged sword- you can either earn exponentially with a right decision but there are equal chances to lose exponentially if you take a wrong call. For a typical NRI with limited knowledge and time to invest towards tracking and monitoring the stock market, a mutual fund route to investing is advisable.

  • Real Estate: Being NRI, you can invest in both residential and commercial form of real estate. Your investments are restricted when it comes to agriculture lands, plantations, and farm houses. You can only accept them in the form of gift or inherited assets and no direct investments are allowed. You need to be very careful about legal documentation as there are many restrictions at the time of repatriation.

 In a case of sale of property, a tax is deducted at source by the buyer at 20% for NRIs. Long-term capital gains are taxed at 20 % and short-term capital gains are taxed at 30%. However, NRIs are allowed to claim exemptions on long-term capital gains under section 54 (investing in another property in India to the extent of proceeds) and section 54EC (if proceeds are invested in certain bonds).  The TDS and incidental capital gains tax makes investing in real estate an unimpressive decision for an NRI.

In case you missed out, you can read about the other options by clicking here – Options for NRIs to invest in India – Part 1.

Options for NRIs to invest in India – Part 1

India with its booming economy offers many attractive options to investors. India is growing economic power has been well noticed by foreign investors including non-resident Indians which make it a preferred hub for investments. Weakening rupee makes it even more attractive for them to flow their money to the home country. The government is also encouraging NRIs to invest with its simplified rules and regulations to boost the inflow.

Here are some the investment options for NRIs in India:

There are various options available to invest. However, it should totally be dependent on the individual’s financial goals and risk appetite. For NRIs, it’s even important to know the tax treatment before investing to get an idea of post-tax return. Read on to know the options:

  • Bank Fixed Deposits: NRI’s can invest in bank deposits in three ways through different accountsNon- Resident External (NRE) account: These deposits can be made through NRE savings account which is maintained in Indian rupee. NRE accounts are meant for money earned outside India. Interest on NRE deposits ranges between 6.5% – 7%. The deposit cannot be withdrawn for a year. Both principal and interest part of the NRE bank deposits are completely repatriable in nature. Interests earned in NRE deposits are tax-free in India.Non-Resident Ordinary (NRO) account: NRO accounts are basically meant for money earned in India in the form of rent, Indian salary, dividend on investments etc (after becoming NRI) and also to hold existing funds which was earned before NRI status. Repatriation in NRO accounts is limited to $1 million per financial year. Being an NRI, you can invest in bank deposits through NRO account also. The only interest part of such deposits can be repatriated. But, interest on NRO deposits is taxable in India as per income tax law at marginal rate i.e. 30%.Foreign Currency NonResident (FCNR) account: NRI can hold deposits in foreign currency (Dollar, Euro, Yen, Pound, etc) through FCNR account and they are unaffected by exchange rate fluctuations. These deposits are tax-free and fully repatriable in nature. However, the interest paid on these accounts is very low.
  • Investments in Government Securities and Bonds: NRIs are free to invest in government securities and bonds. Non-convertible debentures can fetch 7-8% INR return especially when Indian rupee starts appreciating. Government bonds are usually for the expansion plans which are fixed-return based investments. Proceeds from investments made through NRE accounts are repatriable in nature.

It is a good investment option for NRI investors seeking safer investments and is comfortable with lower returns. It is advisable to invest in government securities through gilt mutual funds to ensure easy transactions and tracking.

  • Certificate of Deposits (CDs): Certificate of deposits is basically a money market instrument which is issued by financial institutions for a shorter period of time. They offer higher interest rate when compared with bank deposits of shorter tenure. NRIs are allowed to invest in Certificate of Deposits only on repatriable basis.

While this is a good option for short-term goals, the returns are relatively low and the process to invest is complex.

  • National Pension Schemes (NPS): It is a good investment option for non-resident Indian who holds Indian citizenship. Investment can be made in both repatriable and non-repatriable for through NRE and NRO account respectively. NPS comes with a minimum age restriction of 18 years to the maximum of 60 years. Hence, NRIs can consider this safe investment options to build a good retirement corpus. Investment in NPS is allowed as tax deductions under Section 80C of the Income Tax Act. An additional deduction of Rs. 50,000 is allowed (over and above the limit under Section 80C) as per Section 80 CCD (1B).

However, NPS is practically locked in till the age of 60, after which 40% has to be compulsorily converted into an annuity.

There are quite a few other areas of investment which an NRI can explore. Click here to read Options for NRIs to invest in India – Part 2

Does fixed deposit give you the best returns?

Does fixed deposit give you the best returns?

Usually, no! FDs are the best only if you fall in the lowest tax bracket or are a retiree.

While bank fixed deposits are undoubtedly safe, their returns are poor. In fact, over a long period of time, they tend to return lower than inflation – so your purchasing power actually reduces if your money is stored in fixed deposits over long periods of time. Fixed deposits are useful only if you need the money within the next three years.

Over the long term, there is no alternative to equity if you want to stay ahead of inflation. You can either directly invest in stocks, or, if you lack the time & expertise, take the mutual fund route.

 Conclusion

Fixed deposits give assured returns. So, traditional investors have parked their savings in FDs. However, three things which need to be considered:

  • Fixed deposit returns are lower than inflation. Your money loses value over time.
  • Breaking fixed deposit or premature withdrawals always comes with a cost. It will be an inconvenience when money is required during an emergency.

At present, interest rates on fixed deposits are between 6% to 8%,depending on the time period of investment.Retirees, persons in the lower tax bracket or those needing money within 3 years can opt for fixed deposits.

Fixed Deposit : Choose the Best Option

Fixed Deposit schemes are offered by various institutions. It is very important for you to choose the best. Read on to know how.

Which fixed deposit should you go for?

In fixed deposits, safety is paramount – not half or 0.75 percent of extra interest.

The slightly higher rate of interest doesn’t really matter in the larger scheme of things, while an unsafe FD can give you sleepless nights later.Convenience and good service would be the second factor to look for.

We therefore advise going for a nationalized bank or one of the larger private banks – ICICI, HDFC, Axis or Kotak. Slightly less safe are deposits in cooperative banks.

Corporate fixed deposits can be quite unsafe– it really depends on the company you are investing in. Many companies tend to advertise their deposits and lure you with higher interest rates, so beware!

What term should you choose?

Fixed deposits longer than three years are not useful. The returns they give are poor, and often lower than inflation. For long term investments, you would rather go for equities, which can give better and inflation beating returns over the long term. On the debt side, PPF and public sector bonds (like NABARD or Indian Railways) are better for long term investments.

Below three years, the tenure you should go for really depends on when you think you need the money. Since there is a penalty for premature withdrawal, you might as well choose the tenure so that you are unlikely to break the deposit midway.

Click Here to learn more.

Archives