Going to be an NRI? Here’s where you can and cannot invest

Learn about the best investment options for NRIs as well as those to avoid.

 Going to be an NRI? Here’s where you can and cannot invest

As a developing economy, India has experienced rapid expansion over the past few decades. To top it all, politicians are constantly attempting to improve the country's investment climate. As a result, many NRIs are looking for ways to invest in India to earn higher returns while also contributing to nation-building. In this context, what are the possibilities available to NRIs interested in investing in India? Let’s examine the most viable investment opportunities for NRIs and those that should be avoided.

What NRIs should consider investing in

Fixed deposits

Fixed deposits are popular among both resident and non-resident Indians. Bank FDs are widely regarded as the safest investment option due to the rarity of banks failing on them. NRIs may open FD accounts using their NRO, FCNR, or NRE accounts. The interest rate on a deposit is determined by the bank, the amount, and the deposit term.

  • NRE account: Fixed deposits in NRE accounts can be made in INR. While you may not be taxed on the interest earned, you may be taxed in the country where you live. Deposits range between 5% and 7% in interest, depending on the length of the deposit.
  • NRO account: An NRO account can be used to manage your Indian income. You may, for example, get rental income or dividends from stocks and mutual funds that can be deposited into an NRO account. After showing the required paperwork, you may transfer up to $1 million from your NRO account.
  • FCNR account: You can open an FCNR account in any foreign currency. It may last between one and five years and any interest earned is tax-free. Furthermore, foreign exchange fluctuations do not affect money deposited in your FCNR account.

Mutual funds

Except for those living in the United States and Canada, NRIs can invest in Indian mutual funds. NRIs from the US and Canada are subject to specific restrictions and may invest in only a limited number of Mutual Fund schemes. 

According to their risk profile, an NRI can invest in equity funds, balanced funds, debt funds, liquid funds, and MIPs. Gains on the sale of non-equity mutual funds within three years of purchase are treated as short-term capital gains and taxed at 30%.

After three years, gains on the sale of non-equity funds are considered long-term gains. They will be subject to a 20% tax after indexation. NRIs are taxed just like resident Indians, except that mutual fund companies deduct tax at source (TDS). 

Related: Are You An NRI? Here's How You Can Claim A TDS Refund

Good long-term Indian mutual funds provide returns that outperform inflation. They are professionally managed, making them less risky than direct stocks. There are several ways to invest in mutual funds. SIPs can be used to make regular investments, while SWPs can be used to make monthly withdrawals.

Equity-linked savings schemes (ELSS) have become one of the most popular tax-saving vehicles for all taxpayers, including non-resident Indians who earn income in India.

What NRIs should avoid investing in

When your residential status changes to NRI, many personal finance rules and regulations become relevant to you or simply alter. From your bank accounts to any properties you may own, each one has a unique status. The majority of individuals tend to ignore at least some of them, unaware that they are illegal and can result in hefty penalties.

The most fundamental of these are resident savings bank accounts, which serve as the foundation, and attractive investments such as PPF. 

Resident savings account

Many people make the error of maintaining a resident savings account after becoming an NRI, but this is against the law. Or, to put it another way, it is illegal for NRIs to have local savings bank accounts. According to FEMA regulations, when your status switches to NRI, you must convert your resident savings account to an NRO account.

All money earned in India, such as rentals from property, investments, pensions, etc., must be put in this account, as should payments for insurance premiums or EMIs on loans obtained while in India. This requires notifying your bank of a change in status within a reasonable time frame. 

Public Provident Fund (PPF)

The guidelines governing PPF for NRIs are set forth below. They are brief and stated in layman’s terms so that everyone can understand them:

  • An NRI is ineligible to open a PPF account in India.
  • A resident Indian, on the other hand, may create a PPF account and later become an NRI. Such a person may retain ownership of the account until it matures. 
  • When the PPF account matures, the NRI is obligated to close it. There are no exceptions. 
  • As a result of the preceding, an NRI cannot extend a PPF account. They cannot ignore it either. The only other option is to close the account.
  • If the NRI violates the preceding requirements and leaves the account open, no interest will be paid.
  • If the NRI continues to make PPF payments without notifying their bank of their changed status, no interest will be paid on contributions after they mature. All banks conduct routine monitoring of KYC paperwork, alerting them of the customer's resident status.

