05 Dec 2022 • 6 min read
NRIs in different parts of the world often wonder whether can NRI invest in Indian mutual funds or the stock market or not. While NRIs can invest in Indian stocks and mutual funds, RBI has certain guidelines regarding NRI investments in India. All these NRI investments are regulated by RBI as per FEMA or Foreign Exchange Management Act. This article will help you understand how you can invest in mutual funds or stock market as an NRI.
As an NRI, you can invest in the Indian stock market easily by following a few FEMA regulations by RBI. As per RBI, all investments from NRIs into Indian stocks and convertible debentures have to be made via a PIS account.
PIS account: A PIS account refers to a Portfolio Investment Scheme with which you can buy and sell shares of Indian companies and also convertible debentures. It is an account facility that you need to activate in your NRE or NRO account.
Trading account and Demat account: Trading and Demat accounts are necessary for investing in the stock market for NRIs, like for an Indian citizen. So, you need to open these accounts with a stock brokerage house in India that offers NRI investment and similar services. You have to fulfill all the KYC requirements, and then you can start investing with them.
When you are investing in the Indian stock market, you have to pay short-term or long-term capital gain taxes, depending on the tenure of your investments. At present, the base rate for equity long-term capital gain tax is 10%, with 1.5% and 0.46% surcharge and education cess levied. The total Tax that will be deducted at the source is 11.96% from your investment sales proceeds.
Similarly, for short-term capital gain tax, 15% plus 2.25 surcharge and 0.69% education cess will be levied. All these taxes are deducted at the source. This means the funds you will receive in your NRE or NRO account will be equal to sales proceeds minus TDS.
Two major factors to consider while starting your investment in the Indian stock market as an NRI are-
Firstly, you can only invest but not take part in intraday trading, and
You can invest in a maximum of 10% of shares of a company.
RBI has strict regulations related to these factors. When an NRI purchases 8% or around stakes of a company, RBI starts monitoring the investor, and without intimation and affirmation from RBI, the NRI investor cannot invest in further stakes of the company, and anyway, 10% is the maximum stake one can invest in.
If you are thinking, can NRI invest in mutual funds or not, then yes, NRI can invest in Mutual Fund in India. However, due to heavy paperwork and other Foreign Account Tax Compliance Act (FATCA) regulations, certain mutual fund houses do not accept applications from US-based NRIs as well as Canada-based NRIs. If you are based in these countries, then you have to look for the mutual fund houses which offer mutual funds for NRI in these countries or comply with the additional documentation required as per FATCA.
For investing in mutual funds, you need either of these 3 accounts as per FEMA regulations. As you are an NRI, you cannot have savings account in India –
NRE account: If you want to transfer the funds from your account that you use for investing in mutual funds to your present country, then an NRE account would be the best choice as it is a fully repatriable account. This account is suitable for NRIs looking to save and manage their earnings from a foreign land in India.
NRO account: If you do not want to transfer funds from India to your residing country, then you can go for an NRO account. You can open an NRO account or you can convert your resident account into an NRO account as well.
FNCR account: Foreign Currency Non-repatriable deposit account is an account where NRIs can save their earnings from overseas in certain currencies, which are USD, GBP, JPY, AUD, Euro, and CAD.
So, once you have any of these 3 accounts, you can apply with mutual fund houses that offer NRI investments in your country for investing in mutual funds. The first step would be to comply with the KYC requirements. You have to download and fill up the KYC form and courier the required documents for opening an account with a mutual fund house. The documents required for NRI investment in mutual funds in India are –
Address proof of your overseas residence
Address proof of your Indian residence
Copy of your passport
Copy of PAN
Bank and income statements
These documents need to be attested by any of the following authorities –
Authorised personnel of RBI-registered commercial banks of India which is having overseas branches in your country
Magistrates or judges
Indian embassy or consulates in your residing country
After the documents are submitted, the mutual fund house will carry on with their in-person verification via video conferencing to complete the KYC procedure.
For investments, you can directly invest with your NRI account with the mutual fund house, or you can appoint another person in India to whom you give a power of attorney for handling your mutual fund investments.
If you want to redeem your investments, the investment plus gains (or losses) will be credited to your NRO or NRE account as registered with the mutual fund house after deducting the taxes which are applicable. You can also receive a cheque depending on your convenience.
For equity funds, short-term capital gain taxes will be applicable at the rate of 15% if redeemed within 1 year. While if you redeem your investment after 1 year, then 10% long-term capital gain taxes would be applicable without any indexation benefits.
For debt funds, short-term capital gain taxes would be applicable as per your income tax slab, while for long-term capital gain, 20% with indexation benefit would be levied.
So while NRI can invest in a mutual fund, as well as in stocks in India, there are FATCA and FEMA regulations to be followed. Once you start with your investment, it wouldn’t be as complicated as it may be feeling at this moment.