How NRIs can Invest in Mutual Funds and Stocks in India – A primer
Tips for NRIs to invest in Indian mutual funds, stock market
As an Indian staying overseas, if you want to take advantage of the high growth back home, you can do so by investing in stocks and mutual funds by following some simple steps. The country economic prospects continue to be bright and its long term growth story remains intact. But before we go ahead with the procedures for investment, it is important to know who according to Indian law is considered a nonresident Indian.
According to the Foreign Exchange Management Act (Fema), 1999, an NRI is a person resident outside India who is either a citizen of India or a person of Indian origin (PIO).
|KYC For NRIs||Who is an NRI ?|
|Submission of passport copy is mandatory. Relevant pages of passport having name, photo, date of birth and address should be submitted. Overseas address is mandatory. Either the permanent or correspondence address must be an overseas address.||A person who has been in India for 182 days or more during a financial year and 365 days or more during the preceding four financial years qualifies as a resident of India. NRIs can continue to enjoy nonresident status in India if their presence in the country is more than 60 days but less than 182 days in a financial year, even if their stay in India during the past four financial years is 365 days or more.
A person, who has been deputed overseas for more than 6 months, also qualifies for nonresident status.
FEMA further clarifies that a PIO is a foreign citizen of Indian origin residing outside India who has held an Indian passport at any time or who himself or his father or grandfather was a citizen of India.
The Income Tax Act further identifies the criteria for availing tax exemptions extended to NRIs.
HOW TO GET STARTED?
An NRE account is a rupee account from which money can be sent back to the country of your residence. The account can be opened with money from abroad or local funds. An NRO account is a nonrepatriable rupee account. An FCNR account is similar to the NRE account, except for the fact that the funds are held in a foreign currency.
The amount that is be invested can be directly debited from an NRE/NRO account or received by inward remittances through normal banking channels. An NRI needs to give a rupee cheque or draft from his NRE/NRO account. He can also send a rupee cheque/draft issued by an exchange house abroad drawn on its correspondent bank in India.
If the investment is made through cheques or drafts, the investor should attach with the application form a foreign inward remittance certificate (FIRC) or a letter issued by the bank confirming the source of funds.
FIRC is a proof of payment received by the individual from outside the country in a foreign currency. It is issued by the bank where you have the account to receive the funds.
Other know your customer documents such as Permanent Account Number and address proof are also to be submitted, just as in case of resident investors.
POWER OF ATTORNEY
After you have made the initial investments, is it possible for you to keep track of your money and react to market movements that at times may call for additional purchases, switches or redemptions even as you are away?
Mutual funds allow a power of attorney (PoA) holder to take these decisions on your behalf. All that the PoA holder needs to do is to submit the original PoA or an attested copy of it to the fund house. The PoA should have signatures of both the NRI and the PoA holder. The PoA holders signature will be verified for processing any transaction.
Similarly, an NRI can make a resident Indian his/her nominee in the mutual fund scheme. An NRI can also be the nominee for investments made by a local resident. Fund houses also allow an NRI to have a joint holding with a resident Indian or another NRI in a scheme.
HOW TO REDEEM?
Redemption proceeds are either paid through cheques or directly credited to the investor bank account. All earnings will be payable in rupees. As mentioned earlier, investments made through inward remittances or from NRE/FCNR accounts are fully repatriable. Hence, earnings made by redeeming the units or through dividends are fully repatriable.
However, in case of investments made through NRO accounts, only the capital appreciation is repatriable, not the principal amount. While tax liabilities of an NRI investing in India are the same as that of a resident investor, tax is deducted at source in case of the former.
But are NRIs subject to double taxation once in India and again in the country of their residence? It depends on the country of residence. If the Indian government has a avoidance of double taxation treaty (ADTT) with that country, the NRI will be spared from paying tax twice.
|Tax Implications of NRIs|
|NRIs earnings from Investments in India is taxed at bellow rates|
|Equity Funds/Stocks||Debt Funds|
|Short term Capital Gains Tax||15%||As per Tax Slab|
|Long Term Capital Gains Tax||Nil||10% Without Indexation, 20% with indexation|
|Dividend Distribution Tax||Nil||25% of Liquid Funds, 12.5% on Other Debt Funds|
NRIs can invest in Indian stock markets under the portfolio investment scheme (PIS) of the Reserve Bank of India (RBI). Under this scheme, an NRI has to open an NRE/NRO account with an RBI authorised Indian bank. An individual open only one PIS account for buying and selling stocks.
The next step is to open a demat account and a trading account with a Sebi registered brokerage firm. An NRI cannot transact in India except through a stock broker.
NRIs cannot trade shares in India on a nondelivery basis, that is, they can neither do day trading nor shortsell in India. If they buy a stock today, they can only sell it after two days.
Shortselling is selling stocks that one does not own in expectation that their prices will drop, and buy them back at lower prices.
SUBSCRIPTION TO IPOs
Shares issued through initial public offerings (IPOs) are not covered under he PIS. In case of IPOs, it is the responsibility of the issuing company to inform the RBI the number of shares it is allotting to NRIs.
However, NRIs need NRE/NRO accounts to subscribe to IPOs. The shares acquired through IPOs can also be sold without a PIS account. However, NRIs must furnish their bank details, besides the date of allotment and cost of acquisition of the shares to calculate the tax on any gains they may have made.
Investing in India long term success story is not all that tough after all. All an NRI needs is a right bank account and other documents which even a resident investor will require to submit.