Surojit Pandya, an India-born US citizen, wanted to invest in an Indian mutual fund scheme, but was told that the fund house does not accept investments from people residing in the US.
Most US-registered mutual fund companies which have India operations do not accept investments from Indians living in the US as they are bound by the cap on the number of non-resident investors they can take.
Regulators in some countries require fund managers to be registered with them if they are handling more than a certain number of accounts of their residents. For example, the Dodd-Frank Act of the US requires fund managers handling over 15 US-based investors to be registered with the US regulators and follow their rules. To avoid dual regulators, many fund houses have stopped taking investors from these countries.
For someone like Pandya, one way to invest in the Indian market is to opt for India-specific funds launched by US mutual funds or go for Indian mutual fund houses that allow US-based NRIs to invest in their schemes. But for millions of NRIs not residing in the US, investing in Indian stock markets or mutual funds is not a tough proposition.
As an Indian staying overseas, if you want to take advantage of the high growth back home, you can do so by investing in stocks and mutual funds by following some simple steps. Despite the recent dull phase in Indian equity markets, the country's economic prospects continue to be bright and its long-term growth story remains intact. But before we go ahead with the procedures for investment, it is important to know who according to Indian law is considered a non-resident Indian.
According to the Foreign Exchange Management Act (Fema), 1999, "an NRI is a person resident outside India who is either a citizen of India or a person of Indian origin (PIO)."
|KYC for NRIs||Who's an NRI?|
- Submission of passport copy is mandatory. Relevant pages of passport having name, photo, date of birth and address should be submitted.
- Overseas address is mandatory. Either the permanent or correspondence address must be an overseas address.
- A person who has been in India for 182 days or more during a financial year and 365 days or more during the preceding four financial years qualifies as a resident of India.
- NRIs can continue to enjoy non-resident status in India if their presence in the country is more than 60 days but less than 182 days in a financial year, even if their stay in India during the past four financial years is 365 days or more.
- A person, who has been deputed overseas for more than 6 months, also qualifies for non-resident status.
Fema further clarifies that a PIO is a foreign citizen of Indian origin residing outside India who has held an Indian passport at any time or who himself or his father or grandfather was a citizen of India.
The Income Tax Act further identifies the criteria for availing tax exemptions extended to NRIs.HOW TO GET STARTED?
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 needs to open one of the three bank accounts-non-resident external rupee (NRE) account, non-resident ordinary rupee (NRO) account or foreign currency non-resident account (FCNR)-with an Indian bank.
An NRE account is a rupee account from which money can be sent back to the country of your residence. The account can be opened with money from abroad or local funds. An NRO account is a non-repatriable rupee account. An FCNR account is similar to the NRE account, except for the fact that the funds are held in a foreign currency.
The amount that is be invested can be directly debited from an NRE/NRO account or received by inward remittances through normal banking channels. An NRI needs to give a rupee cheque or draft from his NRE/NRO account. He can also send a rupee cheque/draft issued by an exchange house abroad drawn on its correspondent bank in India.
If the investment is made through cheques or drafts, the investor should attach with the application form a foreign inward remittance certificate (FIRC) or a letter issued by the bank confirming the source of funds.
FIRC is a proof of payment received by the individual from outside the country in a foreign currency. It is issued by the bank where you have the account to receive the funds.
Other know-your-customer documents such as Permanent Account Number and address proof are also to be submitted, just as in case of resident investors.POWER OF ATTORNEY
After you have made the initial investments, is it possible for you to keep track of your money and react to market movements that at times may call for additional purchases, switches or redemptions even as you are away?
Mutual funds allow a power of attorney (PoA) holder to take these decisions on your behalf. All that the PoA holder needs to do is to submit the original PoA or an attested copy of it to the fund house. The PoA should have signatures of both the NRI and the PoA holder. The PoA holders signature will be verified for processing any transaction.
Similarly, 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?
Redemption proceeds are either paid through cheques or directly credited to the investor's bank account. All earnings will be payable in rupees.
"An NRI investing in Indian mutual funds and stocks has to pay TDS (tax deduction at source)."
Rajmohan Krishnan, Executive Vice-President, Kotak Wealth Management
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.TAX LIABILITIES
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.
"The key difference between investment rules for NRIs and those for resident Indians in case of both MFs and stocks is tax deduction at source (TDS)," says Rajmohan Krishnan, executive vice president, regional head, North & South, Kotak Wealth Management.
But are NRIs subject to double taxation-once in India and again in the country of their residence? It depends on the country of residence. If the Indian government has a avoidance of double taxation treaty (ADTT) with that country, the NRI will be spared from paying tax twice.
According to Kavitha Menon, vice president, Wealth Management Group, Parag Parikh Financial Advisory Services, a number of countries have an ADTT with India.
"To give an example, India has an ADTT with the US. If an NRI based in the US makes short-term capital gains from equity investments in India, he pays 15% tax. However, the rate for such gains is 30% in the US. The investor will need to pay tax only for the difference in rate. This means he gets a deduction on the tax paid in India from his tax payable in the US.
| TAX LIABILITIES OF NRIs|
|NRI earnings from investments in India is taxed at the rate given below:|
| ||EQUITY FUNDS/STOCKS||DEBT FUNDS |
| Short-term Capital Gains Tax||15%||As per tax slab|
| Long-term Capital Gains Tax||Nil||10% without indexation, 20% with indexation|
| Dividend Distribution Tax||Nil||25% on liquid funds, 12.5% on other debt funds|
| Total NRI investment should not go beyond 10% of the paid-up capital of a company.|
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 open only one PIS account for buying and selling stocks.
Aggregate investment by NRIs/PIOs 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.
NRIs cannot trade shares in India on a non-delivery basis, that is, they can neither do day trading nor short-sell in India. If they buy a stock today, they can only sell it after two days.
Short-selling is selling stocks that one doesn't own in expectation that their prices will drop, and buy them back at lower prices.SUBSCRIPTION TO IPOs
Shares issued through initial public offerings (IPOs) are not covered under he 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.
Investing in India's long-term success story is not all that tough after all. All an NRI needs is a right bank account and other documents which even a resident investor will require to submit.