Which asset classes can NRIs invest in?

An NRI can only invest in five asset classes in India. These are

1. Bank Accounts including Fixed Deposits,

2. Stocks,

3. Mutual Funds,

4. Real Estate and

5. Insurance.

There are no prescribed limits for investments in the abovementioned avenues. This means that the NRI can invest any amount he or she desires in these instruments.

Which are the avenues that an NRI cannot invest in?

NRIs cannot invest in other savings schemes. NRIs are not allowed to invest in 8% taxable Government of India Savings Bonds, Public Provident Fund (PPF) and the Senior Citizens Savings Scheme. If and when the accounts office comes to know of the anomaly, the deposit will be returned to the investor, without any interest.

Notification dt 25.7.03 prohibits NRIs to open Savings, Recurring Deposit, Term Deposit and Monthly Income Scheme accounts or purchase Kisan Vikas Patras and Nationlal Saving Certificate-VIII (NSC) of the Post Office. The accounts opened prior to this date are allowed to run up to their maturity. As and when the irregularity comes to the notice of the authorities, the money will be returned to you without any interest. Those NRIs who have opened such accounts will do well by withdrawing the investment themselves.

What about accounts that have already been opened while the person was a resident Indian?

Already opened accounts can be continued. As has been mentioned in these columns before, no one is born an NRI, rather people become NRIs when they go abroad for better career prospects. When an Indian Resident goes abroad, more often than not, he leaves a large part of his investments including property behind. These investments may include the abovementioned prohibited investments in terms of PPF, NSC, Post Office instruments etc.

A resident who subsequently becomes NRI during the currency of term of these investments may continue the same till maturity. This means, they cannot open a new account or extend the scheme beyond its maturity. However, an already existing investment may be continued. For those instruments that require periodic investments (PPF), the NRI may use either the NRE or the NRO as per his convenience. Using the NRO account is recommended.

Can maturity Proceeds be remitted abroad?

Yes. As and when such investments mature, the proceeds should be credited to the NRO account. This is very important for the following reason.

Circular 67/2003-RB dt 13.1.03 supplemented by RBI Master Circular dt 1.7.05 makes it possible for an NRI or a PIO to remit as much as US$ 1 million per calendar year for bona fide purposes out of the balances held in NRO accounts including the abovementioned maturity proceeds.

All that is required is that he should have acquired the assets in question, out of rupee resources when he was in India or by way of legacy/inheritance from a person who was a resident in India.

For remittance of sale proceeds of assets, both financial and immovable property acquired by way of inheritance/legacy or settlement from a person who was Resident, there is no lock-in.

An undertaking by the remitter and certificate by a Chartered Accountant in the format prescribed by CBDT vide their Circular 10/2002 dt 9.10.02 has to be produced.

It is necessary to file Form-A2, FEMA Declaration, Certificate from an accountant, and undertaking for payment of income tax, in the specified format. A No-Objection-Certificate from the income tax department will be useful, but not necessary.

The India growth story is selling the world over. Investing in India is compelling not just for those of us who live here, but also for non-resident Indians (NRIs) and persons of Indian origin (PIO) who want a share in their home country's progress even though they don't live here.

If NRIs and PIOs were earlier happy about sending money to their families and having them manage it, today, it is possible for them to invest in the India growth story actively and directly. Whether it is buying and selling residential or commercial real estate, or tasting the Sensex at 20,000, it can all be done at the click of a button now. It is no wonder then that NRIs are no longer content with the 4.5 per cent interest offered by foreign currency nonresident (FCNR) accounts and want to cast a wider net. Here are some options.

REAL ESTATE

Brijesh Dalmia, director, Dalmia Advisory Services, says, "The investment avenue most preferred by NRIs is real estate as they don't have to keep track of the performance of their assets."

NRIs can acquire immovable property like land, a house or a fl at in India, just like a resident. But they cannot hold agricultural land, plantation property or a farmhouse. As an NRI, you can buy, rent and sell your property. The sale proceeds of up to two residential properties can be repatriated. This applies if you are either an NRI or a PIO.

If you net any capital gains from selling the property, this should be credited to the non-resident ordinary rupee (NRO) account, from where you can repatriate an amount up to $1 million per financial year. An NRO account is an account opened in Indian rupees and can be used to route earnings made on investments in India or make legitimate local payments.

