NRI: Investment Avenues & The Indian Growth Story
India had been an attractive investment destination for many years post liberalization of economy in 1990, and most of the times have remained true to the expectations as well. Though, the sentiments started turning negative by the end of second five year tenure of UPA, 2009 – 2014, due to multiple reasons including lack of reforms and policy impediments, and as you can see in figure 2, gap between the inflation and GDP growth had been very high in 2012-13 period.
This started to change with the democracy getting back on the strong governance formula and selecting a government with a clear mandate in a strong message to the polity of what the people really want.
Result, economy started picking up the pieces and with definite measures slowly but surely coming India is once more an outperforming destination for investment.
The amount of investment a country attracts is also a factor in the growth story of that country. In case of our country more than 25 million strong NRI community forms a large investor base of foreign currency investment in the country. The rules of investments however, are much different for NRIs than those for resident individuals.
Our country has been among the world’s greatest beneficiaries of non-resident fund remittances to the country surpassing even the FDI flow.
Figure 1: BSE Sensex Performance |
Figure 2: The Indian Growth Story 2007 - 2015 |
With such huge investments already flowing in, it becomes imperative for the investment advisors to understand the avenues available to NRI investors to safely invest their money and also what their needs could be.
Factors to Account For While Investing
For a resident individual investing in domestic market is simply a decision based on domestic factors like growth prospects and taxability, for an NRI on the other hand more than that should be accounted for:
- NRI status
- Investment Avenue
- Taxability
- Exchange Rate Factors
- Repatriation Needs
NRI Status
Knowing your NRI status is important, because of the different investment choices available to you as an NRI. While many times NRIs stay in a foreign country for many years before striking any change in their status, but if this status is supposed to change quickly, as in the case of a work visa, which may require you to stay on foreign soil at infrequent intervals.
Following conditions define your NRI status:
Figure 3: Determining Your Residential Status
INVESTMENT AVENUES FOR NRIS
NRIs may have multiple investment options to gain from Indian growth story in the way of India focused mutual funds, but many of these investments are regulated by the home country rules, and can only take a limited number of nonresident applications.
Direct investment in Indian instruments and markets are therefore, a preferable option for NRIs. For such investments RBI guidelines provide for two kinds of investment avenues for Nonresident Indians:
- Investments with repatriation option
- Investments without repatriation option
Investment on Repatriation Basis
Allowable investments with repatriation basis provide the NRIs avenues to invest earn and remit the earnings to their respective resident countries. List of the kind of securities is as follows:
- Government dated securities / Treasury bills
- Units of mutual funds operating in India
- Bonds issued by a public sector undertaking (PSU) in India
- Non-convertible debentures of a company incorporated in India
- Perpetual debt instruments and debt capital instruments issued by banks in India
- Shares in Public Sector Enterprises being dis-invested by the Government of India
- Shares and convertible debentures of Indian companies under the FDI scheme (including automatic route & FIPB)
- Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme.
There is no limit on the amount of money an NRI can put in these instruments, and repatriation means money invested in these instruments can be remitted to the foreign country in which the person is residing, thus making such investments attractive choice from the liquidity point of view.
Investment on Non-repatriation Basis
Money invested in these investment instruments cannot be taken back, and thus may prove to be a one shot investment and can be used only for investments in other Indian instruments. Such investments are:
- Government dated securities / Treasury bills
- Units of domestic mutual funds
- Units of Money Market Mutual Funds
- National Plan/Savings Certificates
- Non-convertible debentures of a company incorporated in India
- Shares and convertible debentures of Indian companies through stock exchange under Portfolio Investment Scheme,
- Exchange traded derivative contracts approved by the SEBI, from time to time, out of INR funds held in India on non-repatriable basis.
NRIs are not permitted to invest in small savings schemes and Provident Funds. Therefore, if one had been a resident and have invested in any such investments, after becoming NRI such investments once matured cannot be continued or repatriated.
Other Investment Avenues
Other than the instruments listed above, NRIs can also invest in immovable properties in India. By immovable property we generally mean the real estate sector. This sector has been one of the most attractive destinations for NRIs for long, mainly due to good value of returns and low volatility in prices. More than that, NRIs are allowed to repatriate the sale proceeds as well, unlike the debt instruments listed above.
TAXABILITY OF INVESTMENTS
Taxability of invested amounts is another factor which NRIs should account for while investing money. Tax issues for the top three investment choices can be explained as given below:
Debt Instruments
Investment in Debt can be made through Non Resident Ordinary (NRO), Non Resident External (NRE) accounts and Foreign Currency Non-Resident (FCNR) deposits. Taxability under these deposits and other eligible debt instruments is as follows:
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Figure 4: Taxability of Debt Investment by NRIs
Equity Instruments
Equity investments can be made in three ways by NRIs, either through FDI, through Equity Funds or through direct broking account for equity markets. These investments are routed through Portfolio Investment Schemes or Mutual Funds. Such investments will be taxed as following:
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Figure 5: Taxability of Equity Investments by NRIs
Real Estate Investments
NRIs can invest without restrictions in residential, commercial or other properties with the following exceptions:
- Agricultural Land
- Farm Houses &
- Plantations
Although, investing in residential or commercial properties in the country is easy remittances and repatriation does require some attention. Some of the rules are simply explained below:
- Property Purchased by FCNR Funds: The repatriation cannot exceed the amount paid through this account.
- Property Purchased by NRE A/C Funds: The repatriation cannot exceed the foreign exchange equivalent of the amount in the NRE account.
- Property Purchased using NRO A/C Funds: The sale proceeds must be credited to your NRO account and you can repatriate to the extent of USD 1 million only.
Thus, participating in the great Indian growth story is going to be a lucrative option for NRI investors but unlike resident individuals, there are more rules and regulations to follow for non-residents. Also while investing in a foreign market exchange rates can play a crucial role in maximizing or minimizing the return from country’s growth. Looking at the current scenario Dollar is still trailing at above Rs. 60 levels which in itself are the one of the lowest levels in past three years. Therefore, this can be the best time to enter the market and benefit from both Indian economy and currency Exchange rate.
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