Long and Short-Term NRI Investment
On May 21, 2015, the Union Cabinet gave its approval for amending the definition of Non-Resident Indians (NRIs) in the Foreign Direct Investment (FDI) Policy and to clarify that investments made by NRIs on non-repatriable basis shall be treated at par with domestic investments
CLASSIFICATION AS NRI
Background: From the perspective of exchange control regulations governing FDI, the term NRI refers to a non-resident individual who is a citizen of India or is a person of Indian origin (PIO). The term PIO covers individuals who held an Indian passport in the past or who are children or grandchildren of an individual who was a citizen of India (after the Constitution of India came into force) or who is a spouse of an Indian citizen or a PIO.
In January 2015, the Citizenship Act, 1955 was amended replacing the concept of registration as a PIO cardholder with the concept of registration as an Overseas Citizen of India (OCI) cardholder. The category of individuals entitled to apply for registration as a OCI cardholder are more or less similar compared to those who were entitled to apply for registration as a PIO cardholder, except to the extent that there are some additional conditions in case of spouses.
Proposed change: In line with the amendment to the Citizenship Act, 1955, the definition of NRIs (from the perspective of exchange control regulations governing FDI) is proposed to be modified to cover non-residents who are either Indian citizens or OCI cardholders. Individuals who have registered as a PIO cardholders under the erstwhile Issuance of PIO Card Scheme, 2002 are also deemed to be OCI cardholders.
The proposed change would bring in consistency between exchange control regulations and the Citizenship Act, thereby bridging disconnect currently existing between the two laws. The change in definition is expected to apply to a broad range of transaction by NRIs, particularly, investment in Indian companies, partnerships and proprietary concerns, lending to Indian companies in INR and acquisition of immovable property in India. Also, the amendment may curb the current practice of foreign citizens marrying Indian citizens and becoming PIOs, merely for being able to acquire immovable property in India and thereafter, applying for divorce.
India has the largest population of people living abroad in the world. As per the UN report, 16 million people from India were living outside India in 2015. If you include the person of Indian origin (PIO) this number would rise to 30 Million. Investment options are:
(A) Non-Resident Ordinary (NRO) Account
It is advisable to convert your savings account to NRO account before going overseas. You can visit your bank with Visa and passport and they will convert your existing Savings account to NRO account.
It can be used to deposit Indian earnings like rent, interest, dividends, etc. You can also deposit overseas earnings in NRO account. The account can be opened in the form of Savings, Current or fixed deposit. Remittance from NRE account or remittance received through proper banking channel can be deposited in NRO account. Up to USD 1 Million can be repatriated from NRO account per year. Interest on NRO account is taxable. There is a TDS of 30% from the interest paid.
However, an individual residing outside India and qualifying as a resident of another country can avail the benefit of a lower tax deduction on interest on NRO account under a double tax avoidance agreement. Any individual intending to avail this option can intimate the bank and submit a copy of tax residency certificate from the country where he qualifies as a resident.It should primarily be used for depositing/managing your earnings in India.
(B ) Non-Resident – External (NRE) Account
This account is used to deposit money received from overseas. The account can be opened in the form of Savings, Current or fixed deposit. Interest on NRE deposit is tax free in India. You can fully and freely repatriate your money from NRE Account.
(C) Foreign Currency Non-Resident (FCNR) Account
This account can be opened as term deposits only and is for the period of 1-5 years. You can have this account in any freely convertible currency like Dollar, Pound etc. The interest rates are decided by RBI and are linked to LIBOR rates. Interest income earned from deposits maintained in FCNR account is exempt from tax up to such period the NRI continues to be a non-resident or a resident but not ordinarily resident (RNOR) in India for income-tax purposes.
(D) Mutual Funds
You can invest in mutual funds without any restrictions (except for US & Canada based NRIs*). As a first step, you should update your KYC as an NRI investor. If you are already an investor, you have to change your KYC with NRI status. If you are new to mutual funds, you can submit the following documents at the office of any fund house or registrars like CAMS or Karvy for KYC. They will verify your documents and do the in person Verification (IPV). You can do this during your visit to India or before leaving India. As an NRI, you can invest in mutual funds on non-repatriable basis or on repatriable basis. If it is non-repatriable basis, you can invest from NRO account. Otherwise you have to use NRE account.
AMCs like PPFAS, UTI and a few others now allow US and Canada based NRIs to invest in mutual funds. Tax treatment on mutual fund redemption amount and dividends for NRIs. The taxation of mutual fund for NRIs is similar to resident Indians. But there are TDS for NRIs.
(E) Equity Funds
If you sell equity funds after holding it for 1 year, the gains are treated as long-term capital gain and it is tax-free. But, if you sell it within 1 year, the gains are treated as short term and it is taxed at 15%. For NRIs, there is TDS of 15% in this case.
(F) Non-Equity Funds
If you sell non-equity funds within 3 years of holding, the gains will be treated as short-term capital gains and will be taxed as per your tax slab. But, if you are selling such funds after 3 years, the gains are long term and it will be taxed at 20% after indexation.
In this case, for NRIs, the TDS is at 30% for short term capital gain while it is 20% for long-term capital gain. Dividends are tax free in your hands. But in the case of debt funds, the fund house deducts dividend distribution tax before releasing dividends. If your tax liability is less than these rates, an NRI can file the income tax return and claim the refund.