If you bought your property while you were residing in India and had taken a loan for it here, you can repatriate the proceeds from the sale, provided the loan has been repaid by remitting funds from abroad or debiting your non-resident external rupee (NRE) account. An NRE account is opened with funds remitted from abroad, but is maintained in Indian rupees.

You can also rent out your property in India without any approval from the Reserve Bank of India (RBI). The rent you receive can either be credited to the NRO or NRE account, or remitted abroad.

PIOs who are citizens of Pakistan, Sri Lanka, Bangladesh, China, Afghanistan, Iran, Nepal and Bhutan cannot remit sale proceeds of immovable property.

EQUITY INVESTMENTS

Lovaii Navlakhi, managing director, International Money Matters, says, "Besides real estate, NRIs invest in equity devices through mutual funds. They prefer going indirectly to the markets as direct investment in the market involves a complicated process."

Portfolio Investment Scheme. The RBI requires NRIs to open a separate account for the purpose of the Portfolio Investment Scheme (PINS) or for investing in securities.

PINS is a scheme of the RBI which defi nes the process of purchase and sale of shares and convertible debentures of Indian companies. But they cannot invest in derivatives.

The transactions should be done on a recognised stock exchange through the NRI's account with a designated bank. There is no limit on transactions in the primary market. However, in a secondary market, an NRI cannot purchase more than 5 per cent of the paid-up capital of a company. The sale proceeds are subject to capital gains tax. The tax varies according to the holding period. The NRI investor is required to pay an annual maintenance charge (AMC) for a PINS account. The investor also pays an amount for each transaction under PINS.

Portfolio Management Services.

NRIs who are wary of going to the stock markets directly can take the Portfolio Management Services (PMS) route. Under this, the funds are managed by professionals according to specifi c mandates given by the investor. You will be charged a fee, which is either fi xed or is a percentage of the returns on investment. Broking houses, asset management companies and investment bankers can offer PMS after registering with the Securities and Exchange Board of India (Sebi) as portfolio managers.

Mutual funds.

An NRI with an NRO or NRE account can invest in domestic equity mutual funds (MFs) like a resident Indian. There is a variety of equity MFs you can invest in, depending on your return expectations and risk appetite. Diversifi ed equity funds are the most popular. The underlying investments are spread over a wide basket of sectors and are not clustered around a particular company or sector.

There are other equity funds, such as sectoral and thematic funds, that concentrate on a particular segment of the market. They are dynamically managed funds, all with varying risk and return characteristics. If your income in India exceeds the tax exemption limit, you can opt for the Equity-Linked Savings Schemes (ELSS). These are tax saver MFs. Investors do not have to pay long-term capital gains tax in equity funds. The short-term capital gains tax is 11.33 per cent (including surcharge and cess). Investments in MFs can be on a repatriation or non-repatriation basis.

DEBT INVESTMENTS

FCNR deposits. Despite the fall in interest rates, if you are still interested in FCNR deposits, the RBI restricts that these term deposits can be made only in six foreign currencies—the US dollar, the UK pound, the euro, the Japanese yen, the Australian dollar and the Canadian dollar.

Company deposits. NRIs can opendeposits with companies too. But not all companies provide such services. Company deposits are high-risk instruments. Deposits with companies are on non-repatriation basis. The deposits can be maintained with companies registered under the Companies Act, 1956, NBFCs registered with the RBI, or a body corporate created under an Act of Parliament or state legislature, a proprietorship concern or a fi rm, out of rupee funds which do not represent inward remittances or transfer from NRE or FCNR accounts into the NRO account.

Mutual funds. Debt MFs are for the risk-averse investor. The majority of the underlying assets are debt instruments. Income funds, a category of debt funds, provide regular infl ow of money to investors.

Among income funds, monthly income plans (MIPs) attempt to pay you a certain sum of money every month. Liquid funds invest in scrips of tenor less than one year.

Investments in money market funds can be done only on a non-repatriation basis. NRIs are taxed as per the income tax slab for capital gains from short-term investments made in debt funds. While resident individuals have to pay long term and short term capital gains, as the case maybe, in the case of NRIs, these taxes are deducted at source and are termed tax deducted at source (TDS).

The long-term capitals gains tax is 11.33 per cent. The TDS is 33.99 per cent for short-term capital gains while TDS for long-term capital gains is 11.33 per cent. The dividend distribution tax (DDT) is charged to the scheme. DDT for debt funds is 14.03 per cent (including surcharge and cess) and 28.30 per cent (including surcharge and cess) for liquid schemes.

