Nris: Investing In India From The Us

Non-resident Indians (NRIs) have a variety of investment options available to them in India. These include fixed deposit bank accounts, mutual funds, direct equity, real estate, bonds, NCDs, government securities, and the National Pension Scheme (NPS). However, it is important for NRIs to be aware of certain restrictions and regulations, such as the inability to open PPF accounts or invest in floating-rate savings bonds. Additionally, NRIs should consult with financial advisors to determine the most suitable investment options based on their financial goals and risk tolerance. With careful planning and research, NRIs can make sound investments in India and enjoy the benefits of long-term wealth creation.

Fixed Deposits

Non-Resident External Account (NRE)

The money in this type of account is kept in rupees. It's easy to return the money to dollars. Interest rates on these accounts vary depending on the deposit size and/or bank. You can expect interest rates to be around 7% to 9% per year. NRE fixed deposits are a high-return Rupee deposit option to invest your foreign income. The interest earned on NRE fixed deposits is tax-free in India and there is full repatriability of investment, including interest. The minimum amount for opening an NRE fixed deposit account is Rs 25,000 and the tenure can range from one year to ten years.

Non-Resident Ordinary Account (NRO)

This type of account is generally used by NRIs to control their Indian income. Rent income, dividends from investments, or pension funds can be paid into these accounts. These accounts have a current limit of $1 million that is allowed to be transferred from this account to a U.S. account per year. Take note that the interest earned on an NRO fixed deposit is taxed at a rate of 30%. NRO fixed deposits are similar to NRE deposits in terms of the currency of the deposited amount. However, the interest rates of NRO deposits are the same as domestic deposits.

Foreign Currency Non-Resident (FCNR)

Foreign currencies are stored in these accounts, which helps to avoid the currency fluctuations that take place in financial markets. The currency you deposit will determine the interest rate. Dollars should result in an interest rate of between 2% to 3%. You can take money from this account at any time and it is not taxed by the Indian government. A Foreign Currency Non-Repatriable (FCNR) deposit allows investors to deposit their money in foreign currencies that are accepted all over the world, including US dollars, Great Britain Pounds, and Euros.

National Pension Scheme

Non-resident Indians (NRIs) can invest in India through various avenues, including fixed deposit bank accounts, mutual funds, direct equity, real estate, bonds, NCDs, government securities, and the National Pension Scheme (NPS).

The National Pension Scheme (NPS) is a defined contribution pension system introduced by the Government of India as part of its Pension Sector reforms. The scheme aims to provide social security to all citizens of India and is administered and regulated by the PFRDA.

Eligibility and Requirements:

To be eligible for the NPS, individuals must be NRIs or OCIs and comply with KYC norms. The scheme is available to Indian citizens aged between 18 and 65 years.

Types of Accounts:

The NPS offers two types of accounts:

• Tier I: This is a mandatory pension account that offers tax benefits. Funds in this account are locked until retirement. Partial withdrawals of up to 25% of the contributions are allowed after a lock-in period of 3 years, with a maximum of 3 withdrawals during the tenure. At retirement, a minimum of 40% of the corpus must be invested in an annuity scheme, while the remaining can be withdrawn as a lump sum or in instalments until the age of 70.
• Tier II: This is an optional investment account that does not offer tax benefits, but the corpus can be withdrawn at any time. There is no minimum contribution requirement for this account.

Tax Implications:

The NPS offers tax benefits under Tier I. Employee contributions are tax-deductible up to a certain limit, and exclusive tax savings provisions are available. Employer contributions are also tax-deductible up to 10% of the salary. Annuity proceeds for NRIs and OCIs will be taxed at source, as per the Double Taxation Avoidance Agreement (DTAA) of the country where the annuitant resides.

Benefits of NPS:

The NPS offers several advantages, including low costs, superior returns, flexibility of investments, portability, and online access. It allows individuals to select a Pension Fund Manager (PFM) and define their asset allocation. Additionally, subscribers can continue contributing to the scheme post-retirement and can defer withdrawals until the age of 70.