Extension of PPF account for NRIs

An Indian who remains a resident of the country can extend the PPF in five-year increments up to an infinite time. In effect, this makes PPF a fund in which the holder can defer the maturity date indefinitely. Non-resident Indians are not eligible to get this advantage and must consequently deal with the PPF's predetermined maturity time of fifteen years.

Consider, however, that a resident Indian has extended their PPF and chooses to become an NRI during the extension term. Current laws let an NRI remain subscribed to the account until it reaches its new maturity date. The PPF cannot be extended further once the new maturity time is reached.

Consider the case of a resident Indian who invests in a PPF. Following its maturity, the individual may elect to extend the PPF for an additional five years. For the first two years of this period, let us suppose that the individual remains a resident Indian. After two years, they decide to relocate to another country, and their status changes to an NRI. 

In the situation cited above, the individual may retain the PPF for the remaining three years of the five years. This is the duration of the extended maturity. This subscription period cannot be extended further.

Related: NRIs Will No Longer Qualify To Invest In Public Provident Fund

NRI investment in mutual funds

NRIs are subject to slightly different rules and regulations than local Indians when investing in mutual funds. The following are the primary regulatory considerations that an NRI must bear in mind:

  • Investment conditions: According to the Foreign Exchange Management Regulations, 2000, an NRI may invest in mutual funds in India only in Indian currency. Thus, an NRI must first create one of the following accounts with an Indian bank before investing in a mutual fund: Account in Non-Resident Rupees, Non-Resident Rupees, or Foreign Currency Non-Resident Account (FCNR).
  • Income repatriation: Investments can be made on a repatriable or non-repatriable basis. This means that NRIs must decide whether they want the money from mutual funds routed to their bank account in the nation they are currently residing in or to an Indian bank account. Mutual fund income can be repatriated only if the money were invested by inward remittance from outside via standard banking channels or from the investor's NRE/FCNR account. It may be paid to an Indian bank account under the conditions mentioned above and if the investment is made via the investor's NRO account. Certain countries, such as the US and Canada, prohibit their nationals from investing in India. Among these laws is the requirement for fund managers to register in the US if they manage more than 15 US-based investors. 
  • Power of Attorney: If an NRI does not have sufficient time to make investment decisions regarding mutual funds, they might choose someone in India as their Power of Attorney (POA). The holder of the POA has the authority to make mutual fund investments on behalf of the NRI client. Another possibility is for the NRI to co-invest in a mutual fund with a resident Indian who can manage the fund's operations. NRIs may also nominate resident Indians.
  • Taxes: Interestingly, there is no differential taxation between resident Indians and NRIs; additionally, NRIs must pay tax on short-term capital gains on debt funds at the individual's marginal income tax rate and on equity funds at a flat rate of 15%. They are taxed on long-term capital gains on debt funds at a rate of 20% with indexation and 10% without, but not on the sale of long-term equity funds. However, tax is deducted at source for non-resident Indians, whilst resident Indians must make tax payments according to the advance tax schedule. NRIs who reside in countries with which India does not have a Double Taxation Avoidance Agreement (DTAA) will be required to pay tax in both India and their home country.

Mutual funds redemption

The proceeds of mutual fund redemption are either credited immediately to the investor’s bank account or paid by cheque. Investors will receive all earnings in rupees. Investments made through FCNR/NRE accounts or inward remittances are completely reversible. As a result, dividends and unit redemptions from mutual funds are fully repatriable. However, when investments are made through NRO accounts, the principal amount is not repatriable, but the capital appreciation is.

- By Bharat Prajapati 

Bharat Prajapati is a Commerce Graduate from Mumbai. He is the founder of Newsilike.in wherein he heads the Brand Communication, Digital and Partnerships."

