Investment options in India for a Non Resident Indian (NRI)

Investment Option-1

FIXED DEPOSIT (FD)– An NRI can invest in FD in India through 3 types of bank accounts.

Types of Bank accounts applicable for NRIs & PIO for opening an FD NRE-Non Resident External Rupee Account NRO-Non Resident Ordinary Rupee Account FCNR-Foreign Currency Non Resident Account
Eligibility for opening bank account in India Non Resident Indians/Person of Indian Origin Non Resident Indians/Person of Indian Origin Non Resident Indians/Person of Indian Origin
Type of Account Rupee Account

For depositing money earned externally.

Non-repatriable rupee account.

For income earned in India.

Similar to NRO account except fund are held in foreign currency
Lock-in Period of FD One year No Lock-in 3 years
Interest rate on FD *6.75 – 6.85 % compounded annually *6.25 – 6.4% compounded annually Changes for different currencies
  E.g. 5% p.a. for 3 year dollar FD
Bank Account opening Fee Varies from bank to bank Varies from bank to bank Varies from bank to bank
Tax Interest earned is tax-free Tax is Deducted at Source (TDS)@30% Interest earned is tax-free
Repatriation outside India Any amount $1 million in year Any amount
Currency Risk Yes Yes No
Making investment in any other currency except INR No No Yes
Type of Account Savings, Current, Recurring or Fixed Deposit Savings, Current, Recurring or Fixed Deposit Term Deposit
*interest rates on 31st July,2018

Documents Required:

  1. Account opening form signature –to be verified by bank overseas or Indian Embassy/Consulate/High Commission or any Notary
  2. Photocopy of Indian Pan Card
  3. Photocopy of Passport – Self attested
  4. Photocopy of Visa– Self attested
  5. Statement of Bank Account (Overseas) – Self attested
  6. Proof of Current Residency (Overseas)
  7. Passport size photo
  8. Cancelled Cheque of your overseas bank account
  9. Some other documents may be asked by some banks

Benefits / Drawbacks of Fixed Deposit:

  1. Rate of return is fixed: You don’t have to worry about market volatility in stock markets.
  2. Ease of operation: For repatriation, you don’t have to open an NRO account. You can transfer money from your Indian NRE account to your overseas bank account.
  3. Interest earned is Tax free if you have an NRE account or an FCNR account.
  4. Extremely Low returns as compared to the returns provided by Indian Equity market. It would take approximately 12 years to double your money in a Fixed Deposit. Whereas in a Mutual fund (equity) or a Portfolio management service (equity) your money can become even 5 times in 12 years, which translates to 14.35% CAGR. Just FYI…Indian equity market has delivered almost 17% CAGR return in last 30 years.

Investment Option-2

Real estate– NRIs and PIO can invest in Indian Residential or commercial property only.

  • They cannot buy farm houses or agricultural property in India.
  • You need an NRO bank account to buy or sell property in India.
  • Property can only be sold to resident of India or NRI or PIO only.

Documents Required:

  1. Account opening form signature –to be verified by bank overseas or Indian Embassy/Consulate/High Commission or any Notary
  2. OCI/PIO Card (Overseas citizen of India/person of Indian Origin)
  3. Registered Power of Attorney (if you are not present at the registration office)
  4. Photocopy of Indian Pan Card, if any.
  5. Photocopy of Passport – Self attested
  6. Photocopy of Visa– Self attested
  7. Statement of Bank Account (Overseas) – Self attested
  8. Proof of Current Residency (Overseas)
  9. Passport size photo
  10. Cancelled Cheque of your overseas bank account
  11. Some other documents may be asked by some banks
  12. Title Deed (in the name of the seller)
  13. Prior Title Deeds (of the last years)
  14. Latest Tax Receipts (land and building if any)
  15. Updated Encumbrance Certificate (covering last years)
  16. Approved Plan
  17. Building permit/Notice of Commencement from corporation, municipality or panchayat, if you are purchasing a house/apartment)

Withdrawal– For selling the property and to repatriate money outside India, an NRI/PIO must have

  1. Indian PAN card (Permanent Account Number)
  2. NRO Bank account

Taxation:

When an NRI/PIO sells property in India, it is taxed as follows:

Short-Term Capital Gain– If property is sold within 3 years of purchase then NRI/PIO will get the payment after TDS (TAX Deducted at Source) @ 30.9% of the value after all the expenses incurred in selling and maintenance of the property so sold.

Long-Term Capital Gain– If property is sold after 3 years of purchase then property is subject to TDS (TAX Deducted at Source) @ 20.6% after deducting all the expenses incurred on selling of property and maintenance of the property.

