A complete guide for NRIs investing in Mutual Funds
"NRI is a person residing outside India who is a citizen of India or Person of Indian Origin (PIO)."
Traditionally, NRIs have been more comfortable investing in real estate in India. Real estate investment gave returns in the country at an average of about 14-17% in this decade. Sensex returned 19% in the decade and top performing diversified equity mutual funds have given returns in the range of 25-30%. Though past performance cannot be a pure indicator of future performance, but the pattern will stay true if the Indian economy grows in the 8-9% range in the next decade. So it makes good sense to get a life beyond real estate!
Can NRIs invest in mutual funds?
Non Residents Indians and Persons of Indian Origin can invest in mutual fund schemes in India. In case of NRIs no special approval is to be sought from authorities such as the RBI. They can invest in mutual funds on repatriable basis or non-repatriable basis. To invest on a repatriable basis you must have an NRE account or FCNR account with a bank in India. In this case the investment money should be remitted through usual banking channels or from the NRE/FCNR account of the NRI investor. Investment can be made on a non-repatriation basis as well with investment funds being provided from NRO account or NRE/FCNR account of the investor.
Income Tax Provisions for NRIs:
Based upon a set of specific guidelines and directives, it can be ascertained if a person is actually an NRI. Based upon that, income earned in India can be considered as taxable income. It is important to understand that the income earned by an NRI outside India will not fall under the jurisdiction of the Income Tax Act. However, if his/her income in India through aspects like capital gains from investments in shares, mutual funds, property rental and term deposits exceed the basic exemption limit as defined in the Income Tax Act, he/she would have to file a tax return.
Income tax for non-resident Indians differs from the income tax charged for resident Indians, that difference lies in the taxation slabs.
The major points concerning NRI taxation can be outlined as follows:
- Income tax slabs for NRIs are based only on the income barring any gender, age or other specification
- In case of TDS, all incomes of NRIs are charged irrespective of any threshold value
- No nominal deductions are applicable on investment income except under specific situations
- Tax filing isn’t normally required for NRIs if the income is subject to clauses under Section 115G of the Income Tax Act
Some specific provisions exist as per the Income Tax Act which relate how income tax would be charged for an NRI.
The brief of such provisions are mentioned below:
- Section 115D: Computation of Tax
- Section 115E: Tax on income from investment and long term capital gains
- Section 115F: Non chargeable capital gains on transfer of foreign exchange assets in certain cases – Dealing with exceptions where the transfer of a foreign exchange asset will not incur any tax
- Section 115G: Non-filing of returns of income in specific cases
- Section 115H: Benefits of taxation after an NRI becomes a resident
- Section 115I: Non-application of provisions for NRI taxation
All the above rules are subject to change as per the discretion and direction of the Central Government and the Income Tax Department of India.
Applicable Deductions and Exemptions for NRIs:
Most of the income of NRIs gets subjected to a heavy TDS (Tax Deducted at Source) and that often leads to NRIs paying more tax than they are normally liable for. Thus, knowing the applicable deductions and exemptions that can be availed is important.
The deductions that are allowed for an NRI are as follows:
- Section 80C:
- Life insurance premium payment
- Tuition fee payment
- Principal payment on loan for purchase of house property
- Investment in ULIPs
- Deduction from House Property Income
- Section 80D:
- Premiums of health insurance of the immediate family and dependents
- Up to a maximum of INR 5000 for preventive health check-ups
- Section 80E: Deduction of interest paid on an education loan for the higher education of self, spouse, children or a dependent student subject to the earlier of a period of 8 years or till the interest is paid
- Section 80G: Donations as per Section 80G
- Section 80TTA: Maximum of INR 10,000 on interest from savings bank account
- Long term capital gains from property held for 36 months or more can be invested in another property and the amount used in the transaction will be exempted
Five Income Tax Rules To Know:
If an Indian citizen leaves the country for a job abroad or as a crew on an Indian ship and spends less than 182 days in India in a year, he or she is considered non-resident for tax purposes.
Taxability in India depends on whether an individual qualifies for the NRI status for the year.
Here are some of the income tax rules NRIs should know:
1) An NRI has to pay tax on any income that accrues or arises in India or is received in India. So salary received in India, rental income, interest income from fixed deposits or saving bank accounts and capital gains on assets sold in India are taxable. If the income of an NRI is more than the basic exemption limit for the year, he or she is liable to file return in India. Also, to claim tax refunds, or to carry forward losses to future years, NRIs have to file return.
