NRIs may invest in the Indian stock market freely. NRIs can invest in Indian stock markets under the portfolio investment scheme (PIS) of the Reserve Bank of India (RBI). Under this scheme, an NRI has to open an NRE/NRO account with an RBI-authorised Indian bank. An individual can open only one PIS account for buying and selling stocks.
Aggregate investment by NRIs cannot exceed 10% of the paid-up capital in an Indian company and a PIS account helps the RBI ensure that the NRI holding in an Indian company does not cross that limit. Each transaction through a PIS account is reported to the RBI.
The next step is to open a demat account and a trading account with a Sebi-registered brokerage firm. An NRI cannot transact in India except through a stock broker.
Regulations regarding NRI Trading/investments in shares:
- Intraday trades are not allowed for NRI clients; clients can trade only on Delivery basis.
- All contract notes of either Buy or Sell has to be reported to Authorised Dealer (PIS Banker) within 24 hours to transactions. This is done by the broker.
- Every sale transactions will be credited to client Banks account Net of tax. As per current laws for long term capital gains, Tax rate is nil & for short-term capital gain, tax rate is 15.45%.
Subscription to IPO
Shares issued through initial public offerings (IPOs) are not covered under the PIS. In case of IPOs, it is the responsibility of the issuing company to inform the RBI the number of shares it is allotting to NRIs.
However, NRIs need NRE/NRO accounts to subscribe to IPOs. The shares acquired through IPOs can also be sold without a PIS account. However, NRIs must furnish their bank details, besides the date of allotment and cost of acquisition of the shares to calculate the tax on any gains they may have made.
If directly investing in the market is not your cup of tea, then Mutual Funds provide a very attractive alternative. These while broadly delivering the advantages of the equity market also obviate the pitfalls associated with it.
All investments made by NRIs have to be in local currency, that is, the rupee. Mutual funds in India are not allowed to accept investments in foreign currency. For investing in Indian mutual funds, therefore, an NRI can open an online investment account invest in selected mutual funds in India.
An NRI can make a resident Indian his/her nominee in the mutual fund scheme. An NRI can also be the nominee for investments made by a local resident. Fund houses also allow an NRI to have a joint holding with a resident Indian or another NRI in a scheme.
How to redeem your mutual fund units?
Redemption proceeds are either paid through cheques or directly credited to the investor’s bank account. All earnings will be payable in rupees.
As mentioned earlier, investments made through inward remittances or from NRE/FCNR accounts are fully repatriable. Hence, earnings made by redeeming the units or through dividends are fully repatriable.
However, in case of investments made through NRO accounts, only the capital appreciation is repatriable, not the principal amount.
What about taxes?
While tax liabilities of an NRI investing in India are the same as that of a resident investor, tax is deducted at source in case of the former. Whether an NRI is subject to double taxation-once in India and again in the country of their residence depends on the country of residence. If the Indian government has an avoidance of double taxation treaty (ADTT) with that country, the NRI will be spared from paying tax twice.
NRI earnings from investments in India is taxed at the rate given below:
|Equity Mutual Funds/Shares||Debt Funds|
|Short-term Capital Gains Tax||Investments held for less than 12 months- 15.45%||Investments held for less than 36 months- As per tax slab|
|Long-term Capital Gains Tax||Nil||20% with indexation|
|Dividend Distribution Tax||Nil||28.33%|