NRIs looking for Investment in India often fall prey to mis-sellers, particularly their bankers whose main focus is to meet their sales targets, rather than giving the right advice. This often leads NRIs into complex products that are unsuitable to their requirements.
In addition, a plethora of investment options for NRIs in India is available with various features and specifications, which add to their confusion even further.
As a fundamental rule, the best options for NRI Investment in India should be in accordance with your risk profile and financial goals. It should fit into your overall requirements as per your financial plan.
In this article, we will discuss the investment options for NRIs in India and the important NRI investment in India rules laid down by FEMA (RBI). Let us start with the WHY.
Why do NRIs invest in India?
There are dual objectives for NRIs to invest in India. One is of course to reap the benefits of the promising growth story of the Indian economy. India is one of the fastest-growing and economically stable countries- on the verge of becoming a 5-trillion dollar economy by 2025.
Also, the GDP of India is showing decent growth with rising private as well as government expenditures on education, health, infrastructure development, etc.
In addition, more than 60% of India’s population are in the age group of 25-35 and have higher disposable incomes and a propensity to consume. This means that the demand for products and services in India is ever-rising.
Not only consumption but they invest as well. The stock market rally in 2020 showed the power of retail investors in India.
All of these make India an attractive investment destination for Non-Resident Indians (NRIs).
The second reason is the emotional one. Most NRIs want to spend their retirement years in their home country. There could be other reasons too for which you may decide to come back to India for good. So, it is wise to invest in the same country in which you want to utilize the money.
Best NRI Investment Options in India and NRI Investment Rules:
Now, the reason why NRIs invest in India is clear. The next big question is- where NRIs should invest in India? Let us look at some of the best investment options for NRIs in India. We will also discuss the FEMA regulations or RBI guidelines for NRI investment in India, pertaining to all of these.
Although a bank account is not an investment, it is required to carry out investments. So, we are including it in the list of NRI investment options in India.
As per FEMA regulations, NRIs have to discontinue their resident savings bank account and convert it into an NRO account. This account can be used for depositing the income earned in India like rent, interest, dividends, etc. Local expenses like- loan EMIs, insurance premiums, etc can also be carried out. Interest is taxable. Money lying in this account is repatriable up to 1 million USD per financial year.
The other bank account that NRIs use is NRE Account. This account is meant for your income in foreign currency and expenses overseas. Interest is tax-free in India and funds are fully repatriable.
NRIs can invest in FDs in Indian Rupees. In fact, it is a very popular investment option among NRIs, owing to the safety of funds and predictable returns. NRIs can have three types of fixed deposits in India:
- Fixed Deposit in NRO Account: Just like an NRO savings account, you can open an NRO Fixed Deposit account with the Indian sources of funds. These days, the rate of interest ranges from 3% to 5.50% depending upon the amount and the tenure of the deposit. The rates may vary across banks. Interest is taxable and is subject to TDS. (Read: TDS rates on NRI investments)
- Fixed Deposit in NRE Account: You can open an NRE Fixed Deposit account with the foreign sources of income, in Indian currency. The rate of interest ranges from 5% to 7% depending upon the amount and the tenure of the deposit. The rates may vary across banks. The interest earned on this deposit is completely tax-free in India but may be taxable in your country of residence. For example, in middle-east countries, it would be tax-free but in countries like- the US, UK, etc. it may be taxable subject to the provisions of DTAA. (Read a detailed article on DTAA here)
- Fixed Deposit in FCNR Account: Foreign Country Non-Resident (FCNR) FDs can be opened for a period of 1 to 5 years in foreign currency. This account is not affected by foreign exchange fluctuations and the interest rate is somewhat higher than the savings account. Just like an NRE account, interest remains tax-free in India until you attain the NRI or RNOR status but may be taxable in your host country.
NRI Investment in Mutual Funds in India:
Can NRI invest in mutual funds in India? It is a common query we come across.
