Who is an 'Non Resident Indian (NRI)'?
Non Resident Indians fall under the following broad categories:
a. Indian citizens who stay abroad for employment or for carrying on a business or vocation or for any other purpose in circumstances indicating an indefinite period of stay outside India.
b. Indian citizens working abroad on assignments with foreign Governments/government agencies or International/Regional Agencies like the UNO, IMF, World Bank, etc.
c. Officials of the Central and State Governments and Public Sector Undertakings deputed abroad on temporary assignments or posted to their offices (including Indian Diplomatic Missions) abroad.
Who is a 'Person of Indian Origin' (PIO)?
A citizen of any country (other than a citizen of Bangladesh or Pakistan) is deemed to be of Indian origin, if,
i. he, at any time, held an Indian passport, or
ii. he or either of his parents or any of his grand parents was a citizen of India by virtue of the Constitution of India or Citizenship Act, 1955 ,or
iii. A spouse (not being a citizen of Bangladesh or Pakistan or Sri Lanka) of an Indian citizen or of a person of Indian origin is also deemed to be PIO.
Basic Steps for Investments
What steps an NRI needs to take to start investing in the Indian stock Market?
1. An NRI should open a new bank account with designated bank branch which is approved by RBI (Reserve Bank of India) for this purpose.
2. He should apply for a general approval for investment in Indian Stock Market through his designated bank branch.
3. He should open a Demat Account with a Depository Participant to hold his shares.
4. He needs to register with a broker to execute his buy/sell orders on the stock exchange(s).
Designated bank branch for investments
What is a ’designated bank branch’?
RBI has authorized a few branches of some banks to conduct the business under Portfolio Investment Scheme on behalf of NRIs/OCBs.
Demat account and DP services
What is a Demat Account?
In the advanced countries, depository systems and services have played a significant role in not only facilitating smooth trading and settlement but also attracting foreign investment in the capital market.
The depository system evolved by the National Securities Depositories Limited (NSDL) enables investors to overcome all problems related to handling physical certificates. NSDL is an organization formed to provide electronic depository facilities for securities traded. The securities of investors are held in electronic form through the medium of Depository Participants.
The depository concept is similar to the Banking system with the exception that banks handle funds whereas a depository handles securities of the investors. A depository can therefore be conceived of as a "Bank" for securities. An investor wishing to utilize the services offered by a depository has to open an account with the depository through the Depository Participant. This is very similar to opening an account with any of the branches of a bank in order to utilize the services of that bank.
What is a Depository? Who is a Depository Participant? /td>
A depository holds the securities of investors in electronic form just like a bank holds cash of its customers. As in a Bank, investors can deposit/withdraw and transfer securities. The National Securities Depository Limited (NSDL) is the first depository in India. The functions of NSDL are regulated by the Securities and Exchange Board of India (SEBI).
The Depository Participants (DPs) are the link between the Shareholder, the Company and NSDL. Banks, Financial Institutions, Custodians, Stock Brokers etc. can become DPs subject to their meeting certain requirements prescribed by NSDL and SEBI. NSDL publishes from time to time the list of DPs registered with them.
You can open your accounts with one or more DPs, as you like. The procedure for opening an account with the Depository Participant is similar to opening a Savings Bank Account with the Bank. After opening the account, you can hold shares of any number of companies in your account, provided all such companies have entered the depository system.
NRI Investments - General Regulatory Framework
Which are the broad schemes under which an NRI can make investments in the Indian companies?
Broadly, NRIs are allowed to invest under the Portfolio Investment Scheme (buying through the secondary market) and through the Direct Subscription route (Investments though IPOs/Private Placements).
Government Securities/Units
Can NRIs invest their funds in Government securities or Units of Unit Trust of India(UTI)?
Yes. NRIs are freely permitted to invest their funds in Government securities or Units of UTI through authorized dealers. Units can also be purchased directly from UTI.
