How NRIs Can Invest in Indian Startups and Private Markets Legally?

In recent years, India has emerged as a global startup powerhouse. From fintech unicorns to cutting-edge healthtech ventures, opportunities are brimming across sectors. For Non-Resident Indians (NRIs), this booming ecosystem offers a compelling chance to participate in India's growth story not just sentimentally, but strategically. But how can NRIs invest in Indian startups and private markets legally and efficiently?

Let’s unpack the process, regulations, and options, along with some expert guidance to help you make informed decisions.

Why Indian Startups are Attracting NRI Investors?

Indian startups raised over $10 billion in 2023, despite global macroeconomic headwinds. This resilience, coupled with India’s digital-first economy, makes it a favorable ground for private market investments.

NRIs, especially those with roots or professional ties to India, often have an edge in identifying promising ventures. But more importantly, India’s liberalized investment environment now enables NRIs to invest in startups with fewer restrictions, provided the legal route is followed.

Can NRIs Invest in Indian Startups?

Yes, NRIs can invest in Indian startups under the Foreign Exchange Management Act (FEMA), subject to certain conditions laid down by the Reserve Bank of India (RBI) and SEBI. Investment avenues include:

• Direct equity investment

• Alternative Investment Funds (AIFs)

• Venture Capital Funds (VCFs)

• Convertible notes and SAFE instruments (where permitted)

Routes NRIs Can Use to Invest in Startups

1. Repatriable vs. Non-Repatriable Investments

NRIs can invest via:

• Repatriable basis: Using funds from an NRE or FCNR account. Profits can be taken back abroad.

• Non-repatriable basis: Using funds from an NRO account. Returns are taxable in India and cannot be freely remitted outside India.

Choose the route based on your return expectations and taxation preferences.

2. Investing Through AIFs and VC Funds

A popular and regulated way for NRIs to access India’s startup space is via SEBI-registered AIFs (especially Category I and II). These funds professionally manage pooled investments in early-stage or growth-stage ventures.

Note: NRIs investing in AIFs on a repatriable basis must comply with RBI reporting norms. Funds should flow through proper banking channels.

Invest Through a Curated Startup Fund: Equirus InnovateX

For NRIs who prefer a professionally managed, compliant route to participate in India’s startup growth, funds like the Equirus InnovateX Startup Fund offer a strategic solution.

• What it is:

  Equirus InnovateX Startup Fund is a SEBI-registered Alternative Investment Fund (AIF) designed to give investors access to India’s high-growth startup and private market ecosystem. Managed by Equirus Capital, the fund is curated for HNIs, NRIs, and UHNIs who want to participate in the India growth and innovation story without the complexities of sourcing, evaluating, and managing individual startup investments.

• Why it Works for NRIs:

  • Offers diversification across multiple early and growth-stage ventures
  • Simplifies compliance
  • Curated selection by Equirus’ venture and private market team with deep domain expertise

Instead of evaluating and investing in individual startups directly, NRIs can access a portfolio of opportunities through a single fund, reducing risk and administrative complexity.

RBI and FEMA Guidelines: What You Must Know

To invest directly in an Indian company, NRIs must follow these key rules:

✅ Startup Must Be Eligible

• Registered as a private limited company or LLP under Indian law

• Engaged in eligible sectors (defense, real estate, and print media have restrictions)

✅ Pricing Guidelines

Shares must be issued at fair market value, often backed by a CA valuation report.

✅ Reporting Compliance

• The Indian company must file Form FC-GPR with RBI within 30 days of share allotment.

• KYC compliance is mandatory for fund transfer.

Can NRIs Invest in SAFE Notes and Convertible Instruments?

Startups increasingly offer instruments like Convertible Notes or SAFE (Simple Agreement for Future Equity).

While Indian law allows NRIs to invest in convertible notes in startups (with minimum investment of ₹25 lakhs in a single tranche), they must:

• Route funds through banking channels

• Comply with pricing and tenure rules

• Ensure the instrument is convertible within five years

Taxation for NRIs Investing in Startups

Taxes can significantly impact your returns. Here's what you should know:

✅ Capital Gains Tax (for unlisted shares)

• Short-term capital gains (STCG): If shares are sold within 24 months, these gains are added to your total income and taxed at your applicable income tax slab rates (which can go up to 30% plus surcharge and cess for NRIs).

• Long-term capital gains (LTCG): If shares are sold after 24 months, these gains are taxed at a flat rate of 12.5% (plus applicable surcharge and cess). This rate applies to the entire gain, and no indexation benefit is available for NRIs on unlisted shares. (Note: For listed shares, the rates and holding periods differ, and an exemption of ₹1 lakh on LTCG applies).

✅ Dividend Income

Taxed at slab rates under the Indian Income Tax Act. Applicable TDS (Tax Deducted at Source) for NRIs is usually 20%.

✅ Double Taxation Avoidance

India has DTAA agreements with 90+ countries. You may claim tax credit in your country of residence if tax is paid in India.

Legal Checklist for NRIs Before Investing in Startups

Here’s a quick compliance list before you proceed:

✅ Use an NRE/NRO/FCNR account appropriately

✅ Sign proper agreements (SHA, SSA, convertible note terms)

✅ Perform KYC and PAN registration

✅ Ensure startup files RBI and MCA reports timely

✅ Consult a tax advisor for structuring returns and exits

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FAQs NRIs Ask Before Investing in Indian Startups

Q: Can I invest in a startup owned by a friend or family member?

Yes, as long as the startup is eligible and follows FEMA and RBI norms.

Q: Can I invest through a holding company in Singapore or UAE?

Yes, but the investment will be treated as FDI and follow separate guidelines.

Q: Is there a lock-in period for my investments?

Generally, no lock-in exists unless investing through instruments like convertible notes or AIFs with fixed tenure.

Q: How do I exit these investments?

Through share buybacks, IPOs, secondary sales, or AIF distribution cycles.

Final Thoughts: NRI Startup Investments Done Right

The Indian startup ecosystem offers NRIs a chance to diversify their portfolio and reconnect with the India growth story. But while the opportunity is exciting, it is equally important to follow the legal, tax, and regulatory framework.

Whether you’re investing directly, through AIFs, or via structured instruments, always consult professionals to structure your investment smartly and safely.