Staying overseas on an extended period beyond 240 days will give you as many chances to invest somewhere since you are earning in Dollars($) or Euros or other economy currencies. Being an Indian, NRIs have the privilege to invest back in India.
In this article, we will look into the best investment options in India for NRIs.
Before proceeding with this article, check whether these investments suit you. Read my article on the same: Are you a Non-Resident Indian (NRI), Check your Status post this budget 2020?
Many NRIs still obscure themselves that they are not allowed to invest in India. But that is not right.
Why do NRIs should invest back in India?
Always investing helps to improve our wealth and helps to reach the F.I.R.E stage early. Buying a property either as Land or Apartment gives an upper hand when you return to India in the later stage of life. The property owner shall be used for getting loans if required.
Planning for Retirement:
While earning an income overseas, you may think that you might want to settle down in India at your old age for the medical facilities or be with relatives in India or any other reason. So, for retirement life, you might need a huge corpus of money. For the accumulation of retirement capital, investing in a developing country can multiply your investment and helps to reach the goal easily.
Get higher returns:
When you invest the same amount of money in the country where you are living and compare the same investment in India, if you invested correctly you will make more money. So remember this as a hand note, Higher the return, higher will be the risk; Lower returns mean low risk. So never take a risk which you can not afford to lose.
Best NRI Investment Options available:
1.Fixed Deposits in Bank
This is the most common form of NRI investment in India. If you are reading this as an NRI, I am pretty sure that you might have a Bank Deposit in India.
You can read my article about Fixed deposits in detail. Click here to read about it.
Once you read the above article, You may need to know which type of account to be opened for overseas people.
There are 3 types of Fixed deposit accounts are available.
NRE (Non-Resident External) Account
- NRE accounts are opened to deposit income earned overseas.
- The money held in this account can be remitted back overseas.
- This account shall be opened in the form of savings, current, recurring or fixed deposit accounts.
- Interest earned from the NRE account is exempt from Income tax in India.
- This account is an Indian rupee-denominated currency account.
- The amount deposited in this account must be earned outside India.
- NRE account is mainly used for Investment payments, business, and personal banking.
- NRI Deposits can earn an interest ranging from 7 to 9%pa
NRO (Non-Resident Ordinary) Account
- This is a savings or current account to manage incomes from India like rental income, FD interest, dividends and other sources of income-earning in India.
- The Interest earning in this account is subjected to a 30% tax.
- This account shall be opened jointly with a resident Indian.
- There will be charges for repatriation and presently capped at $1Million per year.
FCNR (Foreign Currency Non-Resident) Account
- This is a fixed-term bank account to deposit income earned overseas.
- This account is not an Indian rupee-denominated account, it can be maintained in 6 different currencies like USD, Euro, AUD, CAD, JPY, GBP.
- The minimum tenure is 1 year and maximum tenure is 5 years.
- Interest earned is tax-free.
Yes. NRI people are allowed to invest in mutual funds as per FEMA. Mutual funds are always considered as a riskier option but the returns are higher compared to other options.
But to open a Mutual Fund account, NRI should have either one of the rupee-denominated NRE, NRO in an authorized Indian bank which eases the investment and pay-out procedure.
Step 1: Opening the Required Account with a Bank
Step 2: Submit KYC (Know your customer) Form to the authorized fund house.
Step 3: Select a method of Payment (Self or direct mode or Power of Attorney)
Step 4: Submit a FIRC (Foreign Inward Remittance Certificate) – Source of income -This is Mandatory. Some funds houses might cancel or enforce extra preventive conditions on investments from NRIs based in the US and Canada owing to the strict rules under the Foreign Account Tax Compliance Act (FATCA).
Step 5: Select a fund to invest and redeem it as and when required.
“Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.”
Taxation of Gains:
Mutual funds have many categories and are taxed at different rates. Equity funds and Debt funds are predominant fund types.
1.Equity Funds: To read about Equity funds elaborately, read my article on ELSS which is a type of Tax saving Equity fund, Click here.
2.Debt Funds: To read about all the types of Debt funds in a detailed explanation, click here.
Coming to Taxation, It will be taxed based on the holding period and fund type.
If the holding period is more than 36 months in Debt mutual funds, it is Long term asset. Meanwhile, in Equity mutual funds, it is more than 12 months.
If the holding period is less than 36 months in Debt mutual funds, it is Short term asset. In the meantime, in Equity mutual funds, it is less than 12 months.
Tax on Equity mutual funds will be as follows :
Long term capital gains, exceeding 1 Lakh is liable to 10% tax whereas short-term gains are taxed at 15%.
Tax on Debt mutual funds will be as follows :
Short term capital gains are taxed at 30%.
Long term gains at 20% with indexation* benefit and 10% without indexation benefit.
*Indexation is the process of adjusting the purchase price of an investment to replicate the outcome of inflation.
3.Direct Equity :
Like Mutual funds, NRIs can invest their money into stocks on the National Stock Exchange of India. NRI can participate under the Portfolio Investment Scheme(PIS) of the Reserve Bank of India. Apply for the PIS permission letter from RBI. The bank where you opened an NRE or NRO account will help you to get the requested letter. With having NRE/NRO account, An Individual shall open only one PIS account for the investment.
The Aggregate investment by NRIs should not cross 10% of the paid-up capital in an Indian company.