Yes, NRIs are allowed to invest in Indian Mutual funds, if they follow the FEMA regulations like- KYC compliance, opening NRE and NRO accounts, etc. Both lump-sum investment and SIP are allowed. (Also Read: All about SIP in mutual funds)
These are good options for NRI investment in India. Mutual funds for NRI in India are ideal for goal-based financial planning and long-term wealth creation. You can choose between equity, debt, and balanced funds offered by various Asset Management Companies (AMCs) based on your goals and risk appetite. (Read: Mutual funds for NRIs in India: a complete guide)
However, if you are an NRI from the US or Canada, there are some restrictions and you cannot invest in all mutual fund investment schemes in India. Due to the FATCA restrictions, many mutual fund houses do not accept investments from US and Canada-based NRIs. Also, the funds that allow, require additional details and paperwork.
As per NRI investment in India rules, mutual fund investments can be done both on a repatriable and non-repatriable basis, depending upon your requirement.
If you want to repatriate your money to a foreign country, you should invest in mutual funds in India through a repatriable account, i.e., NRE or FCNR account.
If you want to invest on a non-repatriable basis, i.e., this money is to be utilized in India only, you should use your NRO Account for investing in mutual funds.
You can choose to invest in mutual funds directly or can give Power of Attorney to a resident Indian relative to carry out the investments on your behalf.
A well-diversified mutual fund portfolio in an asset allocation structure has the potential to generate an inflation-beating return in the long run and manage the investment risk as well.
If you are an NRI between the ages of 18-70 years, you are eligible to invest in the National Pension Scheme or NPS. PIOs and OCIs are also eligible to open NPS accounts. It is a good option for NRI investment in India for those looking to retire in their home country. (Also Read: NRI Retiring in India- important things to plan for)
The NPS account can be opened physically via Point of Presence (Banks) by submitting documents like- PAN card, Aadhar, etc. You can also open an online NPS account through the eNPS portal. (Also Read: How to open an eNPS Account? Step-by-step guide)
However, a Power of Attorney and joint account facility is not available in NPS.
NPS investment can be done through NRO as well as NRE Accounts and the minimum contribution is Rs.6,000 per annum.
There are two choices for investment allocation in NPS- Active Choice and Auto Choice. In active choice you may decide the allocation to Equity (E), Corporate Bonds (C), and Government Securities (G). However, the allocation to equities cannot exceed 75%.
In auto choice, the investment allocation to E, C, and G is selected as per your age, and as your age increases the exposure to equity and corporate bonds gradually reduces, and Government securities increases. (Also Read: All about auto and active choice in NPS)
If you have taxable income in India, you can get an additional tax deduction of Rs.50,000 under section 80CCD over and above the section 80C limit of 1.50 Lakhs. It may help you in additional tax-saving too.
On reaching 60, you may withdraw 60% of the accumulated amount as a lump-sum amount and 40% should be utilized towards buying an annuity plan for regular pensions. However, you may choose to extend NPS with or without contributions up to 70 years and the annuity subscriptions can be deferred up to 3 years. (Check the NPS withdrawal rules in this detailed article)
The withdrawal proceeds would be payable in Indian Rupees and would be credited to your NRO Account if the investment is done on a non-repatriation basis. On the other hand, if the investment is done with the purpose of repatriation, the proceeds would be credited to the NRE account.
Direct Equity shares:
NRIs can invest in the shares of Indian companies. It is allowed up to 5% of the value of the paid-up capital of the company. Excluding those companies that are engaged in the business of agriculture or plantation, construction of farmhouses, chit funds, Nidhi company, or trading of Transferable Development Rights (TDRs).
Once you become an NRI to invest directly in the Indian stock market, you cannot use your domestic Demat account for stock market investments. You need to open a Portfolio Investment Account, commonly known as PINS or PIS Account under RBI. This account should be linked to your NRI Demat account with a registered stockbroker in India.
However, as per NRI investment in India rules (RBI guidelines), NRIs are not allowed to do intra-day trading & short-selling in the Indian stock markets. Investment can only be done with the purpose of holding the stock.
Just like mutual funds, you can invest in direct equities both on a repatriation and non-repatriation basis depending upon your requirements.
Sale proceeds of the investment done on a repatriation basis would be credited to the NRE/FCNR account or NRO account after the payment of all taxes due. Sale proceeds for non-repatriation basis investments will be credited to the NRO account.
NRIs can also invest in derivative contracts on a non-repatriation basis using the Indian funds only. According to RBI guidelines, repatriation benefits are not allowed on these investments.
Investment in direct stocks in India can deliver higher returns over the long-term but come with equal risk too. So, choose this NRI investment in India option only if you have the expertise in stock selection and understand the underlying volatility. Else, it would be a good idea to outsource it to professionals.