Exit Rules:

For NRIs and OCIs, the accumulated corpus under the NPS is repatriable. Detailed exit rules can be found on the official website of the scheme provider.

Application Process:

NRIs can apply for the NPS through online or offline modes. Online applications can be made via the website of the chosen scheme provider, while offline applications can be submitted at the nearest branch, along with the required documentation and KYC details.

Mutual Funds

Steps to Invest in Mutual Funds for NRIs:

Set Up an Account:

NRIs will need to open either an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account with an Indian bank, as mutual fund investments in foreign currencies are not permitted. NRE accounts are suitable for those looking to transfer overseas earnings to India, while NRO accounts are for managing Indian earnings.

Direct/Self-Investment:

NRIs can invest directly in mutual fund schemes via regular banking channels using their NRE/NRO account. They will need to submit Know Your Customer (KYC) documents, including photographs, self-attested copies of their Adhaar, PAN, passport, bank statements, and foreign residence proof. Some banks may require in-person verification, which can be done by visiting the Indian Embassy in the investor's country of residence.

Via Power of Attorney (PoA):

NRIs can also choose to invest through another person by granting them Power of Attorney. Asset Management Companies (AMCs) allow PoA holders to make investment decisions on behalf of the NRI. Both the NRI and PoA holder must sign the KYC documents for this option.

Get Your KYC Done:

NRIs must complete the KYC process before investing in Indian mutual funds. This includes submitting a copy of their passport, date of birth, photo, address, and current residential proof (temporary or permanent). Some fund houses may also require in-person verification.

Additional Considerations for US/Canada-based NRIs:

US and Canada-based NRIs may face additional challenges due to compliance requirements under the Foreign Account Tax Compliance Act (FATCA). This act requires financial institutions to share details of transactions involving US citizens with the US government. As a result, some mutual fund houses have stopped accepting investments from US and Canada-based NRIs, while others have imposed certain conditions, such as offline transactions with additional declarations.

Taxation for NRIs:

NRIs may be concerned about double taxation when investing in Indian mutual funds. However, if India has signed the Double Taxation Avoidance Treaty (DTAA) with the investor's country of residence, they can claim tax relief in their home country if taxes have already been paid in India. The gains from equity-oriented mutual funds are taxable based on the holding period.

Mutual Fund Options for NRIs:

There are several mutual fund houses that accept investments from US and Canada-based NRIs, including Aditya Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund, and Sundaram Mutual Fund.

Best Mutual Funds for NRIs:

When choosing a mutual fund, NRIs should consider their investment goals, risk tolerance, and investment horizon. Diversified equity funds, balanced funds, and international funds can be attractive options. Some specific funds that are popular among NRIs include:

• Navi Nifty 50 Index Fund
• UTI Mastershare Fund
• Aditya Birla Sunlife Flexicap Fund
• Quant Small Cap Fund

Real Estate

Non-resident Indians (NRIs) can invest in residential and commercial properties in India. However, they are not allowed to own agricultural land, plantation property, or farmhouses. Here are some key points and considerations for NRIs looking to invest in Indian real estate:

Eligibility and Legal Provisions

NRIs are eligible to invest in Indian real estate, but they must comply with the Foreign Exchange Management Act (FEMA) regulations. They can buy any number of commercial or residential properties without seeking permission from the Reserve Bank of India (RBI).

Property Types

NRIs can invest in residential and commercial real estate. However, they cannot purchase agricultural land, plantation properties, or farmhouses without specific permission from the RBI, which is considered on a case-by-case basis.

Investment Procedure

NRIs must make payments in Indian Rupees (INR) through a local bank. They need to have an NRI account in an authorized Indian bank to route transactions. NRIs can use post-dated cheques or opt for the Electronic Clearing System (ECS) from an NRE, NRO, or FCNR account.

Joint Ownership

NRIs can jointly purchase property with other NRIs. However, an Indian resident who is not permitted to invest in Indian property cannot be a joint holder, regardless of their contribution to the purchase.

