Indian citizens who once actively invested in Indian markets lose this opportunity once they move offshore because of work or other commitments. These Indian citizens are called non-resident Indians (NRIs). Incidentally, they too can invest in India, subject to the fulfilment of certain conditions.
Technically speaking, NRIs are either Indian citizens or persons of Indian origin (PIOs), and they do not satisfy the residential status clauses according to the Income-tax Act, 1961.
Deepashree Shetty, associate partner, tax and regulatory services, BDO India, the Indian subsidiary of British accounting, taxation and business advisory firm, BDO, says that an individual cannot operate a resident account to conduct transactions in India upon attaining an NRI status.
“Hence, the account needs to be redesignated as an NRE/NRO account. Additionally, it is pertinent to keep the ‘know your customer’ (KYC) regulations updated for the use of the stock/mutual fund account for transactions,” Shetty adds.
Essentially, once you become an NRI, your old accounts opened in India cannot be used for any purposes, and if you are using that account to invest in mutual funds and stocks, then you must either close the account, or, update the KYC details.
Pankaj Shrestha, head-investment advisory division, Prabhudas Lilladher, a Mumbai-based stock broking company, says that there are various ways a NRI can invest in India.
Direct Equity: The Reserve Bank of India’s (RBI’s) portfolio investment scheme (PIS) allows NRIs to invest directly through a designated trading and depository account with a stock broker and a designated bank account called non-resident external (NRE) or non-resident ordinary (NRO) (PIS) Account.
According to Tapati Ghose, partner, Deloitte India, an NRI must hold a PAN card to open a PIS-enabled account, which can either be an NRE or an NRO account. NRE is a non-resident external account, and its funds can be fully repatriated overseas.
“The funds available in an NRO account can be repatriated overseas subject to limits. If an NRI has an NRO savings bank account in India, the Indian funds can be used for making further investments in Indian stock markets,” added Ghose.
NRIs can also invest in initial public offerings (IPOs) by using the same NRE or NRO account. They may also invest in portfolio management service (PMS) schemes, but the minimum ticket size for PMS is Rs 50 lakh. Also, investments in PMS are done in the accountholder’s name and are held in their own demat account.
Prashant Joshi, managing director and head of national distribution, and head, consumer banking group, Development Bank of Singapore (DBS) India, says that NRIs also have the option to delegate their investing decisions to another person by signing and giving their power of attorney letter for facilitating transactions in India.
“This is ideal if clients have someone they can trust to safeguard and monitor their investments,” Joshi adds.
Mutual Funds: NRIs can invest in Indian mutual funds, too, but they will have to comply with all regulatory requirements. There are some restrictions by certain asset management companies (AMCs) in regard to US and Canada-based NRIs.
While opening an NRI investment account, all necessary details, such as passport, address proof, self-attested copy of tax identification number (PAN), FATCA (A US Federal law compliance) declaration, and other required documents, will be required.
For completing the in-person-verification (IPV), NRIs may also visit the Indian Embassy in their country of residence and complete the process.
“To begin investing in mutual funds in India, NRIs should have an NRE/NRO savings account and be KYC compliant,” Joshi adds.
High Net-worth Alternative Investments: According to Sumir Verma, MD, Merisis Advisors, a Mumbai based boutique investment banking company, an NRI can invest in stocks through alternative investment funds (AIF), which is a managed account. "Net worth is another factor that has to be considered. It varies between individuals to entities while investing.," Verma further added.
For AIF investments, the minimum ticket size for category I angel funds is Rs 25 lakhs while for other categories it is Rs 1 crore, and unlike PMS, investments in AIF are done using a pool account. So, it is not necessary to open a separate depository account.
Investment Limits: There are no limits on the maximum investment that an NRI can make in mutual funds. But there is a limit on the maximum stock purchase and sectoral investment limits.
Repatriation of Proceeds: According to Shetty, an NRI can repatriate his/her proceeds from the sale of investment overseas, subject to payment of requisite taxes and fulfilment of certain conditions.
“Also, it should be noted that a CA Certificate (Form 15CB) needs to be obtained for overseas remittances,” Shetty says.
Taxation: An NRE account stores funds earned outside India, and a NRO account stores funds earned in India. According to the Income-tax Act, 1961, NRE accounts are tax-exempt, while NRO accounts are not.
The same equity and debt taxation laws which are applicable to Indian residents apply here too, but since an NRI is not a resident of India, double taxation treaty agreement (DTAA) should also be looked at so that the NRI doesn’t end up paying double taxes in two countries for the same gain.
In short, an NRI needs to have a valid Indian PAN card, an NRE or NRO bank account, comply with FATCA, and do his/her KYC obligations, visit the Indian Embassy for IPV verification, either do self- transactions in the investment account, or appoint anyone by signing POA document, and check for DTAA agreements to pay tax (through NRO account since NRE account proceeds are non-taxable), if he/she wants to invest in Indian equity or debt instruments.