Through this post, we are trying to list down the investment options available for NRIs. As we have been informing throughout all my interactions, no investment makes any sense if we are not informed of why we are investing and what is our target ROI. So, always ensure that Financial planning precedes any investment options judgement.
If you or your close relatives or friends are amongst such NRIs, you would want to put money to productive use by investing in instruments that generate high returns. Despite the ongoing slowdown, India continues to offer numerous investment opportunities to foreign investors, who does not enjoy such high Rate on return on investment in their country of employment.
If you want to invest in India, the first step is to open a savings account. One of the prime things you should know as NRI is that your existing bank accounts are no longer valid. FEMA (The Foreign Exchange Management Act) requires you to inform all banks in which you have an account, whether savings or deposits, of your changed residential estate.
Banks will then classify your account as one of the three basic types of bank accounts for NRIs.
(1) NRE Account
(2) NRO Account
(3) FCNR Account
We have already talked about NRE / NRO accounts in one of our previous positions.
FCNR (non-resident foreign currency) Accounts are an extension of the first two accounts. As the name implies, if you do not want to be exposed to exchange rate risk, you can open an FCNR account at a local bank, where your funds are in foreign currency and do not become rupees.
Tax liability of NRIs
You must be aware of the indications of income tax on investments options in India. Although there is no difference in income tax rates for resident NRIs and Indians, the tax is necessarily deductible at source in case of NRIs. So your stock broker, mutual funds and the bank will deduct the tax before giving you the product of redemption.
Worse still, the TDS is charged at the highest rate applicable to that category of investment regardless of the actual liability (see table). For example, you may not have any tax liability due to losses incurred on another investment options, but your broker will continue to deduct the tax. You may end up paying a higher rate at the time of the sale of your investment, and you can get the excess tax refunded only after filing your tax return.
Investment Options Where NRIs can not invest
NRIs can only invest in five asset classes in India – bank deposits, stocks, mutual funds, real estate and insurance. You can additionally invest in government securities and company deposits. But you can not invest in PPF, nor in bearer instruments such as NSC (National Savings Certificate) or Kisan Vikas Patras once your home state changes. Although it is forbidden to make new investments, existing ones can be left without discomfort. However, they can not extend beyond maturity.
For example, you can continue to make periodical contributions to the current PPF account even when you are abroad through NRE or NRO account. When investments mature, the profits will be credited to the NRO account.
Investment in agricultural land/planting property/farm house is not allowed.
Where can NRIs invest?
Real Estate has always been one of the best investment options that have been used by NRIs in India for many reasons. Some of them were the high (and almost insured) return on investment, their likelihood of returning to India, and also ignorance in other investment options. But taking into account the openness in the real estate sector and the downturn that we have begun to see, it may be wise to look at other investment opportunities as well. We discuss some of these investment opportunities in detail:
(1) High yield fixed deposits
First, the NRIs should benefit from the superior interest rates offered on fixed deposits in India. Interest rates are high but are assumed to come down in the near future.
NRE and NRO deposits currently offer secured rates between 8.5% and 9.5% over some tenures. These are also fairly liquid, so you can always withdraw money (subject to the interest penalty) to invest in other places in better chances.
You can also invest in FCNR deposits to eliminate the depreciation risk in the local currency. The rates on FCNR deposits differ greatly depending on the choice of the foreign currency. For example, the rate for a one-year FCNR deposit in US dollars would be in the range of 3-4%, while equal for deposits in the Australian dollar would be 6-7%.
(2) Direct Equities
NRIs can also invest in equity to participate in the growth of Indian companies. India remains a major investment target for foreign equity investors. However, it is prudent to have patience and to invest for the long run to benefit from the growth of some of the fast growing Indian companies. To be able to invest directly, the NRIs must name their NRE or NRO account as a portfolio investment scheme (PIS) account. Any transaction in the PIS account is reported to the RBI because the Central Bank ensures that the aggregate level of the NRI interest in an Indian company does not exceed 10% of its paid-up capital. To be active in Indian equities, the NRIs must open a Demat account and a trade account (linked with PIS account) with a stockbroker registered with SEBI.
