Points to Ponder. NRIs – In the wonderland of Indian investments

Lewis Carroll recounts how Alice had a great time in the Wonderland.  Like in Alice’s fantasy land, there are some, so called experts, who claim that successful investing has always had that uncanny hint of thaumaturgy about it. This sense of magical control can be intoxicating and fun and it can lead, in some accidentally successful cases, to some epic hubris. But even those, who are glommed on to the latest market mantra, pompously strutting on the investment altar in their druidic vestments, will have to painstakingly navigate the maze of regulations before they can guide the NRIs profitably, out of the even more intriguing Indian investment wonderland! The following paragraphs provide a brief overview of the various options available to NRIs to invest in India and the regulations governing the same. In the following discussion, unless otherwise stated, NRI will also mean OCI (Overseas Citizen of India).

1. Bank Accounts: The most popular, safe and possibly the easiest option is to invest in bank accounts. Such investment can be made in rupees in NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account. For those who do not wish to carry currency risk, there is the option of FCNR(B) (Foreign Currency Non-Resident – Bank) account. Table below compares the features of these three options.

                         Non-Resident Bank Accounts

Note: Apart from the above accounts, there is one more account known as RFC (Resident Foreign Currency) account  which might be of interest to non-residents returning permanently to India.

2. Stocks & Securities: Direct investment in stock and securities by NRIs is permitted after completion of specified documentation to buy and sell stocks and securities on repatriable basis. NRI has to open a d-mat account and has to route the transaction through a PIS (Portfolio Investment Scheme) account, linked to the NRE and/or NRO  account of the NRI.  PIS account can be maintained with only one bank and it should not be a joint account and used only for PIS transactions. Transactions under PIS account are limited to the RBI approved list. Intraday (square up) trades, short selling and non-delivery based transactions are not permitted under PIS account. This is because RBI monitors capital market transaction of NRIs and foreign investors to ensure that their overall stakes by non-resident entities on repatriable basis, in Indian companies do not exceed prescribed limits.

Buying shares in an IPO and then selling does not need a PIS account. Shares bought as a resident can be held on non-repatriable basis and sold in the secondary market (stock exchange) without routing through the PIS account.  Also shares received through inheritance can be held and sold on a non-repatriable basis outside PIS. Further NRIs can trade in futures and options (derivative) segment of the market on non repatriable basis .

3. Mutual Funds: Investment can be made through various types of mutual funds (equity, debt and others ). While no d-mat or PIS account is necessary to make these investments, KYC (Know Your Client ) documentation has to be completed which is a onetime requirement. The investment/redemption can be done online and the redemption proceeds are automatically credited to the account from which investment was funded. NRIs/OCIs from the US and Canada could face some difficulties due to FATCA compliance requirements that has resulted in quite a few fund houses not accepting investment from these countries. But over the last couple of years more and more fund houses have started accepting investment from NRIs /OCIs based in the US and Canada. But some fund houses have their own requirements, such as  accepting only offline investments, requiring  additional declarations, or not allowing investments in closed end funds
4. Real Estate: The desire to stay connected to their roots, the ability to invest large sums at one go, as also the good run the asset class has had until some three years ago has made real estate, especially residential property in India, a favourite investment among NRIs.

Besides residential and commercial property, NRIs can invest in REITs (Real Estate Investment Trusts). They can also raise loans for purchase of property in India. 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.  Payment through travellers cheques or foreign currency notes is not allowed. Repatriation of sale proceeds of a property has some restrictions. These include the condition that in the case of residential property, repatriation of sale proceeds is restricted to a maximum of two such properties

5. What is not Allowed: While NRIs/OCIs can deploy their funds across a host of products such as bank & company deposits, stocks, bonds, debentures, government securities, mutual funds, ETFs (Exchange Traded Funds), insurance/annuity products, real estate, including residential and commercial, gold and derivative products, there are a few no-go areas for their investments.

Small savings scheme such as Public Provident Fund (PPF), National Saving Certificate (NSC), Sukanya Samriddhi Yojana, Senior Citizen Saving Scheme (SCSS) and other offerings of the post office are not available to NRIs/OCIs for investment. The Government’s intent, it appears, is to restrict social security schemes to resident Indians. As regards PPF, the 2017 notification which specified immediate closure of PPF from the day resident Indian became a non-resident, is kept in abeyance  through a notification issued in February 2018. NRIs/OCIs are not allowed to buy agricultural land, farmhouses and plantations. But such property bought as a resident can be continued to be held even as a non-resident. Also such property can be held if received through inheritance or as gift from relatives.  Sovereign gold bonds issued by RBI are not available for investment by NRIs/OCIs. But if they were acquired as resident they can be held till redemption /maturity

6. Taxation: Tax applicable on income of NRIs which is taxable in India is generally the same as in the case of residents. However Tax Deducted at Source (TDS) in respect of payments to NRIs can be onerous and at times impose tedious compliance. These TDS provisions are put in place because of the difficulty of recovering unpaid tax from NRIs.

A tenant has to deduct tax at 30% (plus surcharge and cess) of the rent before the same is paid to the NRI landlady/lord, irrespective of the amount of rent. When an NRI sells a house property, the buyer has to deduct tax at 20% or 30% (plus surcharge and cess) of the capital gains depending on whether such gains are long or short term, respectively. Here the TDS is applicable irrespective of the sale value.

Also on sale of mutual funds units by NRIs, the fund has to deduct tax on capital gains before crediting the redemption proceeds to the NRI’s account. The rate of tax   (10 – 30%, plus surcharge and cess) will depend on the type of fund (equity or non-equity) and on the nature of the gain (long or short term).

When shares and securities are sold under PIS account, tax is deducted before the sale proceeds are credited to the account, generally at 15% of the sale value. Similarly TDS at 30% on the interest earned on NRO deposits is applicable.

NRIs are not eligible for enhanced basic exemption limit of Rs 3 and 5 lacs for payment of income tax. The basic exemption limit for all NRIs, irrespective of age is Rs.2.5 lacs. Similarly tax on capital gains is payable without regard to the basic exemption limit. However, tax breaks such as Section 80C benefits are available to the NRIs.

NRIs can apply to the tax department for a ‘no-TDS’ certificate, if the income in India is under the basic exemption limit, which can then be furnished to the person making the payment. It goes without saying that NRIs can claim refund of excess tax paid under TDS by filing their tax returns. Where NRIs are taxed on their global income in the country of their residence, they can reduce their tax liability by claiming credit for the tax already paid in India, if India has a Double Taxation Avoidance Agreement (DTAA) with their country of residence.

There are also other provisions under the Income Tax Act 1961 under which NRIs can claim some beneficial treatment while computing tax when specified conditions are fulfilled. Section 48 for instance, provides for computation of capital gains in the same currency as the one utilized to fund the purchase of shares and debentures of companies. Also various subsections under Section 115 (particularly Sections 115C to 115G) have provisions which the NRI can use to his benefit. Also NRIs residing in countries with which India has signed DTAA, would do well to go through such agreements in detail so as to choose between the provisions under Income Tax regulations or DTAA, that are beneficial to them in mitigating incidence of tax. For instance as per the prevailing DTAA, residents of Qatar can claim exemption from capital gains tax on sale of units of Mutual Funds in India. However, NRIs who have to grapple with the above issues may do well to consult their auditors before filing their returns.