Portfolio Investment Scheme: India's Investment Gateway

The Portfolio Investment Scheme (PIS) is a scheme by the Reserve Bank of India (RBI) that enables Non-Resident Indians (NRIs) and Overseas Citizens of India (OCBs) to purchase and sell shares and convertible debentures of Indian companies on a recognised stock exchange. NRIs can open a PIS account with a designated bank branch to route their purchase and sale transactions through their NRI Savings Account. The investments can be made on either a repatriation or non-repatriation basis.

Who can invest

The Portfolio Investment Scheme (PIS) is a scheme of the Reserve Bank of India (RBI) that enables Non-Resident Indians (NRIs) to invest in Indian stocks and bonds.

The Portfolio Investment Scheme is designed for Non-Resident Indians (NRIs) who want to invest in Indian stocks and bonds. NRIs are individuals who are citizens of India but reside in a foreign country for work, business, or any other purpose. The scheme also applies to Overseas Citizens of India (OCBs).

NRIs who wish to invest through the PIS must open a separate NRE PIS account for repatriable investments. This account is in the form of an SB account and is used exclusively for stock market operations. No cheque books are issued for this account, and transfers or withdrawals must be approved by the Department of Posts (DPS).

In addition to the NRE PIS account, investors must also open a Trading Account with a broker and a DP account with the bank or broker. The DP account can be debited or credited by the bank or broker, as per the authorisation of the NRI.

The NRI must provide the broker with orders to purchase or sell shares, and the broker will execute these orders. The bank will then make the payment or receive the proceeds from the transactions and issue a daily statement of transactions to the NRI.

It is important to note that NRIs can only deal with one designated bank for their PIS transactions and must obtain permission for investments through the designated bank branch.

There are certain restrictions on investments made through the Portfolio Investment Scheme. NRIs cannot invest in any company engaged in chit funds, agricultural or plantation activities, or the real estate business related to agriculture or farmland. They are also not permitted to carry out intraday trading or short selling of shares.

There are ceilings on the number of particular shares in the portfolio investment, set by the RBI and monitored daily. For example, for investments under repatriation, NRIs can invest only up to 5% of the total paid-up capital of a company. Aggregate investments by all NRIs in a specific share should not exceed 10% of the paid-up capital, which can be raised to 24% with a special resolution from the RBI.

When NRIs sell their investments, the bank will deduct the applicable tax on capital gains and remit it to the Income Tax Department. The bank will also issue a Tax Deduction Certificate (TDS) to the NRI. As per current rules, the TDS rates are as follows:

• Short Term Capital Gain (STCG) - 15.6%
• Long Term Capital Gain (LTCG) - 10.4%

Investment types

The Portfolio Investment Scheme (PIS) allows Non-Resident Indians (NRIs) to invest in Indian stocks and bonds through the Reserve Bank of India (RBI). NRIs can purchase and sell shares and convertible debentures of Indian companies on recognised stock exchanges, such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).

There are two types of investments under PIS:

Repatriation Basis:

• NRIs can invest through a Non-Resident External (NRE) Rupee account for foreign inward remittances from an overseas account.
• Investments are limited to a maximum of 5% of the paid-up capital of a company and 5% of the paid-up value of each series of debentures.
• Aggregate investments by all NRIs cannot exceed 10% of the paid-up capital of the company, which can be increased to 24% with a special resolution.

Non-Repatriation Basis:

• NRIs can invest through a Non-Resident Ordinary (NRO) account for remittances from overseas accounts or local sources.
• Investments can be made in futures or options traded only through an accepted stock exchange, subject to regulatory limits set by the RBI.

It is important to note that NRIs cannot invest in companies engaged in certain activities, such as chit funds, agricultural or plantation businesses, or real estate related to agriculture or farmhouses. Additionally, PIS accounts cannot be opened as joint accounts, and NRIs are not permitted to engage in intraday trading or short-selling of shares.

Account requirements

To participate in the Portfolio Investment Scheme (PIS) in India, investors need to ensure they meet the eligibility criteria and follow the necessary account opening procedures. Here are the detailed requirements:

• Eligibility: The PIS is open to both resident and non-resident Indians (NRIs), as well as Overseas Citizens of India (OCI) cardholders. Foreign Institutional Investors (FIIs) and Qualified Foreign Investors (QFIs) are also eligible to invest under this scheme.
• Designated Bank Account: Investors are required to open a designated Non-Resident Ordinary (NRO) or Non-Resident External (NRE) rupee account with an authorized dealer bank in India. This account will be specifically for transactions under the PIS. The investor will need to provide necessary documentation, such as proof of identity, address, and PAN card, to open this account.
• PIS Account with a Broker: Investors also need to open a PIS account with a registered broker or custodian who has been authorized by the Reserve Bank of India (RBI) to facilitate portfolio investments. The broker will act as an intermediary and handle the actual buying and selling of stocks on behalf of the investor. A Custodian Agreement may need to be signed, outlining the rights and responsibilities of both parties.
• Linking Bank and PIS Accounts: The designated bank account and the PIS account with the broker must be linked. This is typically done by providing a letter of authorization to the broker, allowing them to debit the bank account for purchases and credit the account for sales or redemptions. This ensures smooth settlement of trades.
• Know Your Customer (KYC) Requirements: Investors need to complete the necessary KYC procedures, which may vary depending on their residency status. NRIs and OCIs typically need to provide copies of their passports, visas (if applicable), and overseas address proof. Additional documents, such as a Power of Attorney (PoA) or Board Resolution (for entities), may also be required.
• Reporting and Compliance: Investors should be aware of the reporting requirements under the PIS. They need to provide regular updates to their broker and authorized dealer bank regarding their transactions. This includes details of purchases, sales, and any remittances made. Adhering to the prescribed limits and guidelines for investments is also crucial to maintain compliance.