RBI Approval

The RBI has eased norms for NRI investments, and clearance from the RBI or the Foreign Investment Paper Board is no longer required. This automatic route has reduced paperwork and increased NRI investment in India.

Important Considerations

• NRIs must understand the legal and regulatory environment, including FEMA and RBI regulations.
• Due diligence is essential to verify the seller's documents and ensure no pending dues or liens on the property.
• NRIs should be aware of applicable taxes, such as registration fees, stamp duty, and yearly property taxes.
• Income earned from property in India will be repatriated according to FEMA rules, and TDS will apply to proceeds from the sale of the property.
• NRIs can give Power of Attorney to someone in India to conduct transactions and sign documents on their behalf.

Taxation

NRIs investing in Indian real estate should be aware of the applicable taxes and deductions:

• Rental Income: Rental income is taxable, and the tenant must deduct 30% TDS from rent payments.
• Capital Gains: If the property is sold within two years, profits are short-term capital gains, taxed according to the slab rate for NRIs. If held for more than two years, profits are long-term capital gains, taxed at 20% after indexation.
• Double Taxation Avoidance Agreement (DTAA): NRIs can claim benefits under DTAA to avoid double taxation on specific income sources, including gains from the transfer of property in India.

Popular Investment Destinations

Popular cities for NRI real estate investment in India include:

• Bengaluru
• Hyderabad
• Mumbai
• Delhi-NCR
• Pune
• GIFT City, Gandhinagar, and Ahmedabad
• Chennai

Benefits of NRI Investment in Indian Real Estate

Investing in Indian real estate offers NRIs several advantages:

• Long-term Capital Appreciation: The Indian real estate market has seen significant increases in property values, providing excellent opportunities for long-term returns.
• Rental Income Potential: The rising demand in the Indian real estate market means higher rental returns compared to other investment options.
• Easy Investment Procedure: The Indian government has simplified the investment process, allowing NRIs to invest in real estate from anywhere in the world.
• Diversification of Investment Portfolio: Investing in Indian real estate allows NRIs to diversify their portfolios and protect themselves from market instability.
• Favourable Currency Rates: Investing in the Indian rupee at favourable exchange rates can result in currency gains for NRIs with a long-term investment vision.

Risks and Mitigation

While investing in Indian real estate has its advantages, NRIs should also be aware of potential risks:

• Financial Risk: Borrowing money to invest increases risk, and interest rate fluctuations can impact borrowing costs.
• Market Conditions: Selling a property may be challenging due to a lack of buyers or an inactive market.
• Legal Requirements: Lease terms, registration procedures, property use restrictions, and other government-imposed constraints should be carefully considered before investing.

NRIs seeking to diversify their financial portfolios and maintain connections with their home country can benefit from investing in Indian real estate. With a growing market, rising property values, and the potential for high profits, Indian real estate is an attractive investment option for NRIs. Understanding the legal and regulatory environment, conducting due diligence, and seeking professional advice can help NRIs navigate the process successfully.

Public Provident Fund

Non-resident Indians (NRIs) are not permitted to open or operate a new PPF account in India. However, if a person opens a PPF account as an Indian citizen and later acquires NRI status, the account will remain active until its maturity—15 years from the end of the year in which the account was opened. In this case, NRIs can continue contributing to the existing PPF account until maturity, but they must inform their bank or post office about the change in residential status within one month of becoming an NRI.

After the PPF account reaches maturity, NRIs cannot make any fresh contributions to the account. However, they can repatriate the maturity proceeds through the NRO account under the Liberalized Remittance Scheme (LRS). The PPF corpus can be transferred to the NRO account, and there is no tax on this amount in India, but tax regulations in the NRI's country of residence may vary.

There are two levels of taxation on PPF for an NRI. In India, both principal withdrawals and interest earned are tax-free, and the principal qualifies for a deduction under Section 80C of the Income Tax Act, 1961. However, in countries like the US, the interest earned on PPF is taxable.

Frequently asked questions