Returns- When Delhi, started expanding, it gave birth to NCR (National Capital Region) i.e. Faridabad, Noida, Gurgaon. People were bullish about all 3 areas but of course Faridabad did not grow as did Noida and Gurgaon. And Noida for that matter didn’t grow as much as Gurgaon. So it’s difficult / risky to make such decisions and they could prove to be a disaster for us if they don’t work out in our favor.

Let us say an example of a residential apartment in Gurgaon. As on date, Gurgaon is expanding in localities like Golf course road, Golf Course extension road. And the value of original Gurgaon premium residential properties is not appreciating any more. Of course property prices cannot rise for ever, there are always new properties coming up with better amenities and infrastructure. Thus investing in property with view to get high returns is not a very good idea.

Lot of property value appreciation is dependent upon upcoming government policies / infrastructure plans. But world becoming so dynamic that these policies can be changed overnight and all your investment can become dead with just one decision whch is not even in your hand. We are hearing about an airport in Greater Noida for over a decade now. It is not even finalized forget about actual work starting on ground.

Investment Option-3

DIRECT EQUITIES-NRI/PIO can also invest in direct equities in Indian Stock Market. Some of the things you should know before investing:

  1. Open an PIS account (Portfolio Investment Scheme) through authorize banks to open PIS account by RBI.
  2. NRI/PIO can only invest through a Stock Broker.
  3. You need to be CKYC (Central Know Your Customer) compliant.
  4. Clients need Trading and De-mat account.
  5. Dividend paid by companies can only be received in NRO account.
  6. NRI/PIO cannot do intraday trading.
  7. NRIs can invest in Futures & Options segment also through NRO account.
  8. NRIs/PIO can buy shares debenture, ETFs, Bonds issued by Public Sector Undertakings, dated government securities and treasury bills in NRE(Repatriation)/NRO(Non-Repatriation) account.
  9. Clients can have 2 separate trading account for NRE and NRO
  • NRI/PIO can only sell those shares which are in their Demat account.
  • NRI/PIO can invest upto 10% of the paid-up value of a stock/debentures of a company.
  • NRI/PIO cannot trade in Currency Segment.
  • NRI/PIO can also invest in IPO (Initial Public Offering) if the company has the permission from GoI/RBI.

Documents Required:

  1. Photocopy of PIO card
  2. PIS Permission Letter from the respective designated bank.
  3. Photocopy of Indian Pan Card
  4. Photocopy of Passport
  5. Photocopy of Visa
  6. 2-year statement of Bank Account (Overseas)
  7. Proof of Current Residency (Overseas)
  8. Passport size photo
  9. Cancelled Cheque of your NRE/NRO/FCNR bank account
  • All documents need to be Attested by officials of overseas branch of Scheduled Commercial Bank registered in INDIA, Public Notaries or India Embassy/Consulate General of their respective country.

Taxation:

For equity investment Tax Treatment for NRI/PIO is same as for Indian residents. Except the TDS (TAX Deducted at Source) is done by the bank before repatriation.

Long-term- (if holding for more than one year)- 10% capital gain tax on profit above Rs.1,00,000/-

Short-term- (if holding period is less than one year)- 15% tax on the profit.

Dividend income upto RS.10 lakhs is exempted in the hands of the investor.

Investment Option-4

MUTUAL FUNDS

Mutual Fund is a good alternative to property investment. NRIs can invest through NRE (Repatriable Account) or NRO (Non-repatriable Account).

Things to remember for investment in Mutual Fund investment in India by NRI/PIO:-

  1. Investment can only be done in rupee denomination. Therefore, NRI needs an NRE or NRO account.
  2. NRI can also invest through Power of Attorney (POA).
  3. NRIs don’t need any RBI approval for investment in Mutual Fund.
  4. Many Asset Management companies(AMC) do not allow NRI based out of US and Canada to invest in mutual funds. So please check with the AMC before investing.
  5. Some AMC also conducts In-Person Verification.
  6. Investor need to be KYC (Know Your Customer) compliant.
  7. India has signed Double Taxation Avoidance Treaty with some countries like US. You can claim Tax Relief in your respective country in case you are Taxed doubled.
  8. Your redemption carries a right to repatriation only till you are NRI.

Documents Required:

  1. Photocopy of PIO card
  2. Photocopy of Indian Pan Card
  3. Photocopy of Passport
  4. Photocopy of Visa
  5. Proof of Current Residency (Overseas)
  6. Passport size photo
  7. Cancelled Cheque of your NRE/NRO bank account
  8. 2-year statement of Bank Account (Overseas) –For CKYC
  9. If the investment is to be done by cheque or draft, you need FIRC (Foreign Inward Remittance Certificate) or a letter from your bank.
  • All documents need to be Attested by officials of overseas branch of Scheduled Commercial Bank registered in INDIA, Public Notaries or India Embassy/Consulate General of their respective country.