It is important to carefully review the requirements and consult with authorized professionals or institutions to ensure that all necessary steps are taken to open and maintain accounts for portfolio investments in India through the PIS route.

Tax implications

The Portfolio Investment Scheme (PIS) is a scheme of the Reserve Bank of India (RBI) that enables Non-Resident Indians (NRIs) to purchase and sell shares and convertible debentures of Indian companies on a recognised stock exchange. The tax implications of the PIS are as follows:

• NRIs can invest in Indian stocks and bonds through the PIS, and the investments can be made either through a repatriation basis or a non-repatriation basis.
• For portfolio investment through the repatriation channel, NRIs require a Non-Resident External (NRE) Rupee account for foreign inward remittances from an overseas account.
• For portfolio investment on a non-repatriation basis, NRIs require a Non-Resident Ordinary (NRO) account for remittances from overseas accounts or local resources.
• There is a ceiling on the number of particular shares in an NRI's portfolio investment. These thresholds are set by the RBI and monitored daily. For example, for investments under repatriation, NRIs can invest only up to 5% of the total paid-up capital of a company.
• Aggregate investments by NRIs in a specific share should not exceed 10% of the paid-up capital of the company. However, if the RBI passes a special resolution, this cap can be raised to 24%.
• NRIs cannot invest in any company engaged in chit funds, agricultural or plantation activities, or the real estate business related to agriculture or farmland.
• Investments in exchange-traded derivative contracts approved by the Securities and Exchange Board of India (SEBI) are not eligible for repatriation benefits.
• If an NRI's status shifts to resident Indian, they cannot continue to hold an NRE or NRO account and must inform the authorised branch and set up a new resident demat account.
• NRIs are not permitted to carry out any intraday trading or short selling of shares.
• The cost of transactions under the PIS is low, and reporting to the RBI is seamless, with compliance with all statutory regulations.
• The calculation of capital gains tax and the issuance of tax deduction certificates ensure compliance with applicable tax laws.
• Any profits from capital assets, such as stocks, are termed "capital gains" and are subject to tax depending on the type of investment.
• Listed Domestic Equity Shares held for less than 12 months before being sold are subject to a Short-Term Capital Gains (STCG) tax rate of 15%.
• Capital Gains from Listed Domestic Equity Shares held for over 12 months are subject to a Long-Term Capital Gains (LTCG) tax rate of 10%.
• LTCG is calculated after an exemption of up to Rs. 1 lakh on aggregate long-term capital gains in a financial year.
• In the case of unlisted domestic equity shares, LTCG tax rules apply if the holding period is 24 months or more; otherwise, STCG tax rules apply.
• The STCG tax rate for unlisted domestic equity shares is based on the Income Tax slab rate of the investor for the Financial Year.
• The LTCG tax rate for unlisted domestic equity shares is 20% of the gains with the benefit of indexation.

Investment limits

There are several investment limits to be aware of when it comes to the Portfolio Investment Scheme in India. Firstly, investments can be made on either a repatriation or non-repatriation basis. For investments under repatriation, a separate NRE (Non-Resident External) Rupee account is required for foreign inward remittances from an overseas account. On the other hand, for investments on a non-repatriation basis, an NRO (Non-Resident Ordinary) account is needed for remittances from overseas accounts or local sources.

It is important to note that NRIs can only invest up to 5% of the paid-up capital of a company for a single NRI and 10% for all NRIs combined. This limit is monitored daily by the RBI, and if it is reached, banks are advised to disallow further investments. Additionally, the aggregate investments can be increased to 24% if a special resolution is passed by the general body of the Indian company.

Another key point to remember is that NRIs are not permitted to engage in intraday trading or short-selling of shares. They must take delivery of the shares and cannot sell them on the same day.

In terms of futures and options, NRIs can execute these trades on a non-repatriation basis only and within the regulatory limits set by SEBI.

When it comes to specific sectors, there are restrictions on investing in companies engaged in chit funds, agricultural or plantation activities, real estate business related to agriculture or farmland, and the construction of farmhouses.

Finally, it is worth noting that NRIs can only have one designated bank to channel their transactions under the Portfolio Investment Scheme account for NRE and NRO.

Frequently asked questions