Recently, a friend of mine, an India-born who became a US citizen recently, was told that he is not allowed to invest by an Indian mutual fund company.
He really wanted to get that fund, but just went back to making investments in US thinking that there are no investment options for him in India anymore.
This is a situation that a lot of Non Resident Indians face...
They are doing great in their careers and want to invest in their home country. They view India as a great opportunity with good earning prospects and of course, there is an emotional gratification of staying connected with your country of origin.
But, there is a lot of confusion out there in terms of what's possible and what's not. And not all NRIs are aware about the multitude of investment options available in India.
So, what are the investment options that are available for NRIs? How about tax saving on these investments? And finally, which investments have the best returns?
I will try and answer these and many more related questions in this post...
But, before I get into details on available investment options, you need to be sure that you actually qualify as a Non Resident Indian (NRI) as per Indian Laws.
There are two sets of rules that are in force right now...
- Foreign Exchange Management Act (FEMA) says that anybody who has stayed in India for less than 183 daysduring the preceding financial year is considered to be a Non Resident.
- As per Income Tax Act 1961, a person is an NRI if he hasn't stayed more than 182 days in India in the current financial year OR if he hasn't stayed in India for 60 days or more in the previous financial year and for 365 days or more in the preceding 4 financial years.
Ideally, you should be compliant with both of these rules to be on safe side. If you only fulfill one criterion, please consult your CA.
Do note that if you have already taken a citizenship of a foreign country, you will be classified as a Person of Indian (PIO) origin. But, for all tax and FEMA purposes, NRIs and PIOs are treated exactly the same.
Also, before you can start investing in India, you will need to get a PAN number and will have to undergo a one-time KYC process. You will have to declare your residency and citizenship details as part of this KYC.
Additionally, to invest in India as an NRI, you will need to have an NRI bank account. This is the account you will use to do any investment transactions from.
Any bank that is authorized to deal in foreign exchange can open this account for you.
For NRI bank accounts, you have three options - NRO, NRE and FCNR
1. NRO (Non Resident Ordinary Accounts)
An NRO (Non-Resident Ordinary) savings account is probably the first NRI bank account you will open. Most banks will simply allow to redesignate your current savings account to an NRO account.
These accounts are useful for managing all your Indian incomes i.e. rent, dividends, pension or gifts.
You can open this account either just before you become an NRI or after you have already become one.
Please note that these accounts have repatriation limits. In one year, you can only repatriate a total of USD 1m from NRO accounts.
Additionally, this repatriation will need a tax paid certificate from a certified CA. If you deposit your foreign funds in this account, they will be subject to repatriation limits too.
The interest that you earn on this account is freely repatriable but will be taxed in India. These accounts could be a savings account, a current account or a fixed deposit account.
2. NRE (Non Resident External Accounts)
NRE accounts allow you to hold and maintain your foreign currency earnings in Indian rupees. You can open one up once you have already started residing outside India.
The funds to this account should be mandatorily credited from your foreign earnings. These deposits will be converted to INR at the prevailing conversion rates.
These accounts are completely repatriable i.e. you can take your funds out of India at any time without any restrictions.
Also, the interest you earn on NRE accounts is tax-free in India. These accounts again can be a savings account, current account or a fixed deposit account.
3. FCNR Accounts
FCNR is not a savings or a current account, rather, it's a term deposit with a pre-defined maturity period. It stands for Foreign Currency Non Resident account.
You can open this account once you have already become an NRI.
FCNR accounts are maintained in foreign currency unlike NRE or NRO accounts. You can choose from any major currency like USD, Pound, Canadian Dollar, Deutsche Mark, Yen or Euro.
The interest earned on FCNR accounts is tax free in India and the funds are fully repatriable.
Once you have taken care of these formalities (i.e. PAN, KYC and Bank account), you are ready for investments. But, as a best practice, please do a proper financial planning before you start investing anywhere. And at minimum, write down the exact goals for your investments in India.
Is it your retirement corpus that you want to invest for? Or is it for the general wealth creation and all you want is to get the highest possible returns? Is it a short term investment (up to 5 years) or will it be long term (>5 years)?
Answers to these questions will determine suitability of the options below for you.
Now, assuming you know your goals, let's look at all the investment options available for NRIs...
Best NRI Investment Options in India
- Bank Fixed Deposits
- Direct Equity
- Mutual Funds
- Real Estate
- Government Securities
- Bonds & Non-Convertible Debentures (NCDs)
- Certificate of Deposits (CDs)
- National Pension Scheme (NPS)
Let's look at each of above one by one...