Redemption:

AMC will credit the fund i.e. investment and gains to your bank account(NRE/NRO) directly after deducting taxes. They can also issue the cheque.

Taxation:

Short-term capital gain (Less than one year) – If you sell your Equity Mutual Fund within one year of purchase, you will have to pay the Short-term Capital Gain Tax of 15% on the return you earned. Example: Anil invested Rs. 100,000 in an Equity Mutual Fund of ICICI in January 2000 and sold the same in June 2000 for Rs. 110,000. Tax to be paid by Anil is = Rs. 10,000*15/100 i.e. Rs.1500/-.

Particulars Equity Mutual Fund
Amount Invested 1,00,000/-
Assumed Returns 10%
Profit on the date of sale 10,000/-
Tax Rate(Within 1 Year of Purchase) 15% of the returns generated
Short term Capital Gain(STCG) 10,000/-
Tax to be paid 10,000*15/100=1500/-,
Net Investment Value
(Original Investment+Profit-STCG)
1,00,000+10,000-1,500=1,08,500/-
Post Tax Returns 8.5%

Long term capital gain (More than one year)– As per the Government of India, from Assessment Year FY 2018-2019, any Equity Mutual Fund sold after one year having return of more than One Lac has to pay 10% tax as Long-Term Capital gain.

Particulars Equity Mutual Fund
Amount Invested 6,00,000/-
Assumed Returns 20%
Profit on the date of sale 1,20,000
Tax Rate((after 1 Year) 10% above the return of Rs.1,00,000/-
Long term Capital Gain 1,20,000/-
Taxable Long-Term Capital Gain 1,20,000-1,00,000(Exempt)=20,000
Tax to be paid 20,000*10/100=2,000/-
Net Investment Value
(Original Investment+Profit-LTCG)
6,00,000+1,20,000-2,000=7,18,000
Post Tax Returns 19.67%

Dividend income upto RS.10 lakh is exempted in the hands of the investor.

Investment Option-5

NATIONAL PENSION SCHEME

National Pension Scheme is a retirement planning scheme introduced by the Govt. of India. It is Equity market-linked retirement account. It is managed by PFRDA (Pension Fund Regulatory and Development Authority). In the long run it gives better inflation-adjusted returns.

Things to know: –

  1. Must be KYC compliant.
  2. NRI can invest in NPS if they have Aadhar card or PAN card.
  3. Only one NPS account is allowed per person. Age of the subscriber must be between 18-60 years.
  4. NPS account can be open through net-banking through NRE/NRO account.
  5. PIO and OCI (Overseas Citizen of India) cannot open NPS account.
  6. NPS account can be operated from anywhere in Inida.
  7. There are 7 approved Pension Funds. Subscribers have to choose between- LIC, SBI, UTI, ICICI Prudential, Kotak Mahindra, Reliance Capital and HDFC.
  8. Types of Account-Subscribers have to opt how they want their funds allocation.
    • Active choice- Subscribers decide how much he/she wants to invest between E(Equity), C(Corporate Bonds) , G(Government Bonds) and A (Alternative Investments).
    • Auto choice- There are 3 different Life Cycle Funds to choose from
      • MODREATE LC-50% in E (Equity), 30% C(Corporate Bonds), 20% G(Government Bonds). After the age of 36 it automatically reduces the weight in equity and transfer in C and G
      • LC 75- 75% in E (Equity), 10% C(Corporate Bonds), 15% G(Government Bonds)- up to the age of 35. It trims down E each year by 4% and redistributed in G and C.
      • LC25- 25% in E (Equity), 45% C (Corporate Bonds), 30% G (Government Bonds)- up to the age of 35. It trims down E each year by 1% and C by 2%.

 

TIER 1 TIER 2
TYPE NON-WITHDRAWAL ACCOUNT WITHDRAWAL ACCOUNT
COMPULSORY TO OPEN YES NO
WHO CAN OPEN INDIAN CITIZEN(RESIDENT AND NRI) TIER 1 ACCOUNT HOLDERS
ANNUAL MINIMUM DEPOSIT RS.6000/- NO MINIMUM
BANK ACCOUNT NOT MANDATORY MANDATORY
MINIMUM DEPOSIT IN A YEAR 1 1
INITIAL CONTRIBUTION RS.500/- RS.1000/-
FUNDS TRANSFER YOU CAN’T TRANSFER FUNDS FROM TIER 1 TO TIER2 YOU CANNOT TRANSFER FUND FROM TIER 2 TO TIER 1
WITHDRAWAL UPTO 25% BEFORE THE AGE OF 60 UNDER CERTAIN CONDITION CAN WITHDRAW PARTIALLY OR FULL ANY TIME.

