Investment Options for Non-resident Indians (NRIs)

I have received repeated request to write about investment options available for NRIs. However, since it is an area that I know little about, I requested fee-only financial planner Melvin Joseph's help. Over to him.

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India has the largest population of people living abroad in the world. As per the UN report, 16 million people from India were living outside India in 2015. If you include the person of Indian origin (PIO) this number will rise to 30 Million.

What are the investment options for NRIs? A good number of NRIs are interested in creating assets in India because they wish to return after retirement.

NRIs based in US and Canada has some restrictions in investing in India. The scope of this article is limited to NRIs in other countries.

Let us discuss the popular investment options for NRIs.

I  Bank Deposits:Three types of accounts are popular among NRIs.

1 Non-Resident Ordinary (NRO) Account

It is advisable to convert your savings account to NRO account before going overseas. You can visit your bank with Visa and passport and they will convert your existing Savings account to NRO account.

  • It can be used to deposit Indian earnings like rent, interest, dividends etc
  • You can also deposit overseas earnings in NRO account
  • The account can be opened in the form of Savings, Current or fixed deposit
  • Remittance from NRE account or remittance received through proper banking channel can be deposited in NRO account.
  • Upto USD 1 Million can be repatriated from NRO account per year.
  • Interest on NRO account is taxable. There is a TDS of 30% from the interest paid.

However, an individual residing outside India and qualifying as a resident of another country can avail the benefit of a lower tax deduction on interest on NRO account under a double tax avoidance agreement. Any individual intending to avail this option can intimate the bank and submit a copy of tax residency certificate from the country where he qualifies as a resident.

It should primarily be used for depositing/managing your earnings in India.

2 Non-Resident – External (NRE) Account

This account is used to deposit money received from overseas.

  • The account can be opened in the form of Savings, Current or fixed deposit
  • Interest on NRE deposit is tax free in India
  • You can fully & freely repatriate your money from NRE Account

3 Foreign Currency Non-Resident (FCNR) Account

This account can be opened as term deposits only and is for the period of 1-5 years.

  • You can have this account in any freely convertible currency like Dollar, Pound etc.
  • The interest rates are decided by RBI and are linked to LIBOR rates.

Interest income earned from deposits maintained in FCNR account is exempt from tax up to such period the NRI continues to be a non-resident or a resident but not ordinarily resident (RNOR) in India for income-tax purposes.

Mutual Funds

You can invest in mutual funds without any restrictions (except for US & Canada based NRIs*). As a first step, you should update your KYC as an NRI investor. If you are already an investor, you have to change your KYC with NRI status. If you are new to mutual funds, you can submit the following documents at the office of any fund house or registrars like CAMS or Karvy for KYC. They will verify your documents and do the in person Verification (IPV). You can do this during your visit to India or before leaving India.

  1. KYC application form
  2. Pan Card
  3. Passport
  4. Address proof (both Indian and overseas)
  5. Photograph

As an NRI, you can invest in mutual funds on non – repatriable basis or on repatriable basis. If it is non repatriable basis, you can invest from NRO account. Otherwise you have to use NRE account.

AMC's like PPFAS,UTI and a few others now allow US and Canada based NRIs to invest in mutual funds.

Tax treatment on mutual fund redemption amount & dividends for NRIs

The taxation of mutual fund for NRIs is similar to resident Indians. But there are TDS for NRIs.

Equity Funds: If you sell equity funds after holding it for 1 year, the gains are treated as long-term capital gain and it is tax-free.  But, if you sell it within 1 year, the gains are treated as short term and it is taxed at 15%. For NRIs, there is TDS of 15% in this case.

Non-Equity Funds: If you sell non-equity funds within 3 years of holding, the gains will be treated as short-term capital gains and will be taxed as per your tax slab. But, if you are selling such funds after 3 years, the gains are long term and it will be taxed at 20% after indexation.

In this case, for NRIs, the TDS is at 30% for short term capital gain while it is 20% for long-term capital gain.

Dividends are tax free in your hands. But in the case of debt funds, the fund house deducts dividend distribution tax before releasing dividends.

If your tax liability is less than these rates, an NRI can file the income tax return and claim the refund.

Direct Equity – Shares

NRIs can invest in Indian shares through Portfolio Investment Scheme (PIS) of the Reserve Bank of India (RBI). Each transaction through the PIS account is reported to the RBI.

