According to a Ministry of External Affairs report, there are 32 million NRIs residing outside India. The advent of various developments in the industrial sector has attracted many foreign direct investments (FDIs). This in turn made India a viable option for the NRIs as well in terms of the investment market. This piece is a complete guide for an NRI who wants to invest in the Indian stock market. We will discuss the fundamentals and best investment options for NRIs.
Let’s start off with reasons why an NRI should invest in the Indian stock market. There are various reasons for how investment plans for NRI are helpful in achieving financial goals.
Creating a corpus for your retirement through investment plans is one of the key reasons. You can create wealth in various places through multiple investments and secures your retirement funds. The more you save the better standard of living you can afford in the future when you retire.
NRIs earning in dollars converted to rupees is mostly enough to fulfill the basic needs of your immediate family. However, when it comes to NRI investment options in India you’ll have extra income on hands. The more the merrier and you can send these extra earnings to your family members in India. Also, the extra dollars converted to rupees will improve the standard of living of your family members as well.
There are best investment options for NRI which ensures good returns. The objective to build wealth will accomplish when you use the money to make more money. There are many investment options for NRI hence it becomes crucial to select wisely and earn good returns. Keep in mind higher the rate of interest means higher the risk parameter. Identify your risk appetite and go and plan your investments accordingly.
Alternative investment is another investment option for NRI which has the potential to offer good returns along with the principal amount invested. This asset class is growing popular among investors. Investors can invest in blue-chip companies and yield above-market returns.
Let us discuss various investment plans for NRI. Below listed are a few best investment options for NRI in terms of good returns.
NRIs can consider equity as the best investment option if you are someone who is less vulnerable to risks. Under the Portfolio Investment Scheme, (PINS) of RBI NRIs can directly invest in the Indian stock market. To make such direct investments NRE/NRO account, an active trading account, and a Demat account for NRI are essential. There was a surge in Indian stock markets since the 2019 general elections. It is predicted that more FDIs and NRIs will contribute in the future.
Mutual funds for NRI possess moderate risk. The risk factor is lesser as compared to stock markets but also not very secure as compared to bank FDs. Also, considering returns mutual funds offer higher returns than FDs. Identify your risk profile and financial objectives before you invest in mutual funds. Mutual funds for NRI operate through NRO or NRE accounts. Also, remember you can invest in Indian Rupees (INR) and not in foreign currencies.
Indian real estate has seen tremendous growth over the last decade. The real estate prices in major Indian cities Such as Delhi, Mumbai, Bengaluru, and Pune are booming. In this investment option, NRIs purchase houses in India and let out for rent. Before you invest you need to identify your requirements and risk profile. Investing in real estate is a good option as the country as a lot of development is predicted in India in the coming future.
Portfolio Management Services can be tricky to understand and comes with a greater risk factor. PMS is one of the best investment options for NRIs based in the USA but always analyzes the risk parameter and investment cost involved. Plan PMS only after due diligence.
ULIPs and similar insurance products also make the list of best investment options for NRIs. However, only after proper research consider investing in ULIPs. You can make decent money with ULIP and bankers sell these products to NRIs to maximize earnings in short term.
FDs are not only very common among the resident Indians, but NRIs are attracted as well. They are hands down the best secure investment options for NRIs with decent returns and lesser risk. The returns depend on the rate of interest offered by the bank and the tenure of the deposit. Banks and NBFCs give you higher rates of interest on amounts deposited for longer tenures. Senior citizens have the advantage of a slightly higher rate of interest.
PPF is also considered a safe investment option for NRIs. It is a government-backed scheme available for both resident and non-resident Indian citizens. The present rate of return offered on PPF investment is 8% per annum. PPF investment is a long-term investment and has a lock-in period of 15 years. Also, you can invest up to 1.5 lakh annually when it comes to PPF investment.
Similar to PPF, National Pension Scheme (NPS) is also a government-backed scheme. NPS also offers tax benefits as the returns earned are completely exempted from taxes. Like PPFs and bank FDs, NPS is also considered the safest investment option. The annual rate of interest offered by NPS ranges from 12% to 14%. Also, people between the age of 18 and 60 years can invest in the NPS.
Not all the shares issued in the form of Initial Public Offerings (IPOs) come under PIS. It is mandatory for the company issuing IPO to inform RBI about the shares offered to NRIs. NRIs are not liable to get any special approvals from RBI to purchase or sell IPO shares. To invest in IPO, NRIs must provide the required bank details. Using these details, the tax gains are calculated on the gains that the NRIs have received.
The Indian government also offers investment options for NRIs.
NRI’s can invest in the following types of government securities:
There are mainly two types of bonds wherein NRIs can invest. The Public Sector Undertakings Bonds (PSU) are accompanied by maturity date. In this investment option, you loan money to a company and they repay with interest on a specified date. This date is called the maturity date. These returns are taxed at 20% when you sell the bond after owning it for more than 3 years.
The other type of bond is the Perpetual bonds which don’t have a maturity date. The investor and the company agree on a set amount of returns per year to the investor. The perpetual bonds can be traded on the open market. The profit yield in this type of bond depends on the market conditions and your willingness to sell.
The investments made by NRIs must be in a local currency, that is, the Indian Rupees (INR). Mutual funds for NRI in India do not accept investments in foreign currency. To make investments it is essential that an NRI has a non-resident external rupee (NRE) account, non-resident ordinary rupee (NRO) account, or foreign currency non-resident account (FCNR) with any Indian bank.
If investments are made via cheques or drafts, the investor should attach FIRC with the application form. FIRC is proof of payment received by the individual from outside the country in a foreign currency. The bank which receives your funds issues the FIRC.
Other documents required in the process are Permanent Account Number and address proof similar to the resident investors.
The AMC will send the returns to the investors after the fund redemption process. The investor will receive the funds in the account after the necessary tax deductions. You can also receive funds via cheque. Some of the banks credit the funds directly to the NRO/NRE account of the investor. For non-repatriable investment, the investor can redeem funds only through the NRO account.
The common misconception amongst the NRI investors is that they will spend double in taxes when they invest in India. It was very untrue especially if India has signed the Double Taxation Avoidance Treaty (DTAA) with the country where you reside.
Taxation on the gains from equity mutual funds is dependent on the holding period. For short-term capital gains tax rate is 15%. Whereas for long-term capital gains (LTCG), exceeding Rs 1 lakh a year is 10%.
The debt fund gains from short-term plans are taxable at the rate of 30%. If the holding period exceeds three years, the gains are taxed at 20% with indexation benefit. In the case of non-listed funds, the taxation rate is 10% without indexation.
Hope this article, covered the basic thoughts on some of the best investment options for NRIs who are planning to invest in the Indian stock market from abroad.
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