Investing in the Indian stock market has become increasingly accessible for Non-Resident Indians (NRIs) thanks to various intermediaries. However, these investments are subject to specific guidelines outlined by regulatory bodies like the Reserve Bank of India (RBI). These guidelines ensure compliance and clarity for NRIs investing in Indian stocks.
Let’s delve into the RBI’s directives and shed light on the procedures and considerations for NRI investment services in the stock market.
Who Qualifies as an NRI?
As per the Foreign Exchange Management Act (FEMA), an NRI is an individual of Indian origin residing outside of India for employment, education, business, or other reasons.
To qualify, NRIs need to meet one of two conditions:
- Stay abroad for more than 183 days in the preceding financial year.
- Stay in India for less than 60 days in the last year and less than 365 days during the preceding four years.
Investment through Portfolio Investment Scheme (PIS)
NRIs are allowed to invest in the Indian stock market through the portfolio investment scheme, or PIS—a scheme that enables them to purchase and sell shares of listed Indian companies on recognized stock exchanges by routing such transactions through their NRE or non-resident ordinary (NRO) savings account.
This PIS-enabled NRE account has to be linked with the demat and trading accounts of the NRI investor for stock trading. Under this, account holders have limited investment options such as stocks, bonds, NCDs, etc.
The RBI requires a PIS permission letter to open a trading and demat account, with the option to choose between NRE and NRO accounts. While NRE accounts allow the repatriation of funds, NRO accounts do not offer the same privilege.
Trading and Demat Accounts for NRIs
The RBI employs PIS accounts to monitor NRI investments in India. NRIs must also have trading and demat accounts linked to their PIS accounts. These accounts facilitate trading in the stock market and ensure the proper execution of transactions.
Trading Account Charges
Every NRI investor pouring money into the Indian stock market is levied with certain trading accounts charges such as a trading account opening fee, brokerage charges that vary depending on the broker, platform access fees, call and trade fees, exchange transaction charges, and other taxes, including stamp duty fee, goods and services tax, Sebi charges, etc. These charges are usually similar or slightly higher as compared to resident investors.
Trading Process and Considerations
Trading for NRIs in the Indian stock market closely mirrors that of Indian residents. However, certain limits and rules need attention:
- The overall investment limit for NRIs/PIOs in stock investments is 10% of an Indian company’s paid-up capital.
- Individual investment is capped at 5% of the paid-up capital.
- NRIs cannot engage in intraday trading, only delivery-based trading is allowed.
- NRIs should be mindful of the list of companies available on the RBI’s website for investment purposes.
Non-Repatriable Investments
In the case of non-repatriable investments, there are restrictions on transferring money outside India and NRI investors have to open an NRO savings account with an RBI-approved bank. The investment needs to be maintained in a Demat account linked to the NRO bank account. NRIs are not required to seek PIS permission from RBI and can approach the broker directly to start trading and investing. It allows them to invest in stocks, initial public offers (IPOs), bonds, and Esops (Employee stock ownership plans). As for mutual funds, they can simply use their NRE or NRO savings accounts and get their KYC verified to start investing in them.
Taxation
NRIs will be liable to pay capital gains tax, similar to resident investors. As far as dividend income is concerned, tax is deducted at the rate of 20%, subject to the DTAA (double taxation avoidance agreement), if any. After relevant tax deductions, the corpus is directly credited to the respective NRE or NRO bank account of the investor.
NRI investors should be aware of the tax implications associated with investing in the Indian stock market. Long Term Capital Gains (LTCG) from equity investments up to Rs. 1 lakh are exempted from tax. Gains beyond this threshold are subject to taxation. Short Term Capital Gains (STCG) apply to securities held for less than one year.
Navigating the Indian stock market as an NRI investor demands an understanding of these guidelines. Prior research on Depository Participants, account types, and tax implications can empower NRIs to make informed investment decisions. As the Indian stock market continues to flourish, NRIs can participate in its growth while adhering to regulatory norms.
By following these RBI guidelines and considering the various aspects of investing in the Indian stock market, NRIs can make informed decisions to grow their wealth while complying with regulatory requirements.
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