Can NRIs make investments in National Savings Certificates issued by Post Offices in India?
Yes. Investments in National Savings Certificates can be made by NRIs subject to the terms and conditions applicable to the sale/issue of such certificates. However, NRIs are not permitted to invest in bearer securities like Indira Vikas Patra / Kisan Vikas Patra.
Can Government securities/units be freely transferred or sold?
Yes, provided the transfers/sales are arranged through an authorized dealer. Units can, however, be repurchased directly by UTI.
NRE and NRO Bank Accounts
What are the types of Rupee accounts generally permitted to be maintained for Portfolio Investment Scheme?
NRIs can maintain two types of account i.e. Non-Resident (External) Rupee Accounts (NRE Accounts) and Ordinary Non-Resident Rupee Accounts (NRO Accounts).
What is the distinction between NRE and NRO accounts?
Funds remitted from abroad or local funds, which can otherwise be remitted abroad to the account holder, can be credited to NRE Accounts. Local funds, which do not qualify for remittance outside India, are required to be credited to NRO accounts.
Can money be transferred from NRE account to NRO account or vice versa?
Funds can be freely transferred from NRE account to NRO account. No funds can be transferred from NRO account to NRE account.
Can money transferred from NRE account to NRO account be transferred back to NRE account?
Money once credited into NRO account cannot be transferred back to NRE account. Amount once transferred to NRO account will become non-repatriable.
Can I have multiple NRE and NRO accounts with designated branches of different authorised banks for the purpose of investing in Indian equity markets under the Portfolio Investment Scheme?
No. All investments in Indian equity markets under the Portfolio Investment Scheme must be routed through only one dedicated NRE and NRO account opened with any one of the designated branch of authorized banks. Although you can have multiple NRO and NRE account with different banks/branches but Investments under Portfolio Investment Scheme cannot be made through more than one NRE or NRO account maintained with the designated bank branch.
When a resident becomes non-resident Indian,What happens to his existing bank account in India?
All his bank accounts in India will be redesigned as NRO Accounts.
What is the status of NRO/NRE accounts on the return of the account holder to India?
RBI has advised banks to re-designate such accounts as resident accounts on return of the account holder to India.
Approval for Investments under Portfolio Investment Scheme
What is the permission which an NRI has to obtain to invest under the Portfolio Investment Scheme?
NRIs are allowed to invest in Indian equity markets under the Portfolio Investment Scheme. Under this scheme NRIs / OCBs are permitted to invest in shares/debentures of Indian companies through Stock Exchanges in India. These investments require prior approval of RBI. Designated branch of authorized banks have been now empowered to issue such permissions to NRIs.
How do I get the necessary approvals for Portfolio Investment scheme?
The necessary application is to be submitted to designated branch of authorized bank in one of the prescribed forms, i.e. NRI/RPI.
Investment through Direct Subscription route (IPOs)
What is meant by investment through direct subscription route?
As per the regulations NRIs are allowed to invest up to a certain percentage of the total paid up capital of the company by directly subscribing to the equity/convertible debentures of the company either though a public offering made by the company or through private placements on one to one basis. Regulations provide for different ceilings on such investments based on the industry to which the company belongs and also the nature of investments (repatriation / non-repatriation basis).
Do investments made though subscription to Initial Public Offerings (IPOs) or Private placements also come under the preview of Portfolio Investment Scheme?
No. Investments made by NRIs though subscription to Initial Public Offerings (IPOs) or Private placements are not covered by Portfolio Investment Scheme. Such investments are covered by RBI's regulations with regard to Foreign Direct Investments.
Do NRIs need any permission of RBI to subscribe to Initial Public Offerings (IPOs) or Private placements of equity shares/convertible debentures of existing or new companies?
