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Big Story | NRI investments in India: What, where, how

Anand Kalyanaraman | Updated on January 12, 2020

What are the dos and don’ts for Non-Resident Indians and Overseas Citizens of India when it comes to investing in India? Here’s an overview

When it comes to Indians living abroad and their money matters in India, there is a veritable alphabet soup — NRI, OCI, PIO, NRE, NRO, FCNR (B), RFC, PIS and more.

Add to this, the regulations and restrictions under FEMA (Foreign Exchange Management Act) and the tight tax rules under the Income Tax Act, and it can be quite a task navigating the landscape.

We try to decode some key aspects and give broad pointers that could help make your investment journey easier.

Who’s who?

To many, any Indian living abroad for a considerable length of time gets the NRI (Non-Resident Indian) tag. So, a brother with an Indian passport studying in the US the past couple of years becomes an NRI, and so does an aunt living Down Under the past couple of decades with an Australian citizenship.

But there is a difference between the two, given that India does not allow dual citizenship (simultaneously having an Indian and a foreign country citizenship).

Broadly speaking, an NRI is an Indian citizen ordinarily residing outside India and holding an Indian passport.

An OCI (Overseas Citizen of India), on the other hand, is a person with Indian roots or connections, but holds the citizenship of another country. (More about this in the table below.)



So, in the above example, the brother is an NRI while the aunt is an OCI. Until 2015, there was another category PIO (Person of Indian Origin) which was then subsumed within the OCI. One has to apply to become an OCI; it is not automatic.

While their categories are different, both NRIs and OCIs are largely subject to the same rules on what’s allowed and what’s not, regarding their money, banking and investments in India. In the discussion below, the term ‘non-resident’ includes NRIs and OCIs.

What’s allowed, what’s not?

The no-go investment area for NRIs and OCIs is quite small.

One, you are not allowed to invest in small savings schemes such as the Public Provident Fund (PPF), National Savings Certificate (NSC), Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme (SCSS) and other offerings of the post office.

That’s an unkind cut since many of these schemes offer a rare combination of no-risk and attractive, tax-efficient returns.

The Centre’s intent, it seems, is to restrict social security schemes to resident Indians.

But there have been some small mercies. In late 2017, the Centre had notified the immediate effective closure of PPF from the day a resident Indian became a non-resident.

Thankfully, in February 2018, this notification was kept in abeyance.

So, now, it’s back to the original position — a PPF account opened by a resident Indian can be continued until its original maturity of 15 years even after the person becomes a non-resident; extensions are not allowed though.

A similar notification of effective immediate closure of NSC accounts was not specifically kept in abeyance; so, there is ambiguity on that front.

Next, NRIs and OCIs are not allowed to buy agricultural land, farmhouses or plantations. If you had bought such property as a resident Indian, you can continue to hold them even after you become a non-resident.

You can also inherit or receive such property as gift from relatives. But new purchases are not allowed.

Sovereign gold bonds issued by the RBI are also off the list for non-residents, but these bonds, if acquired as a resident, can be held until redemption or maturity.

But for the above, NRIs and OCIs can deploy their money across a host of products. Bank deposits, company deposits, stocks, bonds, debentures, government securities, mutual funds, exchange-traded funds (ETFs), insurance products, real estate including residential and commercial property, gold, derivatives — the options are many.

Even the recent Bharat Bond issue was open to NRIs and OCIs. Until recently, OCIs were not allowed to invest in the NPS (National Pension System) - Tier I. But an October 2019 circular allows them to do so, at par with NRIs. However, NPS - Tier II is not open to NRIs and OCIs.

Also, while there may not be a regulatory bar, some investment providers, at their discretion, may not allow non-residents to invest in their products.

How to invest?

Investments in India by NRIs and OCIs have to be made, in many cases, in rupees through an NRE (Non-Resident External) or an NRO (Non-Resident Ordinary) account.

An NRE account, which is a rupee account, is generally funded by inward remittances from abroad, and the money can be repatriated (sent back) abroad without restrictions.

An NRO account, also a rupee account, is generally funded by income earned in India or from Indian assets, and there are restrictions on repatriation. (More about these and FCNR (B)(Foreign Currency Non- Resident (Bank) in the table below.)



You need to inform your bank about the change in your status from resident to non-resident and have your bank accounts re-designated as NRE/NRO accounts. You also need to inform your broker about the change in residential status and get the demat account re-designated.

Interest earned on deposits linked to NRE accounts is not taxable, while interest earned on deposits linked to NRO accounts is taxable. That makes NRE term deposits quite popular among non-residents since the after-tax return is attractive; leading PSU and private banks currently offer 6.25-6.5 per cent annually across tenures (1-2 years to 5-10 years).

NRO term deposits also offer similar rates, but the interest is taxable and hence, the post-tax returns lower. Savings bank deposits, both NRE and NRO, currently offer 3.25 -3.5 per cent annually (some banks offer higher rates for large deposits).

Taking stock

To buy and sell stocks and convertible debentures of Indian companies on the stock exchange, you need a demat account, and have to route the transactions through a PIS (Portfolio Investment Scheme) account, linked to the NRE and/or NRO account of one bank. You can open the PIS account with one bank only, and it should not be a joint account. This account should be used only for PIS transactions.