1. Bank Fixed Deposits
Just like resident Indians, Fixed deposits (FDs) are amongst the most popular investment choices for NRIs too. In FDs, your money is deposited for a pre-agreed term at a guaranteed interest rate.
Fixed deposits for NRIs can be NRE, NRO or FCNR.
As explained earlier, the interest on an NRE FD is tax free while interest on an NRO FD account will be taxable.
Do note that the earnings in an NRO account are subject to TDS and balance will be credited only after deducting all taxes.
However, you can claim easily a refund by filing a tax return in case your payable tax is less than tax deducted at source.
Deposits in an NRE account can be repatriated without any limit, whereas those from an NRO account are restricted to a total of 1 million USD per annum.
NRE FDs can earn an interest ranging between 6% to 7% (Indian currency) while NRO FDs will earn anything between 4% and 7%. Exact rate you will get will depend upon your deposit period as well as the bank you make the deposit with.
FCNR accounts are maintained in foreign currency and the interest rate for these accounts depends upon the currency of your deposit. But as an indication, for a deposit made in USD you will earn between 2-3%, while for one in Japanese Yuan, you may earn as low as 0.01% per annum.
FCNR deposits are fully repatriable and completely tax free.
2. Equity and Debt Mutual Funds
Mutual funds are an exciting investment option for NRIs regardless of their investment plans. Whether you are thinking about short term, medium term or long term, there is a mutual fund out there that matches your goals perfectly.
To invest in mutual funds in India, NRIs will need to have either an NRE or an NRO account. All the investments will be made and denominated in Indian currency.
Your choice of NRE or NRO account will determine the repatriability of your returns. Use NRE account if you want repatriability, as investments from NRO account will come with repatriation restrictions.
Unless you are US or Canada NRI, you can invest in any mutual fund in India without any restrictions.
But, for those who are staying in the US or Canada, there are some limitations due to strict FATCA rules. These rules mandate all financial institutions in any part of the world to report all transactions by US citizens and taxpayers to the government there.
Not all fund houses want to comply with these strict regulations and hence many won't accept any investments from these countries.
But, fortunately, there are 8 AMCs that comply with FATCA rules and will allow you to invest even if you are staying in US or Canada.
8 Fund Houses that accept mutual fund investments from US and Canada
- SBI Mutual Fund
- Birla Sun Life Mutual Fund
- ICICI Prudential Mutual Fund
- UTI Mutual Fund
- L&T Mutual Fund
- PPFAS Mutual Fund
- Sundaram Mutual Fund
- DHFL Pramerica Mutual Fund
To invest in mutual funds, you will need to update your KYC with an NRI status. You can go to any fund house or registrars like CAMS or Karvy and they will happily help you with same.
You should ideally get the KYC done before you leave India or while you are on a visit to India as there may be an in-person verification.
Following documents will be needed for your verification - KYC application form, Pan Card, Passport, Indian and Overseas address proofs and photographs.
NRIs can invest in all categories of mutual funds - Equity, Balanced, Debt or Liquid. But which one you should invest in depends upon your risk profile and investment horizon.
Equity funds are suitable for long term investments while you should stick to debt funds for short term investments.
From returns perspective, historically, top performing equity funds have delivered between 15-20% annual returns while debt funds have stayed in the range of 8-10% per annum on an average. Relative to most western geographies, equity funds in India have historically provided good returns.
Your investments are liquid if you are investing in open ended options. For close-ended mutual funds, your lock-in will be determined by the pre-agreed maturity period.
The tax liability for NRIs on mutual funds is exactly same as that of a Resident. The only difference will be that TDS will be deducted for all investments that are done by NRI accounts.
For equity mutual funds (or balanced funds with >65% equity), if you redeem your investments after 1 year or more, the profits are treated as long-term capital gains and are tax-free. However, if you sell your holdings with in one year, you will incur a short term capital gains tax of 15%. Essentially, a 15% TDS will be deducted before balance is transferred to your account.
For debt funds or any other fund with <65% equity, if you sell after 3 years, your profits will be considered as long term gains and will be taxed at 20% after indexation. Any sale of a debt fund before 3 years will attract taxes as your existing tax slab. For NRIs, the TDS in this case is at 30%. Any dividends you earn are tax free in your hands.
If your overall tax liability comes to less than TDS deducted, you can file a tax return and claim the refund.