No. NRIs do not require any permission to invest though Initial Public Offerings (IPOs) or Private placements. In such cases, the Issuing Company should comply with all necessary regulations for issuing securities to a person resident outside India. Do NRIs need any approval from Reserve Bank of India for selling of the securities acquired through IPOs/Private Placement? No. NRIs can sell such shares/debentures on the Exchange without any approval. However, while seeking the credit of sale proceeds to NRE/NRO account, the bank should be provided with the details regarding date of allotment and cost of acquisition to calculate the taxes, if any.
Do NRIs need to route the sale of securities acquired through IPO/Private Placement through the designated bank branch for Portfolio Investment Scheme, if any?
No. The shares/convertible debentures acquired under IPO cannot be routed through designated bank branch, as this is not covered by Portfolio Investment Scheme. For further details please refer to the FAQ on Non PINS below.
Investment with Repatriation Benefits
What are the schemes available to NRIs for direct investments in India with repatriation benefits?
NRIs can make investments in new issues of shares/convertible debentures of Indian companies under direct investment schemes such as 24% scheme/40% scheme/100% scheme. They can also invest in the schemes of domestic Mutual Funds floated by public/private sector institutions/companies and bonds issued by public sector undertakings, Non-resident investors are not required to apply for permission to invest but the company concerned will have to obtain permission from Reserve Bank.
Will repatriation of the original investment and/or dividend income be freely permitted?
Yes. Repatriation of original investment will be permitted after a lock-in period of three years from the date of issue of the equity shares/convertible debentures. In addition, OCBs will be permitted to repatriate net profit (upto 16 per cent) arising from the sale of such investment after the lick-in period of three year. Annual dividend/interest on equity shares/debentures can, however, be freely remitted subject to payment of tax.
Can NRIs invest in non-convertible debentures on repatriation basis?
Yes. Applications for necessary permission should be made to Reserve Bank (Central Office) by the concerned Indian company in form ISD.
What is the procedure to be followed for making investment in the schemes of domestic Mutual Funds or public sector bonds with repatriation benefits?
The concerned Fund/Public Sector Undertaking should obtain necessary permission from Reserve Bank for issue of units/bonds to NRIs. Applications for the purpose are required to be made to the Central Office of Reserve Bank in form ISD(R).
Can NRIs acquire shares disinvested by Government of India in Public Sector Enterprises (PSEs) by inviting sealed tenders?
Yes. Reserve Bank has granted general permission to NRIs to acquire shares of PSEs on their bids being successful provided the holding of a single NRI investor does not exceed one per cent of the paid up capital of the PSE concerned, the purchase consideration /bid money is paid by way of remittance from abroad or by debit to his NRE/FCNR accounts.
What is the procedure for issue of rights entitlement to NRIs?
The concerned company should approach Reserve Bank for issue of rights entitlement to NRIs in the prescribed form if on repatriation basis. However, rights entitlement on non-repatriation basis would be covered by the general permission
Are sale/maturity proceeds of Government securities/Units/National Savings Certificates allowed to be repatriated abroad?
If such securities were purchased out of funds remitted from abroad or out of NRE/FCNR accounts, sale/maturity proceeds can be repatriated. Sale/maturity proceeds of securities purchased out of funds in NRO accounts can only be credited to NRO accounts and cannot be remitted abroad. Interest earned during the financial year 1994- 95 and onwards can, however, be remitted to the extent permitted by Reserve Bank.
Can NRIs obtain loans abroad against the collateral of share/debentures of Indian companies?
Yes. Authorized dealer have been permitted to grant loans/overdrafts abroad to NRIs through their overseas branches and correspondents against collateral of the shares/debentures of Indian companies held by them, provided the concerned shares/debentures were acquired on repatriation basis
Investment without Repatriation Benefits
Is permission of Reserve Bank required for making investments in new issues of Indian companies on non- repatriation basis?