GOVT GUARANTEED SCHEMES

An NRI has the option of investing in government securities (G-secs) and treasury bills (T-bills) on repatriation and non-repatriation basis. But he cannot invest in bearer securities like National Savings Scheme (NSS) and Kisan Vikas Patra (KVP). He can also not invest in the public provident fund (PPF), RBI bonds, Senior Citizens' Savings Scheme and Post Offi ce Monthly Income Scheme. However, if he is already holding a NSS or PPF at the time of change in residential status, he can continue it. However, all these plans cannot be extended after their maturity.

INSURANCE

NRIs can take insurance covers of all kinds available to a resident. There is no coverage limit. But the coverage limit for foreign nationals of Indian origin is Rs 20 lakh for all the insurance policies taken together. Premiums can be paid by direct remittances through an Indian rupee demand draft drawn in favour of the insurer. The insured also has the option of using his Indian bank account to pay through cheques.

Unit-linked insurance plans (Ulips) are also an option available. They are a mix of insurance and MFs. They provide protection and investment opportunities to an individual with a single product. A part of the premium that is paid is invested in equity instruments. On maturity it pays the fund value in most cases.

For investing in any of the options listed above, NRIs should maintain an NRO or an NRE account. The accounts should be with designated banks approved by the RBI for these services. The Foreign Exchange Management Act (FEMA) requires that all banks where you have an account should know that you are an NRI. As soon as you inform the banks about your NRI status, your banking account will be changed to NRO. This account is no different from an ordinary resident account. Only the name is changed. You can operate the account from anywhere in the world. RBI allows remittances from NRO accounts, up to $1 million per fi nancial year (April-March) for bonafi de purposes. These remittances are subject to applicable taxes. This limit includes sale proceeds of immovable properties held by NRIs.

For those who want to remit the balance without conditions, NRE accounts are a better choice. The money in an NRE account can be taken outside the country and converted to another currency as and when the account holder wants.

Money can be easily transferred from NRE accounts to NRO accounts, but not viceversa even if the money has been transferred from an NRE to an NRO account.

An individual can maintain NRO and NRE accounts simultaneously. The rate of interest on NRE savings deposits is at the rate applicable to domestic savings deposits, which is 3.5 per cent at present, applicable to both these kinds of accounts.

CHECK BEFORE YOU BEGIN

Before you start investing in India, check out your investment horizon and analyse your risk appetite. If you do not want to get entangled in an investment that requires constant monitoring, invest in real estate or stocks with a long term view. If you want to invest directly in equities, do study the company and its potential thoroughly. You should also check the tax implications on such investments applicable in the country where you are now residing.

CHECKPOST

Non-resident Indians (NRI) can invest in India in various ways. However, there are limits to this.

REAL ESTATE

● NRIs cannot buy agricultural land, plantation property or a

farmhouse.

● Citizens of Pakistan, Bangladesh, Sri Lanka, China,

Afghanistan, Iran, Nepal and Bhutan cannot remit sale proceeds

of immovable property.

EQUITY INVESTMENTS

● NRIs can invest in shares but not in derivatives.

● There is no limit on transactions in the primary market. But, in a secondary market, an

NRI can buy only up to 5 per cent of the paid-up capital of a company.

● For debentures, too, the limit is 5 per cent of the paid up value of each series of

debentures.

DEBT INVESTMENTS

● FCNR deposits can be made only in six foreign currencies—US dollar, UK pound, Euro,

Japanese yen, Australian dollar and Canadian dollar.

GOVERNMENT GUARANTEED SCHEMES

● An NRI can invest in government securities and treasury bills but not in bearer securities

like National Savings Scheme (NSS) and Kisan Vikas Patra (KVP). Nor can he invest in

the Public Provident Fund (PPF), RBI Bonds, Senior Citizens' Savings Scheme and Post

Offi ce Monthly Income Scheme.

● If the NRI was holding an NSS or PPF at the time of change in residence status, he can

continue with the instrument but cannot extend it after maturity.

INSURANCE

● The coverage limit for foreign nationals of Indian origin is Rs 20 lakh for all the insurance

policies taken together.

BANKING

● Money can be transferred from an NRE account to an NRO account, but not vice-versa.

NRILIC India Investments - Brokers for Indian Mutual Funds, FDs, LIC, ULIPs, Post Office

Friday, March 26, 2010

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