What are the investment options for NRI available in India?
Indian government promotes investment in India from abroad.
This is particularly true for Non Resident Indians (NRI) in USA, Europe, Australia & Middle East.
Indian government & RBI want NRI’s to invest in India.
Lots of NRI investment options are available that supports this cause.
Indian nationals who are residing in USA, Europe, Australia etc like to invest in India.
They get advantage of weaker Indian rupee compared to the currency of their residing nation.
To take advantage of this inclination of NRI’s, Indian government provides favourable NRI investment options to encourage investment in India.
The potential of FDI that can be brought in India through NRI’s are huge.
There are NRI in USA, Europe, Australia who are very successful.
Providing NRI facilities to these NRI’s can bring lots of investment and foreign exchange in India.
But before we go into evaluating the investment options, we must understand the word ‘Repatriation’.
NRI’s are free to buy different investment options in India. But the amount of profit that they can transfer back to their residing nation is controlled.
In repatriation basis, profits can be transferred back to foreign country.
In non-repatriation basis profits cannot be back to their foreign country. Repatriation rules are different for different investment options.
Before NRIs invests in India they must make sure that they are aware of repatriation rules.
Repatriation rules for real estate can be different from equity & debt linked investments.
Its is essential for NRI to open a bank account in India before investing.
From that bank account the money will debited/credited in case of purchase or redemption.
Types of accounts that NRI’s can open in India are:
- Non-Resident Ordinary Rupee Account (NRO Account)
- Non-Resident (External) Rupee Account (NRE Account)
- Foreign Currency Non Resident (Bank) Account – FCNR (B) Account
Comparison between NRO, NRE & FCNR Account
|SL||Description||NRE A/C||NRO A/C||FCNR A/C|
|1||When to Open||After becoming NRI||After Becoming NRI or just before it||After becoming NRI|
|2||Joint Account with NRI Possible?||Yes||Yes||Yes|
|3||Joint Account with Resident Indian Possible?||Yes (with close relatives only)||Yes||Yes (with close relatives only)|
|4||Currency in Savings A/c||INR||INR||USD, Euro, Pound etc|
|5||Current Account & Savings A/c||Yes||Yes||No|
|6||Fixed Deposit Possible?||Yes||Yes||Yes|
|7||Purpose||NRI can keep their savings they managed in foreign country (in USD etc) in NRE a/c in INR||NRI can keep their income generated in India (like dividend, rental income, gift etc)||NRI can use FCNR to keep fixed deposits (in foreign currency) for max period of 5 years|
|8||Income generated in India can be kept?||No||Yes||No|
|9||Repatriation||Yes||No. Only interest income generated from deposits can be repatriated||Yes|
|10||Funds Transfer to any normal Indian Bank Account||Yes||Yes||No|
|11||Funds Transfer to NRO a/c||Yes||Yes||No|
|12||Funds Transfer to NRE a/c||Yes||Yes||Yes|
|13||Funds Transfer to FCNR a/c||Yes||Yes||Yes|
|14||Income Tax on Interest Generated on Deposits?||No||Yes||No|
|15||What happens when NRI comes back and settles down permanently in India?||Account gets converted to resident account||Account gets converted to resident account||Account gets converted to resident account|
|16||Interest Earned for 5Year Fixed Deposit in USD||NA||NA||2.88%|
|17||Interest Earned for 5Year Fixed Deposit in Pound||NA||NA||2.68%|
|18||Interest Earned for 5Year Fixed Deposit (in INR)||8.50%||8.50%||NA|
|19||Interest Earned on Savings A/c (in INR)||4.00%||4.00%||NA|
|20||Interest Rate Charged on Loan against deposit in NRO/NRE A/c||0.50% over the rate paid on the relative Time Deposits offered as security.||0.50% over the rate paid on the relative Time Deposits offered as security.||2.25 % over prevalent Bank’s Base Rate* (12.25% p.a. currently)|
Investment Options for NRI in USA
(1) GOVERNMENT SECURITIES
These securities issued by government of India. Hence they are very safe.
Dated government securities are good for medium to long term holding periods.
The interest that bears on these securities can be either fixed or floating.
Few types of dated government securities are as follows:
- Fixed rate government bonds
- Floating rate government bonds
- Capital index bonds
- National Savings Certificates (NSC)
It easy for NRI to buy government securities in India. Just transfer funds to NRO/NRE/FCNR accounts from your foreign bank account.