You can transact in securities from an RBI-approved list. Intra-day trades, short-selling and non-delivery basis transactions are not allowed. All this because the RBI monitors capital market transactions of non-residents and other foreign investors to ensure that their overall stakes in Indian companies don’t breach prescribed limits.

Buying shares in an IPO and selling them does not need a PIS account. Shares bought by you as a resident can be held on a non-repatriation basis, and sold in the secondary market without routing it through PIS.

Also, shares received as inheritance can be held and sold on a non-repatriation basis without the PIS.

Non-residents can trade in the futures and options segment of the market using rupee funds held on a non-repatriation basis.

MF investments

Unlike stock transactions, it is fairly easy for non-residents to buy and sell mutual fund schemes. Neither a demat account nor the use of the PIS route is needed.

You can buy from the range of mutual fund schemes (equity, non-equity and others).

This can be done either through an intermediary (regular plans) or through direct plans such as buying directly from the fund house portal.

To invest in mutual funds, you must first get your KYC (know your customer) compliance done. For direct investments, this might take a visit to the office of the fund house or the registrar.

It is a one-time process, though, and you can then invest, even online, across fund houses and schemes. Redemption of schemes can also happen online and the money will be credited to the account from which the investment was made.

NRIs and OCIs from most countries can invest easily in schemes across fund houses. But those from the US and Canada could face hurdles due to FATCA compliance requirements that have resulted in several fund houses not accepting investments from these countries.

The good news is that over the years, more fund houses have started accepting investments from non-residents in the US and Canada. But some have their own conditions, such as accepting only offline investments, requiring additional declarations, or not allowing investments in closed-end funds.

Homing in

For many years, real estate, especially residential property in India, was among the favourite investment avenues for NRIs and OCIs, thanks to their ability to invest large sums in an asset class that was having a good run.

The emotional connect in owning a tangible asset in the country of their origin also played a part. The slump in the residential real- estate market over the past few years has seen some of the interest wane.

But many non-residents still prefer property over other asset classes. Also, commercial property has done fairly well in contrast to residential property.

Besides residential and commercial properties, non-residents can invest in REITs (real estate investment trusts). They can also get loans for purchase of property in India.

The payment for immovable property has to be received in India through banking channels. It can also be made out of funds held in NRE, NRO or FCNR (B) accounts of the NRIs/OCIs.

Payments should not be made through travellers’ cheque and foreign currency notes. Repatriation of the sale proceeds of a property has some restrictions. This includes a condition that, in case of residential property, repatriation of sale proceeds is restricted to a maximum of two such properties.

Taxation can be TeDiouS for non-residents

NRIs and OCIs have reason to complain about the strict tax provisions applicable to them in India. The taxman, it would seem, is worried about the difficulty of recovering unpaid tax dues from those who reside outside India. So, he has imposed a heavy TDS (tax deducted at source) burden on non-residents. A payer has to first cut the tax on the income due to an NRI/OCI and then give them the balance amount.

For instance, if an NRI as a landlord lets out a residential property, the tenant has to deduct tax at 31.2 per cent (30 per cent, plus surcharge and cess) of the rent.

It does not matter how much the rent amount is. In the case of a resident landlord, TDS at 5 per cent of the rent has to be cut by an individual tenant only if the monthly rent exceeds ₹50,000.

Clearly, the NRI landlord gets the short end of the stick.

Similarly, on sale of a house property by an NRI, the buyer has to deduct tax at 20 per cent (plus surcharge and cess) of the capital gains, if the gains are long-term in nature, or at 30 per cent (plus surcharge and cess), if the gains are short-term. The TDS is applicable, irrespective of the sale value of the house. In contrast, where a house sold by one resident to another, TDS at 1 per cent of the sale value is applicable if the sale value exceeds ₹50 lakh.

Also, on sale of mutual fund units by NRIs/OCIs, the mutual fund has to deduct tax on the capital gains before crediting the balance to the account. The rate of tax (10-30 per cent, plus surcharge and cess) will depend on the type of the fund (equity or non-equity) and the nature of the gain (short- or long-term).

Similarly, there will be TDS on gains made on sale of shares. Also, the TDS on the interest earned on NRO deposits is taxable at 30 per cent (plus surcharge and cess).

There are other dampeners, too. For instance, NRIs and OCIs are not eligible for the enhanced basic exemption limit for tax purposes of ₹3 lakh and ₹5 lakh that is available to resident senior citizens and resident super-senior citizens.

The basic exemption limit for all non-residents is the same — ₹2.5 lakh currently. On the positive side though, many tax breaks such as Section 80C benefits are available to non-residents, too.

If the taxable income of an NRI/OCI is expected to be under the tax exemption limit, he/she can apply to the Tax Department for a no-TDS certificate, which they can then furnish to the income payer.

Paper trail

As an NRI/OCI, keep safe the TDS certificates that have to be given to you by the tax deductors. These certificates, along with other relevant documents, will come handy in the future, while filing your tax returns or when you want to repatriate the funds abroad.

NRIs/OCIs can claim a refund of excess tax paid via TDS at the time of filing their tax returns. It could be the case that incomes on which an NRI/OCI has paid tax in India is also taxable in the other country in which he/she resides.

In such cases, NRIs/OCIs can reduce their tax liability in the other country by claiming credit for the tax already paid in India, if India has a double taxation avoidance agreement (DTAA) with that country.

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Published on January 11, 2020
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