NRIs have a diverse set of needs. While some aim to get higher returns, others may want to build assets for their family. Let us look at some of the investment options that you can recommend to your NRI clients.
Bank fixed deposit
Fixed deposits have been the favourite investment alternative for NRIs. There are three main categories of NRI bank accounts: NRE (non-resident external accounts), NRO (non-resident ordinary accounts) and FCNR (foreign currency non-resident account).
- NRE (non–resident external) fixed deposit account: NRIs can open this account for earning interest on their foreign savings. The currency of investment is rupee. As an added bonus, the interest earned is not taxable in India. Upon maturity, the complete amount can be transferred back to the foreign country. NRIs can avail of a loan against the corpus held in this account.
- NRO (non-resident ordinary accounts) fixed deposit account: Here also the currency of investment is rupee. However, there are a few key differences between NRE and NRO accounts – the interest earned is taxable, there are restrictions on the amount that can be sent back to the foreign country; also your clients may be able to repatriate only the interest earned on NRO FD account not the principal. Due to its many restrictions, this is not an ideal option for your client if he/she wants to transfer the money back to the foreign country. However, NRO accounts come in handy if the client wants to open a joint account with an Indian resident or needs money for transaction in India.
- FCNR (foreign currency non-resident) fixed deposit account: In 2013, to build up India’s foreign currency reserves, RBI launched FCNR accounts. These accounts are held in foreign currency so that the investor does not have to bear currency risk. Both the interest and the principal can be transferred back to the foreign country. There is no tax levied by India on the interest earned in these accounts.
Another popular investment avenue through which your NRI clients can take exposure to Indian equity and debt markets is mutual funds. Investment in mutual funds is to be made in rupees. Returns earned on the investment are taxable.
Post FATCA regulations residents of USA and Canada can only invest with a few fund houses as most fund houses do not allow such investments due to stringent reporting norms. However, your clients living in any other country can invest in schemes of any fund house of their choice.
Direct equity & debt market investment
Under the PIS (portfolio investment scheme) of RBI, NRI investors can purchase or sell equity and debt securities on a recognised stock exchange. NRIs need prior approval from RBI before transacting in the securities market. An individual can only register for one PIS account. For repatriable transactions investments need to be made from your client’s NRE savings account and for non-repatriable transactions investments need to be made from NRO savings account.
NRIs can take exposure to promising Indian businesses through direct equity investment. However, the investment universe is restricted. RBI publishes a list of companies in which NRIs can invest. Additionally, NRIs cannot take huge exposure in a stock as there are limits on NRI stake in an Indian company.
To invest in equities your client will need to open an NRE or NRO account, a trading account with a SEBI registered broker and a demat account. Generally, it may be easier for your client to invest in equities via the mutual fund route.
Your clients can invest in government securities (G-secs), corporate bonds and certificate of deposits (CD). Clients can earn attractive interest through their debt investments.
While, investment in G-secs and corporate bonds can be made from NRO/NRE/FCNR accounts, investment in CDs needs to be made from NRE/FCNR accounts.
Many of your clients may invest in a property owing to the emotional security such a purchase provides. Generally, NRIs invest in properties to earn rental income. Additionally, capital appreciation can be another source of earning.
Although there is no restriction on the number of real estate purchases, transfer of funds back to foreign country after selling off the property is not that easy. Advisors should ensure that their clients are aware of the restriction on remittances so that they do not purchase a property with capital gains as the main objective.
For your clients who wish to settle in India post retirement, NPS (national pension scheme) is a good avenue to build their retirement kitty. An NPS investor can select the proportion of equity and debt investments in the portfolio and the schemes in which he/she wants to invest. NRIs can invest in both Tier 1 (which come with some withdrawal restrictions) and Tier 2 (which do not have any restrictions on withdrawals) accounts. Investment in NPS is liable for tax deduction.
Let us know which of these products your NRI clients invest in.