2) If an NRI returns permanently to India after spending a few years abroad, his/her foreign income does not become taxable in India immediately. An individual, who has been a non-resident for nine consecutive years, remains RNOR (Resident but not Ordinarily Resident) for two years for tax purposes, which is transitional status between being an NRI and becoming a full-fledged resident Indian. "Till the point of time a returning NRI becomes a resident in India, according to Income Tax laws, which usually takes about two years - any income earned outside India will not be taxed in India unless it's from a business or profession controlled from India. Once, he is a resident, his 'global income' (which includes income outside India as well) gets taxed in India,"
3) In this year's Budget, it was announced that TDS (tax deducted at source) will not be deducted at a higher rate if an NRI without PAN can provide alternative documents. "Earlier the NRI had to pay the tax at the rate of 20 per cent or the rate in force whichever is higher in case the NRI doesn't furnish the PAN. As per the new provision, the NRI doesn't have to pay the higher tax if he doesn't furnish PAN and instead provides the documents specified under the recently notified rules in this regard.,".
4) If an NRI returns to India and turns Ordinary Resident Indian for a particular year, then the person will have to disclose all the foreign assets and foreign income in the tax return. There are stringent penalties under the Undisclosed Foreign Income and Assets Bill, 2015 for not doing so. Such income will henceforth not be taxed under the Income Tax Act but under the provisions of this new legislation on unaccounted money.
5) An NRI can't open a public provident fund (PPF) account. But if the person already has a PPF account before becoming an NRI, he or she can continue to operate the account, but only till the period of maturity. At maturity, the NRI would have the option to remit the proceeds in the country of residence and will not have the option of extension post mandatory 15 years' lock-in period. In case, post maturity, the account is left unattended, it will be considered as "extended without contribution".
Taxability in India depends on whether an individual qualifies for the NRI status for the year.
Here are some of the income tax rules NRIs should know:
1) An NRI has to pay tax on any income that accrues or arises in India or is received in India. So salary received in India, rental income, interest income from fixed deposits or saving bank accounts and capital gains on assets sold in India are taxable. If the income of an NRI is more than the basic exemption limit for the year, he or she is liable to file return in India. Also, to claim tax refunds, or to carry forward losses to future years, NRIs have to file return.
2) If an NRI returns permanently to India after spending a few years abroad, his/her foreign income does not become taxable in India immediately. An individual, who has been a non-resident for nine consecutive years, remains RNOR (Resident but not Ordinarily Resident) for two years for tax purposes, which is transitional status between being an NRI and becoming a full-fledged resident Indian. "Till the point of time a returning NRI becomes a resident in India, according to Income Tax laws, which usually takes about two years - any income earned outside India will not be taxed in India unless it's from a business or profession controlled from India. Once, he is a resident, his 'global income' (which includes income outside India as well) gets taxed in India,"
3) In this year's Budget, it was announced that TDS (tax deducted at source) will not be deducted at a higher rate if an NRI without PAN can provide alternative documents. "Earlier the NRI had to pay the tax at the rate of 20 per cent or the rate in force whichever is higher in case the NRI doesn't furnish the PAN. As per the new provision, the NRI doesn't have to pay the higher tax if he doesn't furnish PAN and instead provides the documents specified under the recently notified rules in this regard.,".
4) If an NRI returns to India and turns Ordinary Resident Indian for a particular year, then the person will have to disclose all the foreign assets and foreign income in the tax return. There are stringent penalties under the Undisclosed Foreign Income and Assets Bill, 2015 for not doing so. Such income will henceforth not be taxed under the Income Tax Act but under the provisions of this new legislation on unaccounted money.
5) An NRI can't open a public provident fund (PPF) account. But if the person already has a PPF account before becoming an NRI, he or she can continue to operate the account, but only till the period of maturity. At maturity, the NRI would have the option to remit the proceeds in the country of residence and will not have the option of extension post mandatory 15 years' lock-in period. In case, post maturity, the account is left unattended, it will be considered as "extended without contribution".
FAQs For NRI:
Ans. As per Section 115C of Indian Income Tax Act, 1961 Foreign Exchange Asset means any Specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible Foreign exchange.
Specified Asset means any of the following assets, namely:
Specified Asset means any of the following assets, namely:
- shares in an Indian company;
- debentures issued by an Indian company which is not private company as defined in Companies Act, 1956;
- deposits with an Indian company which is not private company as defined in Companies Act, 1956;
- any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944;
- such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.