Long term capital gains made on the sale of shares after 1 year from the date of purchase are tax-free Short term capital gains, profits on sale within one year of date of purchase, are subject to a TDS of 15%.

Real Estate

Investing in real estate is easy for NRIs under the ambit of Foreign Exchange Management Act (FEMA).

An NRI or a Person of Indian Origin (PIO) can invest in both residential and commercial properties in India. But they are not allowed to invest in agricultural land, plantation property and farm house. They can own such properties only if it is gifted to them or inherited.

Public Provident Fund (PPF)

PPF is a 15 year scheme of the government with an option to extend it after 15 years in blocks of 5 years. It allows tax benefits under Section 80C and the maturity amount is also tax free. This is a good option for debt investing and can be used as a retirement tool to ensure tax free withdrawal.

NRIs can’t open a PPF account. But those who opened a PPF account before they actually got NRI status can continue the account until it matures. But they cannot extend it after 15 years. On maturity, either, they can close the account or can keep it there and enjoy tax free interest till they close the account.

It is recommended that you open a PPF account before becoming an NRI.

National Pension System (NPS)

NPS is an easily accessible, low cost, tax-efficient and flexible retirement savings account. Under the NPS, the individual contributes to his retirement account. NPS is designed on defined contribution basis wherein the subscriber contributes to his own account. The benefit subscribers ultimately receive depends on the amount of contributions, the returns made on the contributions and the period of contributions.

Yes, an NRI in the age of 18 – 60 years, and complying with the KYC norms, can open an NPS account. NPS is distributed through authorized entities called Points of Presence (POP). Almost all the banks in India are enrolled to act as Point of Presence under NPS. To invest in NPS, you are required to open an NPS account through a POP bank, preferably where you have your NRI account. You can send your NPS application form to your Bank for opening of the NPS account.

The following documents need to be submitted to your Bank (POP) for opening of a NPS account:

  1. Completely filled in subscriber registration form
  2. Copy of Passport
  3. Proof of Address, if the local address is different from the address in your passport.

When the pension/ annuity is to be paid, it shall be in local currency only (i.e. in INR). However, there is no restriction on repatriation of pension, whether paid as annuity or in lump sum. Provisions of Income Tax Act, 1961 subject to amendments from time to time, would be applicable.

How to avoid Double Taxation for NRI?

Some times NRIs are subjected to double taxation - once in India and again in the country of their residence. It depends on their country of residence. If the Indian government has a Double Tax Avoidance Agreement (DTAA) with that country, the NRI will be spared from paying tax twice. Many countries have such treaty with India. For example, India has a DTAA with the UK. If an NRI based in the UK makes short-term capital gains from equity investments in India, he pays 15% tax in India. However, if the rate for such gains is 25% in the UK, the investor will need to pay tax only for the difference in rate in UK. This means he gets a deduction on the tax paid in India from his tax payable in the UK.

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22 thoughts on “Investment Options for Non-resident Indians (NRIs)

  1. Dilip

    Dear Pattu/Melvin

    This is very good and useful article.

    As stated - "If you are already an investor, you have to change your KYC with NRI status." Could please clarify doubt this?

    I understood that if already investor as a resident investor then need to change the KYC as NRI.

    But what happens to the already invested amount under resident status? Does it automatically converted in to repatriable?

    Is there any issue in continuing the investment under old KYC(resident) status from NRE account?

    Waiting for clarification on above queries.

    Reply
  2. Melvin Joseph

    No. Though you can continue to receive the contracted rate of interest on NRE deposit till maturity, the interest will be taxed once his tax status changed to Resident. But, if he can maintain the Resident - But Not Ordinary Resident status (RNOR), till that time, the interest will be tax free.

    Reply
  3. Deepesh

    Once you return permanently, you are no longer NRI as per FEMA. Hence, you can't own NRE account. Those NRE deposits have to be re-designated as resident deposits. Interest on resident deposits is taxable.

    Reply
  4. Melvin Joseph

    Investments in units purchased in Rupees, where the investor was a resident of India and subsequently becomes a non-resident, will not qualify for repatriation . Once you become NRI, you are supposed to change the tax status. You can continue investing from NRO account without repatriation option. Investing under old KYC from NRE account is not possible.