NRI Investment in Real Estate in India:
NRIs are permitted to invest in real estate in India- both commercial and residential and hold any number of properties. NRI buying property in India does not require any prior approval from RBI. However, as per NRI real estate investment in India rules, you are not allowed to invest in agricultural lands, farms, or plantations.
You can purchase the property through your own funds lying in an NRE, NRO, or FCNR account. You are also eligible to take home loans in India to fund 70% to 90% of the property value.
NRIs are also allowed to acquire property in India by means of gifts or inheritance from the resident Indian relative. As per FEMA regulations, relative means- wife/ husband, brother, sister, father, mother, son, son’s wife, daughter, and daughter’s husband. However, if the property is agricultural land, farm, or plantation, it can be acquired through inheritance only, not gift.
The rental and the sale proceeds of the property would be credited to your NRO account and is repatriable for up to two properties within the overall limit of 1 Million USD. If the amount of repatriation or the number of properties is more, RBI approval shall be required.
However, in case you have made the payment through your NRE or FCNR account, the sale proceeds are freely repatriable.
NRI real estate investment in India should be done keeping in mind your requirements. Although it may also generate returns for you but has its own share of risks like- difficulty in management, high costs, low liquidity, taxation issues, etc. (Also Read: 10 reasons why real estate is riskier than equity?)
If you want to take the benefits from the growth of the real estate sector in India without committing huge capital, REITs can be a better option for you. (Read a detailed article on REITs here)
Portfolio Management Services or PMS:
Portfolio Management services or PMS is also an option for NRI investment in India. You can invest in the Indian stock markets through the PMS route. Like direct equity investment for this too, you are required to open a PIS account.
Generally, the investment is done by giving Power of Attorney to the PMS provider in India to buy or sell stocks on your behalf. The minimum amount of investment is INR 50 Lakhs. (Also Read: How NRIs can make the best use of Power of Attorney in India?)
The NRI investment rules remain mostly similar to that of direct stock investment, as explained above. However, there are some additional documentation requirements that you may confirm with the service provider.
Every PMS manager has different investment strategies and some can be concentrated and complex. Do not decide by only seeing the past performance. Make sure that you are comfortable with the risks and the costs involved before committing your hard-earned money to a PMS.
These can be considered as one of the best investments in India for NRIs like those based out of the US due to the limited options, and tax issues in mutual funds. For others, NRI mutual fund investment in India can be better than PMS. (Also Read: How PMS is different from Mutual Funds?)
PPF and other small saving schemes:
If you have already invested in PPF you can continue that until maturity (15 years) along with the contributions but cannot extend it beyond that. As per NRI investment rules in India, you are not allowed to open a PPF account once you become an NRI.
As per RBI regulations, NRIs are not allowed to invest in other small savings schemes like- Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme, or Post office schemes.
Unit Linked Insurance Plans (ULIPs):
ULIPs are a mix of insurance and investments and often involve high charges and commissions. That is the reason we financial planners do not advise ULIPs or endowment insurance plans.
These are only meant only to be sold, not purchased. Ideally, insurance and investments need to be kept separate because the purpose of both these products is separate. Insurance is a protection planning tool and investment is done to reach financial goals.
So, be cautious when your banker tries to sell you such policies. Rather than making you rich, these investment plans make them rich. (Also Read: Conflict of interest- Beware of it when investing)
Other Options for NRI investment in India:
Apart from the above-mentioned ones, the following are the other options for NRI investment in India:
- Alternative Investment Funds (AIFs)
- Government Securities
- Non-Convertible Debentures (NCDs)
- PSU, infrastructure, municipal, and other tax-free bonds
- Corporate FDs and bonds
NRI investment in India- Conclusion:
Yes, It is important for NRIs to be aware of the Investment options available to them. Following the NRI investment rules will keep them on the right side of the Law. But it is equally important that any purchase or Investment should be backed by a properly crafted Financial Plan based on your Risk appetite and goals.
All investments are good if invested for the right purpose and goal, else even good investments can turn bad.
Hope you find this article on NRI investment options in India and important rules useful. If you have any specific queries related to NRI investment in India, feel free to share them in the comments section below. We will try to address the same.
This Article is written by Mr. Varun Baid, CFP Professional