As a developing economy, India has experienced rapid expansion over the past few decades. To top it all, politicians are constantly attempting to improve the country's investment climate. As a result, many NRIs are looking for ways to invest in India to earn higher returns while also contributing to nation-building. In this context, what are the possibilities available to NRIs interested in investing in India? Let’s examine the most viable investment opportunities for NRIs and those that should be avoided.

What NRIs should consider investing in

Fixed deposits

Fixed deposits are popular among both resident and non-resident Indians. Bank FDs are widely regarded as the safest investment option due to the rarity of banks failing on them. NRIs may open FD accounts using their NRO, FCNR, or NRE accounts. The interest rate on a deposit is determined by the bank, the amount, and the deposit term.

  • NRE account: Fixed deposits in NRE accounts can be made in INR. While you may not be taxed on the interest earned, you may be taxed in the country where you live. Deposits range between 5% and 7% in interest, depending on the length of the deposit.
  • NRO account: An NRO account can be used to manage your Indian income. You may, for example, get rental income or dividends from stocks and mutual funds that can be deposited into an NRO account. After showing the required paperwork, you may transfer up to $1 million from your NRO account.
  • FCNR account: You can open an FCNR account in any foreign currency. It may last between one and five years and any interest earned is tax-free. Furthermore, foreign exchange fluctuations do not affect money deposited in your FCNR account.

Mutual funds

Except for those living in the United States and Canada, NRIs can invest in Indian mutual funds. NRIs from the US and Canada are subject to specific restrictions and may invest in only a limited number of Mutual Fund schemes. 

According to their risk profile, an NRI can invest in equity funds, balanced funds, debt funds, liquid funds, and MIPs. Gains on the sale of non-equity mutual funds within three years of purchase are treated as short-term capital gains and taxed at 30%.

After three years, gains on the sale of non-equity funds are considered long-term gains. They will be subject to a 20% tax after indexation. NRIs are taxed just like resident Indians, except that mutual fund companies deduct tax at source (TDS). 

Related: Are You An NRI? Here's How You Can Claim A TDS Refund

Good long-term Indian mutual funds provide returns that outperform inflation. They are professionally managed, making them less risky than direct stocks. There are several ways to invest in mutual funds. SIPs can be used to make regular investments, while SWPs can be used to make monthly withdrawals.

Equity-linked savings schemes (ELSS) have become one of the most popular tax-saving vehicles for all taxpayers, including non-resident Indians who earn income in India.

What NRIs should avoid investing in

When your residential status changes to NRI, many personal finance rules and regulations become relevant to you or simply alter. From your bank accounts to any properties you may own, each one has a unique status. The majority of individuals tend to ignore at least some of them, unaware that they are illegal and can result in hefty penalties.

The most fundamental of these are resident savings bank accounts, which serve as the foundation, and attractive investments such as PPF. 

Resident savings account

Many people make the error of maintaining a resident savings account after becoming an NRI, but this is against the law. Or, to put it another way, it is illegal for NRIs to have local savings bank accounts. According to FEMA regulations, when your status switches to NRI, you must convert your resident savings account to an NRO account.

All money earned in India, such as rentals from property, investments, pensions, etc., must be put in this account, as should payments for insurance premiums or EMIs on loans obtained while in India. This requires notifying your bank of a change in status within a reasonable time frame. 

Public Provident Fund (PPF)

The guidelines governing PPF for NRIs are set forth below. They are brief and stated in layman’s terms so that everyone can understand them:

  • An NRI is ineligible to open a PPF account in India.
  • A resident Indian, on the other hand, may create a PPF account and later become an NRI. Such a person may retain ownership of the account until it matures. 
  • When the PPF account matures, the NRI is obligated to close it. There are no exceptions. 
  • As a result of the preceding, an NRI cannot extend a PPF account. They cannot ignore it either. The only other option is to close the account.
  • If the NRI violates the preceding requirements and leaves the account open, no interest will be paid.
  • If the NRI continues to make PPF payments without notifying their bank of their changed status, no interest will be paid on contributions after they mature. All banks conduct routine monitoring of KYC paperwork, alerting them of the customer's resident status.