    Reply
  5. Deepesh

    Amount invested as resident (before turning NRI) does not become repatriable. However, funds after redeeming those units come to NRO account. And you can repatriate upto USD 1 million per annum from NRO account. Must be enough for most of us.

    You can't continue under old KYC (resident) from NRE account.

    Reply
  6. Deepesh

    Hi Melvin,
    As I understand, only interest on FCNR is exempt from tax for RNOR.
    So such benefit for NRE deposit (re-designated as resident deposits). Interest will be taxable for RNOR.

    Reply
  7. Raman

    So technically it is upto me whether to declare the status or not. Suppose if I remain out of India (on work) for 182 days of a FY and then back to India for the remaining 180 days and continue in India for the next 180 days (total of 360 days) and the take up a job out of India for the next 6 months, I will be NRE for both FYs..

    Reply
  8. Deepesh

    Yes, you do exercise a lot of discretion as per FEMA. Only you know if you have returned permanently.
    However, if you are coming to India to take up employment, you are resident from day 1 as per FEMA. The definition of NRI is different as per FEMA and Income Tax Act.

    Reply
  9. Raman

    Agree with you fully. Once we take up employment at India it becomes different. What I have assumed is not doing any work during such period.

    Reply
  10. Deepesh

    You are testing limits of the law. 🙂 FEMA gives a lot of leeway, I agree. I doubt your bank or RBI will come after you for a subjective matter.
    However, there can be an issue if your case comes up for scrutiny for Income Tax. You will have to convince IT Assessing officer.
    I say this because Section 10 of Income Tax Act refers to FEMA when it comes to exemption for NRE interest.
    Most likely, nothing will happen. But be prepared.

    Reply
  11. Ajay

    Hi,

    Are NRI eligible to claim TDS deducted on debt fund investments by filing tax returns, subject to the tax free income limit of 150000?

    If it's under DTAA, can we claim any benefits instead of 30% TDS.

    Regards

    Ajay

    Reply
  12. Deepesh

    Hi Ajay,
    You can claim back excess tax paid (through TDS) at time of filing returns. Btw, the limit is Rs 2.5 lacs now.
    In case DTAA allows taxation at lower rate, you can submit requisite documents with the AMC. They will deduct TDS at a lower rate.
    Under DTAA, You get tax credit for taxes paid in India.

    Reply
  13. Ajay

    Hi Deepesh,

    Nothing mentioned about this matter in any of AMC documents...

    Even it's deducted at 30% by AMC, can we claim just by using 24AS statements of IT dept pertaining to my PAN?

    Has any one done this. I have done this for my NRO FD but could not do it for debt fund, one CA said it's not possible.... pls let me know...

    Regards

    Reply
  14. Deepesh

    Ajay,
    To be honest, none of my clients have tried this. Hence, I do not have practical knowledge. Do not check with CA. Check this with AMC. Drop an e-mail to find out.
    For NRI, you have NRE FDs. Hence, the charm, need and tax benefits of debt mutual funds is not anyways not so high.
    TDS is merely deduction at source. If excess tax is deducted, you can claim it back at the time of filing returns.
    There is a post on my website about TDS deductions for NRIs. Suggest you check it out.

    Reply
  15. SureshKumar

    If suppose i am (NRI) investing in MF through my wife or other blood relative accounts means i can avoid TDS in Eq.MF and Debt also.. Right..?

    Reply
  16. VINAY MAITHANI

    One important thing to note is that once you become NRI and have NRE status then it is in the interest to close either Resident Indian savings account or convert them to NRO. As per FEMA an NRI cannot have Resident Indian Savings account.

    Reply
  17. Mani Sriram

    Incorrect. All interest from NRE deposits are taxable upon return to India. The account holder is allowed to hold the deposits until maturity, but is responsible to pay taxes on it on par with resident deposits. Only FCNR is exempted from tax as long as the account holder enjoys RNOR status.

    Reply
  18. Mani Sriram

    The moment the NRI returns back to India and stays over 182 days in a FY, the NRE FD interest is taxable, though he can hold the NRE deposits till maturity

    Reply
  19. Ajay

    Nee fixed deposit will remain as NRE status for a 2 year period after your return to India. Post that it will be treated as ordinary fixed deposit of resident

    Reply

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