What's the best way for NRIs to invest in India?

Mint

15 hours ago

The Indian growth story isn't just a headline – it's a lived experience. The moment a non-resident Indian lands in Mumbai, the Adani Group welcomes them with world-class airport infrastructure. Step outside and there's an Ola cab waiting. At dinner time, Tata salt on the table reminds them yet again of an Indian company's dominance in the growing economy.
The urge for non-residents to invest in India is as real as the country's growth story. If you're an NRI who wants to invest a part of your portfolio in the Indian market, the first step is to decide how to route those investments efficiently.
Should you open a demat account and invest directly in stocks? Which type of account should you use to invest in Indian mutual funds? What about the Gujarat International Finance Tec-City (GIFT City) route?
We lay out the pros and cons of each method.
Demat account
Before applying for a demat account, NRIs first need to first sort out their bank account. When an Indian resident turns NRI, they first need to convert their bank account to an a non-resident ordinary (NRO) account.
They may also open a non-resident external (NRE) account if they wish to manage their foreign earnings in India. The funds in NRE accounts are freely repatriable to foreign countries, while those in NRO accounts have certain restrictions.
Note that existing resident accounts cannot be converted to NRE accounts.
PIS and non-PIS accounts
For NRIs looking to invest in India, the distinction between a portfolio investment scheme (PIS) account and a non-PIS account is crucial. These two account types govern how NRIs can invest in the Indian financial markets, particularly in stocks and other securities.
A PIS account is a special account for NRIs that is designed for trading in the Indian stock market. It's a scheme regulated by the Reserve Bank of India (RBI), primarily for buying and selling shares and convertible debentures on a recognised Indian stock exchange.
A non-PIS account, in contrast, offers a more flexible way for NRIs to invest in India. It is similar to a regular demat account, usually an NRO account, and allows NRIs to invest in a broader range of financial instruments beyond just stocks, such as mutual funds, bonds and derivatives.
A PIS account allows money to be repatriated, albeit with certain restrictions, through an NRE account. Not all banks offer the PIS facility, and RBI approval is needed to open a PIS account, which has a cumbersome documentation process.
Opening a non-PIS account is relatively straightforward and does not require RBI approval. Although a non-PIS account can be opened using NRE as well as NRO funds, sale proceeds credited to a non-PIS account cannot be freely transferred abroad. Up to $1 million a year can be transferred from an NRO to an NRE account, but this requires a letter requesting the transfer, a Foreign Exchange Management Act declaration, working out capital gains & tax deducted at sounce, and proof of source of funds.
'Form 15CB from a chartered accountant and Form 15CA from the income tax website are typically required by AD (authorised dealer) banks to ensure compliance and verify the transfer's legitimacy," said Pankaj Bhuta, founder of P. R. Bhuta & Co. CAs.
PIS accounts also have higher charges and restrictions on investing in stocks where the NRI quota has been breached. There are no such limits for non-PIS accounts.
Investing in Indian mutual funds
NRIs don't need a demat account to invest in mutual funds. They can use an NRE account if the funds are from abroad or an NRO account if they are from India, such as rental income.
Alok Dubey, a mutual fund distributor who mainly caters to NRIs, said know-your-customer (KYC) procedures are the main hassle for NRIs looking to invest in Indian mutual funds. Physical documents need to be sent to the authorities, and it's difficult for NRIs to change details such as a name mismatch in PAN and Aadhar.
For NRIs in the US, experts said, investments in mutual funds and exchange-traded funds fall under its passive foreign investment company (PFIC) rules. This means unrealised gains are taxed as ordinary income and cannot be offset against unrealised losses or carried forward. PFIC does not apply if the investment is in direct stock, bonds, or through a portfolio management service (PMS). And since the US and Canada have restrictions on what can be advertised, only a handful of mutual are available to NRIs there.
Although India levies capital gains tax on mutual funds, some countries have double tax avoidance agreements (DTAAs) with India under which mutual fund capital gains are taxed in the foreign country. But since countries such as the UAE and Singapore don't levy any tax on capital gains, mutual funds gains by NRIs in these are tax-free.
Dubey said some asset management companies (AMCs) don't levy tax deducted at source (TDS) on capital gains in case of an NRE account, while all AMCs deduct TDS in case of an NRO account.
Another option is to invest in mutual funds or ETFs that invest in India but are based outside the country. In such cases, the tax will depend on the respective foreign country's laws.India taxes such mutual funds and ETFs at the fund level and this creates a drag on returns since these taxes cannot be claimed back in foreign countries.
Gift City funds
Funds based in GIFT City offer an interesting proposition to NRI investors. Many AMCs have launched alternative investment funds (AIFs) that invest in the Indian markets, with a minimum ticket size of $150,000.
They come with a host of benefits: there's no need for KYC using Aadhar, the NAV is in dollars, and the funds are fully repatriable. But the biggest advantage is that certain funds attract no tax in India.
GIFT City Category-3 AIFs, which invest or feed into mutual funds in India (other than direct stocks) are granted tax exemption in India.
Coming soon: inbound retail funds
Retail funds with smaller ticket sizes are yet to be launched for NRIs and foreigners. According to sources, some AMCs have started the process of filing for an inbound retail fund via GIFT City and are consulting with the International Financial Services Centres Authority.
Ankur Choudhary, co-founder and CEO of Belong, said inbound retail funds with low ticket sizes would make it easy for NRIs to gain exposure to Indian markets. He said his company was in consultation with IFSCA and would offer such funds once they were approved.
Mint reported earlier that DSP Mutual Fund launched the first outbound retail fund in GIFT City, investing in the overseas market. Outbound funds are meant for residents looking to invest abroad, although NRIs can also invest in them.
Conclusion: there's no perfect way
Each way for NRIs to invest in India has its pros and cons. GIFT Gity funds are an interesting proposition but the large ticket size is a downer. Even once retail funds are launched, there may not be a lot variety in the offerings.
While PIS accounts offer full repatriation, they are cumbersome to open and investments are subject to NRI limits. Opening a non-PIS account is easier, but the funds are not freely repatriable.