Extension of PPF account for NRIs

An Indian who remains a resident of the country can extend the PPF in five-year increments up to an infinite time. In effect, this makes PPF a fund in which the holder can defer the maturity date indefinitely. Non-resident Indians are not eligible to get this advantage and must consequently deal with the PPF's predetermined maturity time of fifteen years.

Consider, however, that a resident Indian has extended their PPF and chooses to become an NRI during the extension term. Current laws let an NRI remain subscribed to the account until it reaches its new maturity date. The PPF cannot be extended further once the new maturity time is reached.

Consider the case of a resident Indian who invests in a PPF. Following its maturity, the individual may elect to extend the PPF for an additional five years. For the first two years of this period, let us suppose that the individual remains a resident Indian. After two years, they decide to relocate to another country, and their status changes to an NRI. 

In the situation cited above, the individual may retain the PPF for the remaining three years of the five years. This is the duration of the extended maturity. This subscription period cannot be extended further.

Related: NRIs Will No Longer Qualify To Invest In Public Provident Fund

NRI investment in mutual funds

NRIs are subject to slightly different rules and regulations than local Indians when investing in mutual funds. The following are the primary regulatory considerations that an NRI must bear in mind:

  • Investment conditions: According to the Foreign Exchange Management Regulations, 2000, an NRI may invest in mutual funds in India only in Indian currency. Thus, an NRI must first create one of the following accounts with an Indian bank before investing in a mutual fund: Account in Non-Resident Rupees, Non-Resident Rupees, or Foreign Currency Non-Resident Account (FCNR).
  • Income repatriation: Investments can be made on a repatriable or non-repatriable basis. This means that NRIs must decide whether they want the money from mutual funds routed to their bank account in the nation they are currently residing in or to an Indian bank account. Mutual fund income can be repatriated only if the money were invested by inward remittance from outside via standard banking channels or from the investor's NRE/FCNR account. It may be paid to an Indian bank account under the conditions mentioned above and if the investment is made via the investor's NRO account. Certain countries, such as the US and Canada, prohibit their nationals from investing in India. Among these laws is the requirement for fund managers to register in the US if they manage more than 15 US-based investors. 
  • Power of Attorney: If an NRI does not have sufficient time to make investment decisions regarding mutual funds, they might choose someone in India as their Power of Attorney (POA). The holder of the POA has the authority to make mutual fund investments on behalf of the NRI client. Another possibility is for the NRI to co-invest in a mutual fund with a resident Indian who can manage the fund's operations. NRIs may also nominate resident Indians.
  • Taxes: Interestingly, there is no differential taxation between resident Indians and NRIs; additionally, NRIs must pay tax on short-term capital gains on debt funds at the individual's marginal income tax rate and on equity funds at a flat rate of 15%. They are taxed on long-term capital gains on debt funds at a rate of 20% with indexation and 10% without, but not on the sale of long-term equity funds. However, tax is deducted at source for non-resident Indians, whilst resident Indians must make tax payments according to the advance tax schedule. NRIs who reside in countries with which India does not have a Double Taxation Avoidance Agreement (DTAA) will be required to pay tax in both India and their home country.

Mutual funds redemption

The proceeds of mutual fund redemption are either credited immediately to the investor’s bank account or paid by cheque. Investors will receive all earnings in rupees. Investments made through FCNR/NRE accounts or inward remittances are completely reversible. As a result, dividends and unit redemptions from mutual funds are fully repatriable. However, when investments are made through NRO accounts, the principal amount is not repatriable, but the capital appreciation is.

- By Bharat Prajapati 

Bharat Prajapati is a Commerce Graduate from Mumbai. He is the founder of Newsilike.in wherein he heads the Brand Communication, Digital and Partnerships."

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