NRIs shall open a Demat account and a trading account with a SEBI-registered brokerage firm(like Zerodha). An NRI account holder can not do day-trading but can do the delivery based trading.
4.EXCHANGE TRADED FUNDS (ETF)
NRIs can purchase EFTs from their Trading account and can trade them online. Equity, Debt, Gold and International Indices ETF’s are available on NSE.
5.Real Estate :
NRIs sported a revelatory role in the Indian real estate market. NRI buy properties either as investment purpose or settle back once they retire. However, NRI has to follow the RBI & FEMA rules.
“An NRI or person of Indian origin (PIO), as defined in FEMA, can acquire by way of purchase, any immovable property in India, other than agricultural land/plantation property/farmhouse. This is under general permission that has been given by the government of India. However, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, shall acquire or transfer immovable property in India, other than lease, not exceeding five years, without prior permission of the Reserve Bank,” explains Amarjit Bakshi, managing director, Central Park.
NRI is permitted to buy properties in both residential and commercial categories in India.
Taxation of Gains:
NRIs can gain profit from their investments in real estate, in terms of income through rental and short or long-term gain.
The rental income earned from a property asset in India falls under the income accrued in India and is taxable, irrespective of residential status.
Long-term capital gains:
Long-term capital gains (applicable when the property is held for more than two years) are taxed at 20 percent. However, unlike short-term capital gains, the exemption can be claimed under sections 54, 54F and 54EC.
Short-term capital gains:
Short-term capital gains apply to the profit earned through the sale of a property, within two years of its purchase. The capital gains for such property are calculated as the difference between the sale proceeds and the cost of acquisition. It is taxed as per the applicable slab rate for the NRI.
NRIs are eligible to open corporate deposits, Non-Convertible Debentures(NCD) and PSU bonds issued in India. Tax-free bonds are also available both on a repatriable and non-repatriable basis.
To apply for a repatriable basis, an NRE account is needed.
To apply on a non-repatriable basis, the NRO account is needed.
In the Repatriation Scheme, the profits earned can be transferred back to their living country.
In Non-Repatriation Scheme, the profits earned cannot be transferred back to their living country.
For the PSU Bonds, Fixed maturity contract bonds are available which means the Company will repay the principal with interest on a specific date mentioned in the bond. PSU Companies issue these bonds when the Ministry of Finance permits to issue when they require funds for expansion or modernization of their business.
NCDs are the debentures issued by the company to the public to raise funds and if the debentures can not be converted into shares at the time of maturity is NCD.
Perpetual Bonds are similar to regular bonds but it does not have any fixed maturity. They can not be redeemed but the company pays fixed interest to the holder of the bonds.
7.Certificate of Deposits(CDs)
CDs are a short term debt type investment and a negotiable money market instrument. To open a CD, NRI should have a Demat account in its name. NRIs can only subscribe to Indian CDs on a non-repatriable basis in multiples of 1 Lakhs. The average yield of CDs varies from 7 to 8.%. This is similar to fixed deposits but the profits can not be transferred back.
These bonds are issued by the government with a fixed maturity date. Some of the securities are as follows :
- Capital Index Bonds – Rates are adjusted according to the inflation rate of the Indian market.
- Floating rate government bonds – Variable Interest rate as and when RBI rates announced.
- Fixed-rate government bonds – Fixed Interest rate throughout the bond period
- Zero-coupon bonds or Discount bonds – It does not pay interest but the investor gets a large discount on the face value of the bond.
The above-dated government securities are for longer-term investments. There are few other opportunities for the short term investment.
T-Bills are short term borrowing instruments having maturity dates ranging from 3 to 12 months. These bonds are available at auctions conducted by RBI. This is similar to Discount bonds, but here the investor has to bid for a discount where he/she can make a fixed profit when the bond is redeemed.
9.National Pension Scheme(NPS)
You can read my detailed article on NPS: National Pension Scheme – Benefits and Returns
In Short, It is a tax-efficient retirement savings scheme. NPS is available to all NRIs that are between 18-65 years old, except PIO/ OCI holders or foreign citizens. Funds from NRE and NRO accounts can both contribute to an NPS. Contributions made by an NRI from these accounts are subject to regulatory requirements prescribed by the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA)
The following points need to be remembered for exit from the NPS:
Repatriation of non-repatriation of the proceeds of the NPS will largely depend on whether the investment is made through the repatriable NRE account or the non-repatriable NRO account.
If the NRI wants to withdraw on the attainment of 60 years of age, then a minimum of 40% must be annuitized and the balance can be withdrawn lump sum. However, complete withdrawal is permitted if the corpus is less than Rs2 lakh. NRIs can also defer the withdrawal up to the age of 70.
In the case of premature withdrawal before attaining the age of 60, a minimum of 80% will have to be annuitized and only the balance can be withdrawn lump sum. However, complete withdrawal is permitted if the corpus is less than Rs1 lakh.
In the event of the death of the NRI, the nominee will be eligible to receive 100% of the corpus accumulated in a lump sum.
Other Investment options where NRI’s not allowed
NRI has so many investment options in India. Even if you are living away from the country, you can still participate in economic development and get mutually benefitted from the gains made. If you can invest as per your risk appetite, you can hit a Home-run in your Financial Independence Journey.
Thanks for reading the article. Share this with your NRI friends if you like.