What is a Non-Resident Indian (NRI)?
A non-resident Indian (NRI) is a citizen of India who has spent less than 183 days of the financial year (or tax year) in India. The tax year stretches from April 1st to March 31st in the succeeding year. This means you had to be outside of India between April 1st of last year until March 31st of this year for more than 182 days. NRI’s are still citizens of India but they don’t pay tax there.
8 Best NRI Investment Options in India
Many NRI’s live under the misconception that they aren’t allowed to invest in India. But that is simply not true. Here are the 8 best investment options in India for NRIs.
1. Fix Deposit Bank Accounts
This is probably the most common form of NRI investment in India. With a fixed deposit, you deposit money into an account and it is kept safe for a predetermined amount of time. You can’t withdraw the funds before the period is over. The money plus the interest is paid out to you after the period has ended.
Three Types of Fixed Deposit Accounts
There are three main types of fixed deposit accounts that serve as NRI investment options in India:
Non-Resident External Account (NRE) – The money of such an account is kept in rupees. It’s easy to return the money to dollars. Interest rates on these accounts vary depending on the deposit size and/or bank. You can expect interest rates to be around 7% to 9% per year.
Non-Resident Ordinary Account (NRO) – This account type is generally used by NRI’s to control their Indian income. Rent income, dividends from investments, or pension funds can be paid into these accounts. These accounts have a current limit of $1 million that is allowed to be transferred from this account to a U.S. account per year. Take note the interest earned on an NRO fixed deposit is taxed at a rate of 30%.
Foreign Currency Non-Resident (FCNR) – Foreign currencies are stored in these accounts. It helps to avoid the currency fluctuations that take place in financial markets. The currency you deposit into the account will determine the interest rate of it. Dollars should cause an interest rate of between 2% to 3%. You can take money from this account at any time and it is not taxed by the Indian government.
2. Mutual Funds
Mutual funds are large pools of money of investors’ money which is managed by qualified and certified professional fund managers. Mutual Funds currently operate under strict regulations of the Securities Exchange Board of India (SEBI). Mutual funds are a bit riskier than fixed deposits, but that is why the returns of mutual funds are more than that of fixed deposit accounts.
An NRI needs an NRE, NRO, or FCNR account in India to be able to invest in an Indian mutual fund. These accounts help to facilitate the investment and payout process.
However, NRIs would have to comply with all regulatory requirements such as completion of KYC before investing. It should however be noted that a few countries such as US and Canada have restricted investments by NRIs in Mutual Funds without relevant disclosures. NRIs from these countries, thus need to check once with their advisor on feasibility of investing in Indian funds before actually investing.
NRIs are provided most of the benefits and conveniences of resident Indian investors while investing. They can invest through SIPs , they can switch as per their convenience, they can opt for growth or dividend options and can repatriate the redemption proceeds whenever they want to.
Thus NRIs and PIOs can invest and enjoy the full benefit of investing in a wide variety of Indian Mutual Fund schemes.
3. Direct Equity
You can always invest your money into stocks on the National Stock Exchange of India Ltd. (NSE) if you feel you have enough knowledge. You will need to be part of the Portfolio Investment Scheme (PINS) of the Reserve Bank of India (RBI). This will allow you to trade stocks on the NSE.
You will need the following three things:
- An NRE/NRO savings account dedicated only for your PIS purposes.
- A dematerialized account that holds shares in an electronic form.
- A SEBI trading account with a registered broker.
4. Real Estate
Investing in a property is one of the favorite NRI investment in India. It serves as a good long term investment with steady growth (provided the property is in the right location). Make sure which type of bank account you use to buy and sell a property (NRO, NRE, or FCNR). The rules applicable to the account will determine how much money you will be allowed to return to dollars in the end.
5. Bonds and Non-Convertible Debentures (NCDs)
Bonds and NCDs have risk involved, but it can also serve as a good investment option.
There are three main bond categories:
- PSU Bonds – Public Sector Undertakings Bonds (PSU) are contracts with a maturity date. You in effect loan money to a company and they promise to repay it with interest on a specific date (called the maturity date). The interest rate on a PSU will be determined by the creditworthiness of the company who issues it. These investments are taxed at 20% if you sell it after owning it for more than 3 years.
- Non-Convertible Debentures (NCD) – This debt is secured by the company’s assets. The interest rate will, therefore, be a bit lower as secured debt has less risk involved. But, the interest rate on NCDs will still be very competitive when compared to returns on investments like equities.
- Perpetual Bonds – These bonds don’t have a maturity date so there is no date by which it pays out. The issuing company, however, promises to pay the holder a set amount of returns per year. The holders of perpetual bonds trade it on the open market. Market conditions and your willingness to sell will determine if you make a profit with the selling of this investment.
6. Government Securities
The government also provides investment opportunities.
Treasury bills or T-bills typically have maturity dates ranging between 3 and 12 months. T-bills are bought at RBI auctions. It does not earn the investor any interest but it’s promised to be redeemed at a discount. This means you will make a specific profit when the T-bill is redeemed.
For longer-term investment strategies, NRI’s can look at the following types of dated government securities:
- Fixed rate government bonds – The interest rate on this bond is fixed.
- Floating rate government bonds – The interest rate on this bond will change according to the market-related changes.
- Capital index bonds (CPI bonds) – These bonds have a coupon payment rate that is adjusted according to the inflation rates of the Indian market.
7. Certificate of Deposits
Certificate of Deposits (CDs) is usually used as a short termed investment. It almost works like a fixed deposit, but the holder of a CD may sell it. You need a dematerialized account to buy and sell CDs. A CD has a maturity date by which it promises to repay a certain amount. Please note, amounts invested into CDs are typically very hard to return to dollars.
8. National Pension Scheme (NPS)
This pension scheme allows Indian citizens to save for retirement. You need to be between the ages of 18 and 60 to become a member of the NPS. There are two accounts each with its own rules and regulations.
Tier 1 Account – All payments and funds in this account are locked until retirement. If you retire before the age of 60 you may take 20% of the investment as cash. You are obliged to invest the rest into an annuity (an investment that pays you a fixed yearly amount). Retiring after 60 will allow you to take 40% as cash and the rest must be invested into an annuity.
Tier 2 Account – Only tier 1 account holders are allowed to open tier 2 accounts. Tier 2 accounts are unrestricted so you can deposit and withdraw money as you wish. You can also decide how the portfolio of your tier 2 account is structured. There are many types of investments that you can choose from to help you to create a diversified investment strategy.
An NPS is not exempt from tax. The capital gains aren’t taxed, but all payouts are taxed according to your tax slab (the tax bracket under which your Indian income is classified).