The Indian banks in which NRI has maintained its bank-account can buy/sell government securities for NRI.
On basis of simple advice from NRI, banks can buy and sell government securities on behalf of NRI.
The same banks will also credit interest earned on these government securities in NRI account.
Bonds issued by Indian Public Sector companies can also be purchased by NRI.
Again the Indian banks (where NRI has bank a/c) will help in purchase of government-bonds.
2) Treasury Bills
Treasury Bills (T-Bills) are suitable short term investing.
Here suitable investment horizon is 1 year. T-Bills are issued by government India from center.
T-Bills are very safe investment option. The validity of T-bills are 3 months, 6 months & 12 months.
T-Bills pays no interest.
But when they are issued, they are issued at a discount to face value.
During redemption face value is paid to the investor.
Minimum investment amount in T-Bill is Rs 25,000. Investors can invest in T-Bills in multiple of Rs 25,000.
T-Bills can be purchased by participating in auctions organized by RBI. Auction participation can be done online in www.rbi.org.in.
A Resident Indian can buy T-Bills by opening Constituent SGL account with a Bank.
Here government securities without any paper work. NRI can buy T-Bills using their NRO/NRE accounts.
They shall contact their Indian bank for effecting the purchase.
3) Mutual Funds
NRI can invest in funds operating in India. Units of mutual funds can be purchased by NRI’s directly from the issuer.
The can also use other methods of buying mutual fund units like online purchases.
Mutual fund issuer first provide offer documents to NRI’s.
After reading the offer document, NRI should fill an application form.
In the application form they must clearly write the scheme name & number of units of mutual fund they want to buy.
NRI can also be bought directly from issuers website. Most issuer provide direct debit facility.
Hence payment may not involve cheque and DD at all.
It is a point worth noting that Indian Mutual Fund Houses are not allowed to accept funds from NRI in foreign currency.
Hence investment by NRI, in mutual funds, can be made only in INR.
To solve this problem, we have already discussed that an NRI must open a NRO/NRE/FCNR account with an Indian Bank.
Tax payable by NRI for Investing in Mutual Funds:
|Equity Linked Funds||Debt Linked Funds|
|Short Term capital Gain Tax||15%||As per Tax Slabs of NRI|
|Long Term Capital Gain Tax (with Indexation)||NIL||20%|
|Long Term Capital Gain Tax (without Indexation)||NIL||10%|
|Dividend Distribution Tax (Liquid Funds)||NIL||25%|
|Dividend Distribution Tax (Other Debt Funds)||NIL||12.50%|
4) Bonds issued by PSU
When PSU need fund to expand or modernise its business, they can raise it by issuing bonds.
These bonds are also considered as very safe investment options.
Ministry of Finance gives permission to PSU to issue bonds to public. NRI are allowed to buy these bonds.
5) Convertible Debentures (CD), Non-CD, Perpetual Bonds, Stocks, Exchange Traded Funds (ETF)
If an NRI has got PIS (Portfolio Investment Scheme) approved from RBI, he/she can purchase shares traded in BSE & NSE.
Almost all nationalized banks have got permission to provide PIS services to NRIs.
After ones PIS is approved, NRI can purchase and sell stocks from secondary market.
Not only shares but debentures, non-convertible debentures, equity linked mutual funds can be purchased under PIS scheme.
Under PIS scheme, IPO shares and bonus shares are not covered.
Banks like ICICI Bank, Axis Bank, IDBI, Yes Bank etc provides PIS facility for NRI’s. After an NRI has opened PIS accounts.
They also need to open DEMAT A/c & ONLINE TRADING A/c.
Once an NRI has all three (PIS, Demat & Trading A/c) he is free to trade shares online. An NRI cannot do day-trading in India.
They can only sell their shares after completion of 2 days of holding period.
Before investing in Indian stocks, NRI must know what is paid-up capital. Knowing this define the limit upto which a NRI can invest in a company. Paid up capital can be obtained by looking at companies balance sheet. The value under the heading ‘share capital’ is paid-up capital. Suppose paid-up capital of a company XYZ is Rs 150Crore. A NRI can buy shares less than 10% of Paid-up capital. In this example, NRI can buy stocks of market price less than Rs 15 crore. NRI’s are charged a nominal fees for providing PIS service. Some banks charge very nominal fees but they do profit sharing.
Companies raise funds by issuing debentures to public.
Some debentures can be converted into shares after maturity. NCD’s are non-convertible debentures.
