How can an NRI Invest in the Indian Stocks & Mutual Funds?

NRIs (Non-Resident Indians) in various parts of the world often wonder whether NRIs can invest in Indian mutual funds or the stock market or not. While NRIs can invest in Indian stocks and mutual funds, RBI (Reserve Bank of India) 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 stocks or mutual funds as an NRI.

Can NRI invest in Indian stock market?

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 must be made via a PIS account.

Process of NRI investment in the Indian stock market

1. 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.

2. 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 (Know Your Customer) requirements, and then you can start investing with them.

Tax implications on stock investments

When you are investing in the Indian stock market, you must 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.

Things to consider while investing in stocks directly

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 in 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.

Can NRI invest in mutual funds in India?

If you are thinking, can NRI invest in mutual funds or not, then yes, NRI can invest in Mutual Funds 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, you must look for the mutual fund houses that offer mutual funds for NRI in these countries or comply with the additional documentation required as per FATCA.

Accounts requirements

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 –

1. 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.

2. 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.

3. 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.

KYC procedure

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 must download and fill in the KYC form and courier the 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
Photographs (recent)
Copy of PAN (Permanent Account Number)
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
Public notary

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.

How to invest?

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.

How to redeem your mutual funds?

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.

Tax implications

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.

Other NRI investment plans & options in India

There are several other NRI investment plans available in India. Some of them are -

1. Fixed Deposits

NRE and NRO fixed deposits provide attractive interest rates.
Interest earned on NRE fixed deposits is exempt from taxes, while interest on NRO fixed deposits is subject to taxation.

2. Real Estate

NRIs can purchase residential and commercial properties in India, but are restricted from buying agricultural lands, farmhouses, and plantation properties.
Any rental income from properties is taxable in India.

3. Bonds and Government Securities

NRIs can invest in government, corporate, and infrastructure bonds through their NRE/NRO accounts.

4. National Pension System (NPS)

NRIs can invest in the National Pension System, a long-term retirement-focused investment option regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
Investments can be made through NRE/NRO accounts.

5. Public Provident Fund (PPF)

The Public Provident Fund is a long-term savings scheme provided by the government of India.
As an NRI, you cannot open a new PPF account or begin investing in it.
However, NRIs can continue to maintain their existing PPF accounts that were opened before they became an NRI.
Existing PPF accounts can be maintained until maturity, and interest earned is tax-free in India.

6. Exchange-traded funds (ETFs)

NRIs can invest in ETFs which are listed on Indian stock exchanges.
It offers a diversified portfolio with the convenience of trading like a stock.

7. Unit-Linked Insurance Plans (ULIPs)

These plans offer a blend of insurance coverage and investment opportunities.
They offer the benefit of life insurance coverage along with market-linked returns.

Conclusion

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 will not be as complicated as it may be feeling at this moment.

How can an NRI Invest in the Indian Stock Market & Mutual Funds?