No. Indian companies have been granted general permission to accept investments on non-repatriation basis, in shares/convertible debentures by way of new/rights/bonus issue provided the investee company is not engaged in agricultural /plantation activity or real estate business(excluding real estate development i.e. development of property and construction of houses) or chit fund or is not a Nidhi company.
Are any formalities required to be completed by NRIs for getting the benefit of the above general permission?
No. However, the firms/companies concerned are required to file declarations with Reserve Bank in form DIN giving particulars of the investments made within ninety days from the date of the investment.
Can NRI individuals make investments in domestic public/private sector Mutual Funds or Money Market Mutual Funds floated by commercial banks and public/private sector financial institution on non/repatriation basis?
Can Overseas Corporate Bodies make similar investments in mutual funds on non-repatriation basis?
OCBs can make such investments only in domestic public/ private sector Mutual Funds. They can also make investments in Money Market Mutual Funds.
Can NRIs purchase existing shares/debentures of Indian companies by private arrangement?
Yes. Reserve Bank permits NRIs, on application in form FNC 7, to purchase shares/debentures of existing Indian companies on non-repatriation basis. An undertaking about non-repatriation is to be given in form NRU.
Is it necessary for a resident, holding securities in Indian companies, to secure any approval from Reserve Bank on his becoming a non-resident for holding such securities?
No. Reserve Bank has granted general permission to companies in India to enter the overseas addresses of the shareholders in their books in such cases provided the companies obtain undertakings from the holders that they will not seek repatriation of any income or sale proceeds of the security.
Is income/interest earned on investments/deposits held in India by NRIs on non-repatriation basis allowed to be repatriated?
Yes. Income/interest accruing during on bank deposits and investments held by NRIs with non-repatriation benefits will be eligible for repatriation. The entire income earned during the financial year 1996 - 1997 onwards will be eligible for repatriation. Note: The investment / principal amount of deposits made / held on non-repatriation basis will, however, not be allowed to be repatriated abroad.
What is the procedure to be followed for seeking repatriation in such cases?
NRIs should designate a branch of an authorized dealer through whom the remittance of income is to be made and make an application in form RCI to the designated branch giving details of incomes earned during the previous financial year along with a Chartered Accountant's Certificate. The designated branch will allow the remittance of net amount (i.e. after payment of tax) or credit it to NRE/FCNR account of the applicant.
Maximum Permissible Investments – Restrict List / Watch List
Is there any limit for purchase of shares/convertible debentures by NRIs under the Portfolio Investment Scheme?
Yes. An NRI can purchase up to a maximum of 5% of the aggregate paid up capital of the company (equity as well as preference capital) or the aggregate paid up value of each series of convertible debentures as the case may be. For the purpose of this ceiling, investment under the Portfolio Investment Scheme on repatriation as well as non-repatriation basis will be clubbed together.
There is an overall ceiling of 10% of paid-up equity share capital of the company/paid-up value of each series of convertible debentures for purchase by all NRIs / OCBs put together. The overall ceiling can be raised to 30% if the company concerned passes a special resolution to that effect in its general body meeting.
Shares/convertible debentures acquired through IPO/Private Placement are excluded for the purpose of above limits.
Who monitors these ceilings on the holdings by NRIs/OCBs? What is RBI's Restrict List/Watch List?
While limits of individual holdings by NRIs / OCBs are monitored by the respective designated bank branch, RBI monitors the holding limits by NRIs / OCBs in aggregate. Once the aggregate holding of NRIs / OCBs builds up/ about to build up to the maximum prescribed ceiling, RBI puts the concerned stock under the Restrict List/Watch List which is published by RBI from time to time.
What happens if an NRI purchases a stock in excess of the prescribed limit?
An NRI will have to immediately off load such portion of the holding, which is in excess of the prescribed limit.
Taxation of Capital Gains and TDS
What are the tax obligations applicable to NRIs?