They cannot be converted into shares upon maturity. NRI is allowed to buy NCD of Indian companies.
Debentures that can be converted into shares upon maturity are called convertible debentures.
NRI are allowed to buy convertible debentures of Indian companies.
Perpetual bonds are like normal bonds but it is without fixed maturity. Hence it can never be redeemed.
So how investors make money by perpetual bonds? Companies pay fixed interest to the holder of such bonds.
Institutions like Government, banks etc who require funds for very long time issues perpetual bonds.
NRI’s can also buy Exchange Traded Funds (ETF’s) by opening NRI-Trading account. They can then trade ETF’s online.
Tax Liability of NRI investing in Stocks in India:
|Short Term capital Gain Tax||15%|
|Long Term Capital Gain Tax||NIL|
|Dividend Distribution Tax||NIL|
6) Money Market Mutual Funds (non-repatriation basis)
Money market mutual funds invest in short term securities like T-bills, short term debt certificates issued by government of India.
These investments are very safe but give very low returns. NRI’s are allowed to invest in money market funds.
The returns generated by these funds are taxable for NRI’s. Invested money from here cannot be repatriated to foreign country.
The bank, on behalf of NRI, must apply to RBI in form ISD, seeking permission for investment in money market mutual funds.
It is a formality that must be taken care by banks.
NRI’s need not go into this procedure.
NRI must simply inform their bank of their intentions (with details) and balance will be taken care from India.
7) Real Estate Property
NRI’s can buy real estate property in India. But they cannot buy agricultural land or a farm house.
The payment for acquiring property should come only from NRO/NRE/FCNR account.
Payment cannot be made in foreign currency. NRI’s can freely buy residential and commercial properties in India.
No matter how good or bad the equity market is, real estate sector keep receiving investment from NRI’s.
In times of euphoria (like after BJP government formation in 2014), real estate sector boom to new highs.
Real estate sector has always been favorite of NRIs. Simply by opening a NRO/NRE/FCNR accounts in Indian banks, NRI can start pumping in money in real estate sector.
NRI’s generally invest in real estate to take advantage of capital appreciation. They invest in project-launch stage and within 3 years they book profits.
In this case, a good real estate project can give to returns of 20-25% per annum. The problem for NIR’s start from here.
They cannot take away profit to their residing country.
If payment for property is made using FCNR account, then money equal to paid amount from FCNR can be repatriated.
If payment is made through NRE account then case is different. Suppose an NRI had $60,000 in NRE account.
The NRI paid $50,000 (in equivalent Indian Rupee) to buy a real estate property. After that he maintained $10,000 in NRE account till sale of property.
He sold property after 3 years for $80,000.
After the sale, NRI can repatriate only $10,000 (balance) + $50,000 (paid earlier). Balance money should stay in NRE account.
The transaction from NRO account is different.
NRI can repatriate full amount subjected to limit of $1 million.
8) Company Deposits
Both public and private companies can accept deposits from NRI abroad.
Companies must first confirm the investment limit from RBI before accepting funds from NRI.
Once RBI’s clearance is received, funds can be directly sent from overseas banks to companies account.
If NRI has NRO/NRE/FCNR account in India, then payments can be made from these accounts to companies.
Details of deposits received from NRI should be disclosed to RBI.
This is in responsibility of company and not of NRI.
Hi Mani, I’ve been reading your blogs to come up with a retirement portfolio for my parents. I was looking for more info on perpetual funds as constant source of income in the income portfolio. A Google search showed only this page. Would be great if you can share your thoughts on that as comment or full post. Thanks for sharing your knowledge. Very easy to understand.
The term ‘perpetual funds’ is not commonly used in India. So please tell me more about how you mean by it…
Alternatively, I’ll suggest you read this article on regular monthly income investment. It can give you some idea.
Thank you for asking.
Extremely useful article that encapsulates perfectly the investment opportunities for NRIs in India. Thank you for all the relevant information.
I am 36 year old nri. I want to retire by 56. I have 40 lakhs corpus plus I can invest 1 lakh per month for next 20 years. My targets are to have a returement corpus after 20 years, child marriage after 20 years, child education after 13 years.
What is the best investment option.
Are you sure about the taxes payable for long term for stocm is NIL… I live in new york and i have a Nre and a Nro account …If i decide to invest 10lacs today and if that investment becomes 50lacs in 10 years so i would t pay any taxes on it??? Please explain