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Wednesday, October 23, 2013

Investment Options for NRIs

As i go about living my dream of transforming lives of thousands of people by enabling them to plan their financials well, many of the non resident Indians (NRIs) have come back and sought more details on the investment options available to them. Through this post, i am trying to list down the investment avenues available for NRIs. As i have been advising throughout all my interactions, no investment makes any sense if we are not aware of why we are investing and what is our target return. So, always make sure that Financial Freedom planning precedes any investment decision.

If you or one of your close relatives or friends are among such NRIs, you would want to put the money to productive use by investing in high return generating instruments. Despite the ongoing slowdown, India continues to offer numerous investment opportunities for foreign investors, who do not enjoy such high rates in their country of work.

Getting Started
If you wish to invest in India, the first step is to open a savings bank account. One of the first things you should know as an NRI is that your existing bank accounts are no longer valid. The Foreign Exchange Management Act (FEMA) requires you to inform all the banks where you have an account, be it savings or deposits, about your changed residential status.
The banks will then classify your account as one of the three basic types of bank accounts for NRIs.
(1) NRE Account
(2) NRO Account
(3) FCNR Account
We already discussed about NRE / NRO Accounts in one of our earlier posts.
FCNR (Foreign Currency Non Resident) Accounts are an extension of the first two accounts. As the name suggests, if you do not wish to be exposed to exchange rate risk, you can instead open a FCNR account with a local bank, where your funds are held in the foreign currency, and not converted to rupees.

Tax liability for NRIs
You should be aware of the income tax implications on investments in India. Although there is no difference in the income tax rates for NRIs and resident Indians, the tax is compulsorily deducted at source in case of NRIs. So your share broker, mutual fund and bank will deduct tax before giving you the redemption proceeds.
Worse, the TDS is charged at the highest applicable tax rate for that investment category irrespective of the actual liability (see table). For instance, you may not have any tax liability due to losses incurred on another investment but your broker will still deduct the tax. You may end up paying a higher rate at the time of sale of your investment and can get the excess tax refunded only after you file your income tax return.

Where NRIs cannot invest
NRIs can invest only in five asset classes in India - bank deposits, stocks, mutual funds, real-estate and insurance. You can also invest in government securities and company deposits. But you cannot invest in PPF (Public Provident Fund), or bearer instruments such as NSC (National Savings Certificate) or Kisan Vikas Patras once your residential status changes. Though you are barred from making any fresh investments, existing ones can be left undisturbed. However, they cannot be extended beyond maturity. 
For example, you can continue to make periodic contributions to the existing PPF account even when you are abroad through your NRE or NRO account. When the investments mature, the proceeds will be credited to the NRO account.
Investment in agricultural land/plantation property/farm house is not allowed.


Where can NRIs invest
Real Estate has always been one option that has been exploited by NRIs for investment in India for many reasons. Some of them included the high (and almost assured) return on investments, their probability of coming back to India, and also unawareness in other investment options. But considering the opaqueness in real estate industry and the downturn that we have started to see, it may be wise to look at some other investment options as well. WE discuss some of these investment options in detail:

(1) High Yield Fixed Deposits
As a start, NRIs should take advantage of the superior rates of interest offered on fixed deposits in India. Interest rates are at high levels but are expected to come down in the near future.
NRE and NRO deposits are currently offering assured rates between 8.5% and 9.5% across a range of tenures. These are also reasonably liquid, so you can withdraw funds at any time (subject to interest rate penalty) in order to invest in better opportunities elsewhere.
One can also invest in FCNR deposits, to eliminate the risk of depreciation in the local currency. The rates on FCNR deposits differ widely depending on the choice of foreign currency. For instance, the rate for a one year FCNR deposit in US dollar would be in the range of 3-4% while the same for a deposit in Australian dollar would be 6-7%.

(2) Direct Equities
NRIs can also invest in equities to participate in the growth of Indian companies. India remains a great investment destination for foreign equity investors. However, it is advisable to have patience and invest for the long haul to truly gain from the growth of some of the fast growing Indian companies. To be able to invest directly, NRIs will need to designate their NRE or NRO account as a portfolio investment scheme (PIS) account. Each transaction in the PIS account is reported to the RBI, as the central bank ensures that the aggregate level of NRI holding in any Indian company does not exceed 10% of its paid-up capital. To be able to transact in Indian equities, NRIs will have to open a demat account and trading account (linked to your PIS account) with a local stock broker registered with Sebi.

(3) Mutual Funds
The first option is to invest in any of the India-focused offshore mutual funds or ETFs operating in your home country. These India-dedicated mutual fund schemes invest in a diversified basket of Indian companies, usually with the help of research inputs from their Indian subsidiaries or other Indian fund houses. NRIs can also invest in mutual funds domiciled within India, using your NRE or NRO account. These funds do not charge any entry load, but the investment is in rupees. NRI investors should be cognizant of the exchange rate risk while investing in rupee terms. The recent sharp slide in the rupee, for instance, has eaten away most of the returns of these funds.

(4 and 5) Insurance and Real-Estate
Presently, NRIs can invest in life insurance policies in India without any limit on the cover. Some companies offer foreign-currency denominated policies and also allow you to pay the premium in foreign currency.
You can also invest in residential and commercial property in India without obtaining any special permission from the RBI.

Cheers


Manoj Arora
Lead a Financially Free Life !!

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