Income on investments (capital gains) forming part of sales proceeds are subject to Capital Gains tax. The rate of tax depends upon the period of holding. Currently the tax rate applicable for short-term capital gains and long-term capital gains is 31.5% and 10.5% respectively. These tax rates are inclusive of 5% surcharge.
What is meant by 'long term capital gain' and 'short term capital gain'?
Capital assets can be either short-term or long term or so be the capital gains arising there from.
Short term capital gain: Any capital gain arising out of sell of shares/debentures held for a period not more than 12 months from the date of its acquisition shall be a short term capital gain.
Long term capital gain:Any capital gain arising out of sell of shares/debentures held for more than 12 months from the date of its acquisition shall be a long term capital gain. The period of holding is defined as the period from the date of purchase to the date of sale. For example if the sale transaction date is 15-06-2000, all those purchases, which are affected up to 15-06-1999, are eligible for long term capital gain tax. Purchase made on 16-06-1999 and thereafter will be subjected to short term capital gain tax.
How is amount of capital gain determined?
Capital gain is the calculated based on the difference between the net sale consideration (sell price less brokerage) and the cost of acquisition (purchase price plus brokerage) of the concerned holding. Value of holding is calculated on FIFO (First In First Out) basis.
What is 'Double Taxation Avoidance Treaty'?
India has entered into Double Taxation Avoidance Treaties with certain countries under which NRIs, who are residing in any of these countries, are liable to pay income tax at the rate applicable in India or in the country where they are residing, which ever is lower.
How can NRIs take benefit of 'Double Tax Avoidance Treaty'?
To avail benefit of lower rates of tax as per double taxation avoidance treaty entered in by India, NRIs need to submit the Residency Certificate issued by Tax Authorities of the country of his residence. These documents should be submitted to the designated bank branch at the time of opening the bank account or subsequently. New TDS rate shall be applied only after the acceptance of the Residency Certificate by the designated bank.
If my income is covered under the provisions of 'Double Taxation Avoidance Treaty' and thereby attracts tax at confessional rate or NIL rate, Would you still deduct TDS on sale transaction?
Once the designated bank has recognized your account under 'Double Taxation Avoidance Treaty', TDS would also be deducted as per the applicable concessional/NIL rate as the case may be.
What is "Tax Deduction at Source (TDS)" on capital gains arising out of sale of holdings by NRIs?
As per Indian tax laws, all the capital gains arising out of sale transactions are subject to tax. In the case of NRIs, the capital gain arising out of sale transaction is subject to deduction of tax at source (TDS) i.e. at the time of crediting the sale proceeds to the respective NRE/NRO account by the concerned bank branch. Accordingly, the concerned bank shall determine the tax liability and tax will be deducted at source. The concerned bank, which has deducted tax at source, shall issue a certificate in this regard.
Is TDS deductible if the sale proceeds are credited to NRO Bank account?
No TDS is deductible if the sale proceeds are credited to NRO Bank account.
Can I square up my transaction in the same settlement?
As per the Regulations, NRI investors should take delivery of shares purchased and give delivery of shares sold which implies that for sell transaction you have to give delivery irrespective of the fact that the same shares have been bought by you in the same settlement cycle. For buy transaction, the stock would be credited to your demat account independently.
As long as your sell transaction is backed by actual holdings in your demat account and the buy transaction is validated against the trading limits available, you can do two independent buy and sell transactions in the same stock in the same settlement cycle.
Can loss from one transaction be set off against gain from another transaction while calculating TDS?
No. As per the terms of portfolio investment scheme, setting off of losses against gains in not permitted. Bank will calculate TDS, wherever applicable, on every sale transaction independently.
I am holding 100 shares of ABC. 75 shares have been allotted in IPO and remaining 25 shares have been purchased from secondary market. Can I sell entire 100 shares by placing one order for 100 shares?
No. You must place two orders for 75 shares and 25 shares. 75 shares acquired through IPO would be sold from your Non PINS account and 25 shares purchased through the secondary market would be sold from your PINS account.