Rules for exit from the scheme: –

If exit before the age of 60

  1. Compulsory annualisation: minimum 60%
  2. Lumpsum Withdrawal: maximum 80%
  3. If corpus is less than Rs.1,00,000/- complete withdrawal

If exit after 60 years:

  1. Compulsory annualisation: minimum 40%
  2. Lumpsum withdrawal: maximum 60%
  3. If total corpus is less than Rs.2,00,000/- complete withdrawal
  4. Investment can be continuing till the age of 70.
  5. Purchase of annuity can be deferred for a maximum period of 3 years.

If exit upon the death of subscriber

  1. Full redemption to the nominee

Documents Required:

  1. Photocopy of Indian Pan Card
  2. Photocopy of Indian Passport
  3. Photocopy of Visa
  4. Proof of Current Residency (Overseas)-Driving license, utility bills or bank statement.
  5. Passport size photo
  6. NRE/NRO bank account
  7. 2-year statement of Bank Account (Overseas) –For CKYC

Taxation:

  • 40% of the accumulated NPS corpus at the time of retirement is TAX FREE.
  • 40% corpus used to buy annuity will be taxed yearly as per one’s tax slab.
  • The remaining 20% is taxed as per one’s tax slab at the time of retirement.
  • Investment up to Rs.1.5 lakh under Section 80C and Rs.50000 under Section 80CCD (1B) can be used for tax deduction every year.

Investment Option-6

GOVERNMENT BONDS AND SECURITIES

NRIs can invest in

  • Government securities –
    • Capital index bond- Bonds value rise or fall as per Consumer Price Index. It provides protection from inflation.
    • Floating rate bond (FRN or Floater)-it has variable interest rate. For example: FRB 2024.
    • Fixed Rate government bond- Coupon rate or interest rate is fixed till maturity. Most government bonds are issued at fixed rate. For example: 8.24% GS bond issued for 10 years.
    • zero coupon bond- they are issued at discount and redeemed at full value. On interest is paid.
    • Tax free Bonds-No TDS (Tax Deducted at Source) is deducted on this investment. No income tax is applicable on interest earned.
  • Public Sector Undertakings issued bonds-bonds issued by government enterprises.
  • Perpetual bonds- these are bonds without fixed maturity.
  • Treasury bills- This is short term borrowing instrument of government of India i.e. less than one year. They are issued at discount rate and redeemed at face value. No interest is paid.
  • Bonds can be kept in physical or demat form.

Documents Required:

  1. Photocopy of Indian Pan Card
  2. Photocopy of Indian Passport
  3. Photocopy of Visa
  4. Proof of Current Residency (Overseas)- Driving license, utility bills or bank statement.
  5. Passport size photo
  6. NRE/NRO bank account
  7. 2-year statement of Bank Account (Overseas) –For CKYC
  8. All documents need to be Attested by officials of overseas branch of Scheduled Commercial Bank registered in INDIA, Public Notaries or India Embassy/Consulate General of their respective country.

Taxation:

Long-term-(if holding period is more than 3 years)- 20% tax after the benefit of indexation.

Short-term-(if holding period is less than 3 years)- 30% tax on the profit.

 Investment Option-7

CERTIFICATE OF DEPOSITS

Can also invest in Company Deposits of Public and Private companies if the RBI allows the companies to raise funds from NRI.

  • Investment can only be done in NRO (Non-repatriable) account.
  • It can’t be used in the secondary market (Stock market).
  • CDs issued by banks have maturity date between 1 year to 7 years.
  • Financial Institutions issued CDs have maturity between one year and 3 years.
  • Interest rates are generally higher than bank Fixed Deposits.
  • Minimum amount of CD is Rs. 1,00,000/-. Larger amount is in the multiples of Rs.1,00,00/-.

Documents Required:

  1. Photocopy of Indian Pan Card
  2. Photocopy of Indian Passport
  3. Photocopy of Visa
  4. Proof of Current Residency (Overseas)- Driving license, utility bills or bank statement.
  5. Passport size photo
  6. NRE/NRO bank account
  7. 2-year statement of Bank Account (Overseas) –For CKYC
  8. All documents need to be Attested by officials of overseas branch of Scheduled Commercial Bank registered in INDIA, Public Notaries or India Embassy/Consulate General of their respective country.

Taxation-

If the interest deposit exceeds Rs.5000/- TDS @30% is applicable.

 

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