(3) Mutual funds
The primary option is to invest in any of the Indian-based offshore investment funds or ETFs operating in your home country. These India-dedicated investment fund schemes invest in a diversified basket of Indian companies, usually using research information from their Indian subsidiaries or other Indian fund houses. NRIs may also invest in investment funds based in India by using your NRE or NRO account. These funds do not charge an entrance fee, but the investment is in rupees. NRI investors should be aware of the exchange rate risk while investing in rupee conditions. The recent sharp fall in the Rupee, for example, has wasted most returns on these funds.
(4 and 5) Insurance and Real Estate
Currently, NRIs can invest in life insurance policies in India without limiting their coverage. Some companies offer foreign currency deferred policies and also allow you to pay the premium in forex.
You can also invest in the household and commercial real estate in India without obtaining any special permission from the RBI.
(6) Investment in bonds/government securities:
The government and the companies need money from time to time for various projects or their expansion. Therefore, bonds are issued for borrowed capital. When you invest in bonds, you are considered as a Debtor in contrast to equity, where you have a stake in the company.
As NRI, you have the freedom to invest in bonds and government bonds. Investors receive fixed returns on such bonds issued by companies or government institutions. When buying through NRE / FCNR accounts, the proceeds are easily repatriable in the country where you live.
(7) Certificate of deposit:
The NRIs also have the option to get the CDs (certificate of deposits) but on a repatriable basis. The CDs are non-negotiable money market instruments issued in Demat for or in the form of debt loans. CDs result in a higher interest rate compared to bank deposits. The maturity period ranges from 7 days to 1 year and is best suited for people with short-term financial goals.
(8) National Pension Scheme(NPS):
This is also a good investment option, but NRIs who are Indian citizens can contribute to NPS. If you give up your Indian citizenship, the account is closed. NRI, who are citizens of India aged between 18 and 60, can contribute by transferring funds from their NRE / NRO accounts.
Thus, investment in NPS can be made by:
- Indian Citizens living in India or
- NRI, which have an Indian citizenship.
You get to choose from various funds such as fixed rate options, government bonds or equity investments.
Under NPS or National Pension Scheme, there are two types of pension accounts available:
(I) Tier-I Account: You will contribute to the NPS account with certain restrictions on the revocation. This is a non-deductible account until retirement.
(Ii) Tier II account: You can always withdraw from the pension account without restriction.
Deposits in NPS returns a fair amount of profits and allows you to retire a good post corpus. But, you can only retire 60% at maturity, and the rest 40% must be converted into an annuity.
The following documents must be deposited in your bank (POP) to open an NPS account:
- Filled in Registration form for subscribers
- Copy of the passport
- Proof of the address if the local address differs from the address in your passport.
A tax deduction According to section 80 C, is available up to a maximum amount of Rs.1.5 lakhs. An additional deduction of Rs.50000 under section 80 CCD (1B) is also available for contributions to NPS. This additional deduction is over and beyond the Tax deduction of Section 80 C.
Public Provident Fund (PPF)
PPF is a 15-year government investment option with an option to extend it in blocks of 5 yrs after 15 yrs. It allows tax advantages according to section 80C, and the matured amount is also tax-free. This is a good option for debt financing and can be used as a retirement tool to ensure tax-free retirement.
NRIs can not open a PPF account. But those who have opened a PPF account before they have NRI status can continue the account until it matures. But they can not extend it after 15 years. Also at the due date, they can close the account or keep it there and have a tax-free interest until they close the account.
It is recommended that you open a PPF account before you become an NRI.
How to Avoid Double Taxation for NRI?
Sometimes the NRIs are subject to double taxation – once in India and once again in their country of residence. It depends on their country of residency. Whether the Indian government has a double tax evasion agreement (DTAA) with their country, the NRI is spared from paying the tax twice. Many countries have such a treaty with India. For example, India has a DTAA with the UK. When an NRI based in the UK makes short-term capital gains from investments in India, it pays 15% tax in India. However, if the rate of such profits is 25% in the UK, the investor must pay taxes only for the difference in the rate in the UK. This means he gets paid a deduction on the tax paid in India from his tax in the UK.