Who is a Non-Resident Indian (NRI)?
A non-resident Indian (NRI) is a citizen of India who has spent less than 183 days of the financial year (or tax year) in India. The tax year stretches from April 1st to March 31st in the succeeding year. This means you had to be outside of India between April 1st of last year until March 31st of this year for more than 182 days. NRI’s are still citizens of India but they don’t pay tax there.
1.Fix Deposit Bank Accounts
This is probably the most common form of NRI investment in India. With a fixed deposit, you deposit money into an account and it is kept safe for a predetermined amount of time. You can’t withdraw the funds before the period is over. The money plus the interest is paid out to you after the period has ended.
Three Types of Fixed Deposit Accounts. There are three main types of fixed deposit accounts that serve as NRI investment options in India
Non-Resident External Account (NRE) – The money of such an 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.
Non-Resident Ordinary Account (NRO) – This account type is generally used by NRI’s 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 the interest earned on an NRO fixed deposit is taxed at a rate of 30%.
Foreign Currency Non-Resident (FCNR) – Foreign currencies are stored in these accounts. It helps to avoid the currency fluctuations that take place in financial markets. The currency you deposit into the account will determine the interest rate of it. Dollars should cause 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.
An NRI needs an NRE, NRO, or FCNR account in India to be able to invest in an Indian mutual fund. These accounts help to facilitate the investment and payout process.
Mutual funds have two predominant categories and they are taxed differently.
Equity Funds – More than 65% of the fund contains stocks (equity). You will pay 15% tax if you sell the investment within the first year. The investment is tax-free after owning it for more than one year.
Debt Funds – Less than 65% of the fund is invested in stocks (equity). NRI’s pay 30% tax after selling it within 3 years of owning it. You will only pay 20% tax when you sell it after owning it for more than 3 years.
3. Direct Equity
You can always invest your money into stocks on the National Stock Exchange of India Ltd. (NSE) if you feel you have enough knowledge. You will need to be part of the Portfolio Investment Scheme (PINS) of the Reserve Bank of India (RBI). This will allow you to trade stocks on the NSE.
You will need the following three things:
An NRE/NRO savings account dedicated only for your PIS purposes.
A dematerialized account that holds shares in an electronic form.
A SEBI trading account with a registered broker.
4. Bonds and Non-Convertible Debentures (NCDs)
PSU Bonds – Public Sector Undertakings Bonds (PSU) are contracts with a maturity date. You in effect loan money to a company and they promise to repay it with interest on a specific date (called the maturity date). The interest rate on a PSU will be determined by the creditworthiness of the company who issues it. These investments are taxed at 20% if you sell it after owning it for more than 3 years.
Non-Convertible Debentures (NCD) – This debt is secured by the company’s assets. The interest rate will, therefore, be a bit lower as secured debt has less risk involved. But, the interest rate on NCDs will still be very competitive when compared to returns on investments like equities.
Perpetual Bonds – These bonds don’t have a maturity date so there is no date by which it pays out. The issuing company, however, promises to pay the holder a set amount of returns per year. The holders of perpetual bonds trade it on the open market. Market conditions and your willingness to sell will determine if you make a profit with the selling of this investment.
The NRI can invest in India through the NRE account or the NRO account. While the NRE account is an external account and hence Repatriable, the NRO account is a resident account and hence the funds are non-Repatriable beyond the limit of $1 million per year.
Depending on risk profile, an NRI can invest in equity funds, balanced funds, debt funds, liquid funds, and MIPs. Gains on the sale of non-equity funds after 3 years are long-term gains. They will be taxed at 20% after indexation. Good Indian mutual funds give returns that can beat inflation in long term.
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