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Although it is appealing for Indians to migrate and settle down in developed, “high-income” countries and get the status of non-resident Indians (NRI), the lure of equity investment and stock market opportunities largely brings their focus back to India.

The majority of NRIs choose Indian mutual funds to build nest eggs, diversify their investment portfolios, and benefit from greater returns in the Indian debt market, which are generally higher than in many industrialized nations.

MPVD & Associates has been working with NRIs all across the world as a pivotal NRI Tax consultancy in Kolkata, where we have broadly helped our clients have a holistic investing experience, for both long-term and short-term. We are publishing this blog to provide current and future investors with an overview of the current guidelines for non-resident Indians to invest in the Indian stock markets.

The NRI Status

What qualifies you as an NRI? We have extensively covered this topic in previous articles, and if you are an NRI, you are probably aware of it, but it is still necessary for us to clear the air for those Indian citizens or persons of Indian origin (PIO) who are currently living in a foreign country but mistakenly consider themselves NRI. The following are the major parameters of NRI status:

  • PIOs that leave India for employment, business in a foreign country, or as a member of the crew on an Indian ship

  • PIOs that lived outside India, either in a foreign country or as a crew member on a ship, for 182 days or more in a fiscal year

  • PIOs that resided in India for less than 365 days in four consecutive fiscal years

  • PIOs that reside in India for more than 60 days and less than 182 days in a current fiscal year

  • PIOs or NRIs with an income value of Rs 15 lakh or more who lived in India for a maximum of 120 days during a fiscal year, with four previous years totaling over 60 days

You do not immediately become an NRI if you are the spouse or child of an NRI. You might, however, be eligible for some tax benefits and concessions relating to financial transactions. Your NRI status will be determined by your circumstances, such as your domicile in India and time spent overseas.

We constantly advise NRIs to seek competent tax advice. MPVD & Associates also provides free online advice for NRIs to get them started on the correct track to safe and compliant mutual fund investments in the Indian market, as well as to define an appropriate and realistic financial goal.

What Do NRIs Need To Start Investing In Indian Mutual Funds?

Foreign Direct Investments (FDI) are pivotal for the Indian economy. As per the Foreign Exchange Management Act, 1999 (FEMA) Regulations, the Government of India now permits NRIs and foreign nationals to invest in the Indian stock market. However, with the new amendments to the FDI Policy 2020, there are certain restrictions on NRI investors.

NRIs are now able to trade in Indian stocks and F&O, however, they are not permitted to deal in currency derivatives or commodities. The RBI allows NRIs to engage in Indian stock markets or shares, but only through an RBI-approved dealer or bank, and only through the following routes:

  • Portfolio Investment Scheme (PIS): It allows NRIs to buy and sell shares of listed Indian firms on recognized stock exchanges for up to 5% of the paid-up capital of each debenture by routing transactions via their NRE or non-resident ordinary (NRO) savings account.

  • NRE (Non-Resident External) account: through this route, NRIs may deposit money in foreign currency and convert it into Indian INR for free. This is a Repatriable Demat account, so can park overseas profits. Therefore NRIs have the freedom of saving or investing in INR through their NRE account or transferring funds to their home country abroad in the converted currency and vice versa.

  • NRO (Non-Resident Ordinary) account: This is a resident investing route that focuses on bona fide INR transactions. It does not allow free repatriation like NRE. There is a $1 million per year limit on repatriation. NRIs require an NRO to engage in F&O trading with the assistance of a custodial participant.

Having the appropriate investment path is not enough for all types of investors, and NRIs frequently want assistance in managing and executing their accounts and investment-related compliances. For NRIs, one can designate an investment broker or financial service provider, as well as a Mandate Holder or Power of Attorney.

The Indian Government Modified The FDI Policy

Inbound M&A activity in India increased 17.9% year over year to $11.6 billion during the pandemic. Private equity investments drove 441 deals valued at a record-breaking $9.4 billion. Global and domestic megacorporations drove the frenzied deal-making activity.

To protect Indian firms from the opportunistic effect of acquisitions, the Directorate for Promotion of Industry and Internal Trade amended some sections of the foreign direct investment (FDI) policy on April 17, 2020. And a big inspiration for this decision was to block direct investments from China.

  • NRI stock market transactions must be routed through their NRE or non-resident ordinary (NRO) savings accounts.

  • The RBI only accepts NRIs for F&O trading via non-repatriable NRO accounts.

  • Before trading in F&O, NRIs must get a Custodial Participant (CP) code.

  • NRIs can only deal in Indian shares on a delivery basis.

  • NRIs are not permitted to engage in intraday trading, BTST trading, STBT trading, or short selling.

NRIs Don’t Need To Pay Double Tax for Their Income from Investments

Many NRIs seek the greatest investing opportunities in India. Investing in mutual funds is one possibility. Because India is a developing country, mutual fund investments here promise more sensible returns for NRIs. In a recent poll conducted in 2023, Over 53% of NRIs sided with the Indian Stock Market for delivering higher returns on equity investments than any other country.

But are you worried about having to pay twice as much in taxes in India as in your home country? Don’t be, because India has signed a Double Taxation Agreement with 85 countries, which include the UK, USA, Canada, Australia, Bangladesh, New Zealand, Nepal, South Africa, and many others.

NRIs living and working in any of these 85 countries will be exempt from having to pay double taxation on the income earned in India through mutual fund investments.

The income earned in India is taxed in India. So once you have paid tax for your stock market income in India, you have the provision to claim a tax deduction in the other country on the basis that it has signed a DTAA with India.

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