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Wednesday, October 23, 2013

NRIs, PIO / OCI Card Holders and their Investment Options in India

[Rev. 2 Updated 31st Aug 2018]
Did you know that PIO Cards are no more valid after 30th Sep 2018?
Did you know that NRIs / PIOs with OCI Cards are almost at par as far as financial investments in India is concerned? 
Do you know where all NRIs or OCI Card holders can invest in India?
Do you know who qualifies to be an NRI?
Do you know the advantages of holding an OCI Card?

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. India continues to offer numerous investment opportunities for foreign investors, who do not enjoy such high rates in their country of work.

Who is an NRI?
An NRI (Non-Resident Indian) is an Indian citizen who is ordinarily residing outside India and holds an Indian Passport. Click here to read the details and the technical definition of being an NRI.

Who is an OCI Card Holder?
A person of Indian origin who is a foreign national and gets registered as Overseas Citizen of India Cardholder under Section 7A of the Citizenship Act, 1955 is an OCI. As to where a PIO (Person of Indian Origin) /OCI (Overseas Citizen of India) card holders are people whose ancestors were of Indian Nationality and who is presently holding another countries’ citizenship/nationality (i.e. he/she is holding foreign passport). In respect of facilities available in economic, financial and educational field, PIO/OCI is considered the equivalent of an NRI.

What about the PIO Card?
The PIO scheme stands abolished. All PIO cards are valid until September 30, 2018. After September 30, 2018, PIO card will be considered as an invalid travel document. Therefore, all applicants, who have not yet converted their PIO cards to OCI card, are requested to apply for OCI in lieu of PIO before September 30, 2018.

Does OCI Card mean Dual Citizenship?
India does not allow dual nationality. The Overseas Citizen of India (OCI) is the closest thing to dual citizenship that the government offers. You can eventually become an Indian citizen if you are an OCI for five years and live in India for at least one year.

What are the benefits of an OCI Scheme / OCI Card ?
1/ A registered Overseas Citizen of India is granted multiple entry, multipurpose, lifelong visa for visiting India, he/she is exempted from registration with Foreign Regional Registration Officer (FRRO) or Foreign Registration Officer (FRO) for any length of stay in India.
2/ An OCI Card holder is entitled to general parity with Non-Resident Indians in respect of all facilities available to them in economic, financial and educational fields except in matters relating to the acquisition of agricultural or plantation properties.
3/ OCI Card Holders have parity with NRIs for inter-country adoption of Indian children, for air fares in domestic sector and for practice as Chartered Accountant in India.
4/ The OCI registration booklets are treated as identification of the cardholders for availing any services rendered by the State Governments.
5/ OCI cardholders have also been allowed to file affidavit to declare their address in India for this purpose.

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

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 for NRIs.

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, it may be wise to look at some other investment options as well. We discuss some of these investment options in detail:

(1) Real Estate
OCI card holders can purchase residential and commercial properties in India. But they are not permitted to purchase agricultural land, including farmland or any kind of plantation property. 
A person who had bought residential/commercial property/agricultural land/ plantation property/farm house in India when he was an Indian citizen, can continue to hold that property without the approval of the Reserve Bank after becoming an OCI card holder.
He/she may transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India and is a citizen of India or to an OCI card holder resident outside India.
OCI card holders can also rent out their properties in India

(2) 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 7% and 8% 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%.

(3) 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.

(4) 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. 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.
These are the AMCs that currently accepts investments from NRIs / OCI Card Holders : L&T, UTI, PPFAS, Sundaram, Canara Robeco . Other mutual fund houses are also slowly joining in.
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.

(5) Insurance
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.

(6) Setting up Business Venture in India
PIOs and OCIs can set up business ventures in India. They are allowed to set up a Limited Liability Company (LLC) or a Limited Liability Partnership (LLP) form of company. 

(7) Availing Loans in India
NRIs can avail loans against securities held in NRO, NRE and FCNR account without any ceiling subject to the usual margin requirements. Loans can be availed for personal use, buying house or business purpose.

(8) National Pension Scheme
RBI has opened National Pension Scheme (NPS) as investment option for NRIs to provide them an access to old-age income security. Minimum annual subscription under NPS is Rs 6,000 while allocation to equities is capped at 50% of investment.


Manoj Arora
Official Website

Revision History
Rev. 2 : 31st Aug 2018
Included definition and updates on OCI/POI Cards, Added more investing options for NRIs.
Rev.1 : 23rd Oct 2013
Original revision

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