Taxation for NRI investments in mutual funds
Type of Tax
Short Term Capital Gains
15% tax before 1 year
Taxed as per your slab before 3 years. TDS at 30%
Long Term Capital Gains
Tax free after one year
Taxed @ 20% with indexation after 3 years
3. Direct Equity
If you know your way around stock market and want potentially higher (and potentially riskier) returns, NRIs are eligible to invest directly in Indian equities under the Portfolio Investment Scheme (PIS) of RBI.
Only one PIS account is allowed per individual and each transaction done through these accounts will be reported to RBI.
You will need three things to make direct equity investments in India
- A separate NRE/NRO savings account linked to PIS
- A demat (dematerialized) account to hold your shares in and
- A trading account with a registered broker with SEBI
Please note that NRIs can't trade in all Indian stocks. RBI publishes the list of stocks that are eligible for NRI investments.
Also, there is a restriction on how much stock you can own for one single company and you can't own more than 10% of the paid-up capital.
Further, NRIs are not allowed to do any intra-day trading or short-selling. They can only trade on a delivery basis.
Taxation on equities for NRIs is exactly same as residents, except that that these taxes are deducted at source (TDS) by the brokerage.
If shares are sold after holding them for 1 year or more, the profits are considered to be long term capital gains and are tax-free. Any sales prior to 1 year will attract a short term capital gains tax with a TDS of 15%.
Stock markets are highly volatile, individual stocks even more so. Please be careful and invest after due consideration.
IPOs are not covered under PIS. But NRIs can easily apply for them through their trading accounts or 3-in-1 accounts.
4. Real Estate
Indians love investing in real estate. And NRIs are no different. In fact, for most NRIs, having a home back in your own country is almost an emotional investment.
Having said that, real estate in the past has given reasonable appreciation and can be a lucrative long term investment.
NRIs can purchase both residential and commercial properties. However, you cannot buy agricultural lands, farm houses or plantations. However, this rule doesn't apply if you get ownership of agricultural land through inheritance or as a gift.
The payment for buying a property has to be made in Indian currency and has to mandatorily come from an NRO, NRE or FCNR account.
Please note that the account type you choose to make the payment for purchase will determine how much flexibility you have when you want to sell your property.
If the initial payment for buying the property was made through an FCNR account, money equal to originally paid amount can be repatriated. The rest of the proceeds, however, can't be repatriated.
If the payment was made through an NRE account, again, only the proceeds to the tune of original cost can be repatriated and balance has to stay in the NRE account.
If the payment was made through an NRO account, you can repatriate the full amount subject to the overall limit of $1m per year.
To be on safe side, get a professional to help you if you are planning to invest in real estate.
5. Government Securities
A government security is a tradable instrument issued by the Government of India to raise funds for development or for special projects.
These funds can be short term (usually called treasury bills or T-bills with maturities of less than a year) or long term (usually called government bonds or dated securities with maturities of one year or more).
These investments are considered to be extremely safe as they have a sovereign guarantee backing them.
Treasury bills or T-bills are suitable for all short term investments. They are typically issued with a validity of 3 months, 6 months or 12 months.
T-bills don't pay any interest as such, but are issued with a discount to the face value so at redemption you will make a profit.
T-bills can be purchased by participating in RBI auctions and they can be purchased in multiples of 25,000 INR.
For medium to long term investments, you should look at dated government securities. The interest on these securities can either be fixed or floating.
Some common types of dated government securities are as follows:
- Fixed rate government bonds
- Floating rate government bonds
- Capital Index bonds
- National Saving certificates
NRIs are not allowed to invest in National Saving Certificates but they can invest in T-bills or other dated government securities quite easily.
To do so, you will first need to transfer the desired investment amount to your NRE, NRO or FCNR account. Once this amount is deposited, the Indian bank can purchase (or sell) these securities on your behalf. The interest from these securities will also come directly to your NRI account.
The interest earned from these instruments is taxable if it's credited to NRO account and tax-free if the account used is NRE.
However, if the bond has been marked as tax-free during the issue, the interest becomes tax-free in India regardless of the account.
These securities are tradable on money market and hence are highly liquid.
6. Bonds and Non-Convertible Debentures (NCDs)
Just like government issues securities to raise money, both public and private companies do so as well to raise capital.
PSU bonds are generally considered to be less risky while private bonds will have a wide spectrum of riskassociated with them (depending upon the credit rating of the company that issues them).
Non-convertible debentures on the other hand, are secured debt and are issued by corporations with the backing of its assets.
Finally, perpetual bonds works like lifetime irredeemable fixed deposits. Investors will receive a fixed interest on these bonds every year, but don't have an option to redeem their principal. Perpetual bonds are issued by banks under tier-1 capital.
