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.
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.
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.
- KYC application form
- Pan Card
- Address proof (both Indian and overseas)
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%.
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:
- Completely filled in subscriber registration form
- Copy of Passport
- 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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