Ans. RBI notification is silent on the issue of bonus shares and right entitlements. In the case of bonus shares, one can safely take the view that if the bonus shares are allotted as a result of shares for which payment is made by the way of inward remittance in foreign currency or by debit to NRE / FCNR account they would be treated as foreign Exchange Assets.
Though nothing specific has been mentioned regarding the right entitlement, one can apply the analogy of bonus shares to right entitlements also. If payment for the original shares has been made by the way of inward remittance in foreign currency or by debit to NRE/ FCNR Account they would be treated as foreign exchange assets.
Though nothing specific has been mentioned regarding the right entitlement, one can apply the analogy of bonus shares to right entitlements also. If payment for the original shares has been made by the way of inward remittance in foreign currency or by debit to NRE/ FCNR Account they would be treated as foreign exchange assets.
Ans. Investment options available to NRIs under FDI route can be broadly classified under two heads namely:
I. Automatic Approval Route.
II. Prior Approval from Government Route.
Presently most of the activities are under Automatic approval Route i.e 100% FDI. No approval is required for FDI in case of activities under Automatic Route only a notification to RBI is required within 30 days.
Cases that are not covered under the Automatic Route fall under Prior Approval from Government Route. Approval from government is required in such cases.
I. Automatic Approval Route.
II. Prior Approval from Government Route.
Presently most of the activities are under Automatic approval Route i.e 100% FDI. No approval is required for FDI in case of activities under Automatic Route only a notification to RBI is required within 30 days.
Cases that are not covered under the Automatic Route fall under Prior Approval from Government Route. Approval from government is required in such cases.
Ans. 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.
Ans. Portfolio Investment Scheme (PINS) is a scheme of the Reserve Bank of India (RBI) defined in Schedule 3 of Foreign Exchange Management Act 2000 under which the 'Non Resident Indians (NRIs)' and 'Person of Indian Origin (PIOs)' can purchase and sell shares and convertible debentures of Indian Companies on a recognized stock exchange in India by routing all such purchase/sale transactions through their account held with a Designated Bank Branch .
Ans.
- An NRI should open a new bank account with designated bank branch which is approved by RBI (Reserve Bank of India) for this purpose.
- He should apply for a general approval for investment in Indian Stock Market through his designated bank branch.
- He should open a Demat Account with a Depository Participant to hold his shares.
- He needs to register with a broker to execute his buy/sell orders on the stock exchange(s).
Ans. 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.
Ans. NRIs are allowed to invest in Indian equity markets under the Portfolio Investment Scheme. Under this scheme NRIs 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.
Ans. 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/offer for sale /Private Placements).
Ans. Yes. Investment can be made on repatriation as well as non-repatriation basis. However, an NRI will have to open NRE account as well as NRO account with designated bank branch as the sale proceeds of non-repatriation investment can only be credited to NRO account.
Ans. The repatriation of the sale proceeds, net of taxes, are allowed if the original purchase was made on repatriation basis and such investments were made out of funds from NRE/FCNR account or by means of remittance from abroad.
Ans. Yes, NRIs can invest without any limit on non-repatriation basis in shares and convertible debentures of Indian Cos., issued either by public issue or private placement or right issues. NRI can also purchase Govt. Securities (other than bearer securities), treasury bills, units of domestic mutual funds etc on non-repatriation basis.
Ans. Yes. NRIs can invest on repatriation basis in:
- Govt. securities(other than bearer securities), treasury bills or units of domestic Mutual Funds
- Bonds issued by PSUs
- Shares in Public Sector Enterprise disinvestments by Govt. of India
- Fund for such investment are to be received through foreign inward remittance or to debit of NRE/FCNR accounts.
Ans. An NRI does not require any permission to acquire any immovable property in India or transfer any property in India to a Resident citizen of India.
PIO's who are citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, require prior permission of RBI for acquiring or transferring any immovable property in India.
PIO has some restrictions. He does not require any permission to
PIO's who are citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan, require prior permission of RBI for acquiring or transferring any immovable property in India.
PIO has some restrictions. He does not require any permission to
- Purchase a property out of forex.
- Acquire a property by way of gift from a ROI.
- Acquire a property by way of inheritance from a Resident or a person Resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or FEMA.
- Sell any immovable property in India to a Resident.
- Gift or sell agricultural property to a Resident who is a citizen of India.
- Gift or sell a residential or commercial property in India to a Resident or person Resident outside India.