As an NRI, you can consider all of the above options in your investment plan. Just like government securities, you need to have the requisite money in your NRI account and your bank will execute the purchase or sell instruction on your behalf.
Same rules on repatriation as are there in case of government securities will apply to these investments as well.
7. Certificate of Deposits
Certificates of deposits (CDs) are non-negotiable money market instruments issued in demat form or as promissory notes.
They are like fixed deposits, but have a higher liquidity as they can be freely transferred from one person to another.
CDs are issued in India by scheduled commercial banks or financial institutions. These certificates are issued at a discount to face value and will typically yield a higher effective rate of return as compared to most bank deposits.
Their maturity period ranges from 7 days to 1 year for banks and between 1 and 3 years for financial institutions. And the minimum amount you can invest is 100,000 INR.
This option is best suited for short term investments. NRIs can invest in these certificates on a non-repatriable basis.
8. National Pension Scheme (NPS)
NPS is a cost-effective and government backed voluntary defined contribution retirement savings scheme.
Any NRI who is still an Indian Citizen and is aged between the age of 18 to 60 years can avail of this scheme by opening an NPS account. If you are not an Indian citizen anymore, you won't be allowed to open a new NPS account.
NPS at its heart is a pension scheme and has restrictions on how much you can withdraw. Having said that, the restrictions vary by the type of two sub-accounts it offers:
Tier 1 account
All contributions in this account will be locked till retirement with some exceptions.
If you retire prior to attaining 60 years, you can make a lump-sum withdrawal of 20% of your corpus while 80% of the corpus has to be mandatorily used to buy an annuity.
If you retire when you are 60 years or more, you can withdraw up to 60% of the accumulated corpus as a lump sum while the remaining 40% has to be mandatorily used to buy an annuity.
Tier 2 account
This account comes without any restrictions and you can make withdrawals from this account whenever you want without any penalties. You can only have a tier-2 account once you already have a tier-1 account.
Both tier 1 and tier 2 accounts offer a variety of funds to choose from.
You can choose between Equity, Corporate Bonds or Goverenment Securities. You can manually decide the ratio of your allocation between these three options or it can be decided automatically basis your age.
To invest in NPS as an NRI, you will need to open an account through any of numerous authorized entities called points of presence (POP) or avail of eNPS facility.
Almost all Indian banks can act as POPs, but ideally you should choose a bank that's already hosting your NRI account.
NPS is under Exempt-Exempt-Tax structure. So, all contributions and accrued capital gains are tax free, but withdrawals are subject to tax.
As per current tax rules, at retirement, a withdrawal of up to 40% of the total corpus as a lump-sum will be tax-free (while 20% will be taxed according to your tax slabs if you go for the maximum lump sum withdrawal limit of 60%). Income from annuity will be taxable as per your tax slabs.
The proceeds of NPS scheme, either the lump sum or the annuity, will only be paid in Indian currency. There is no restriction on repatriation of accruals, whether it's annuity or lump sum.
Common Questions on NRI Investments
How to avoid double taxation for NRI investments?
In some jurisdictions, NRIs may be subject to double taxation, i.e. they are taxed both in India and in the country of their residence.
You can avoid the double taxation in case Indian government has a Double Tax Avoidance Agreement (DTAA) with your current country of residence. If you have already paid the tax in India, you will get an equivalent deduction from tax payable in your country of residence if DTAA exists.
On last count, India had a DTAA agreement with 134 countries.
Are NRIs allowed to invest in PPF?
No, NRIs can not invest in PPF (Public Provident Fund). If you already had a PPF account before you became an NRI, prior to Oct 2017, you are allowed to operate it till it matures.
Earlier, as per notification G.S.R. 1238 (E), dated Oct 3, 2017, as soon as you become an NRI, your PPF was deemed to be closed and your money accumulated till then was supposed to start earning interest rate applicable to post office savings account.
However, the good news is that the aforesaid notification has now been put in abeyance once again as per a new communication (dated Feb 23, 2018) by the ministry.
Are NRIs allowed to invest in Post office schemes?
No, NRIs can't invest in post office savings schemes.
This essentially means that they are barred from investing in instruments like National Savings Certificates, PPF, Sukanya Samriddhi Yojana, Post Office Monthly Income Schemes or Post Office Time deposits.
And that's all...
This post covers all investment options available to NRIs in 2017. I hope it has been useful. On a final note, before you make any investment decision, make sure that you know of all the repatriation restrictions and taxation obligations.
If you still have questions, let me know...