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.