Non-Resident Indians (NRIs) contribute greatly across borders to shape and boost India’s reputation globally. If they primarily earn abroad, their foreign income falls under the tax jurisdiction of their host country. However, the scenario changes when NRIs decide to invest back in their home country.
Investment options in India are plentiful, some even exclusively designed for NRIs. But any returns, be it interest, dividends, or capital gains, from these investments will be subjected to Indian tax regulations. So, investing as an NRI requires following specific rules for safe and profitable investments. Let’s explore these investment opportunities and their tax implications.
NRI investment opportunities
NRIs can invest in Indian stocks directly through Portfolio Investment Schemes (PIS), which are governed by the Reserve Bank of India (RBI). There’s a list of approved stocks with numerous high-quality options. Yet limitations, like no short selling, specific option positions, and a need for delivery-based investments, may affect how NRIs approach investment management.
NRIs can diversify their portfolios further by participating in capital markets through various channels like mutual funds, direct equity, Portfolio Management Services (PMS), and insurance products. They can also explore options like Fixed Deposits (FDs), Recurring Deposits (RDs), and debt funds, which let them enter the debt market. To explore and capitalise on more financial opportunities, it is advisable to leverage the expertise of NRI banking professionals (often accessible through NRI bank accounts). These experts can offer a wealth of information and sophisticated investment management strategies tailored to NRIs’ needs.
Taxation on investments for NRI
An NRI can invest in both equity and debt investments with tax implications determined by the asset class and the holding period.
Equity
Gains from equity investments like stocks and equity mutual funds are taxed at 15% and subject to TDS (in case applicable) if they are held for less than one year. Equity investments held for over a year fall into the long-term category. Here, gains exceeding Rs 1 lakh within a year incur a 10% tax. Dividend income from Indian investments is taxable at a rate of 20% plus applicable surcharges and cess.
Debt
For non-equityinvestmentslike debt funds, debt exchange-traded funds (ETFs), international funds, gold funds,as of April 1, 2023, and specific categories of hybrid fund schemes that invest less than 35% in Indian equities, are included in an individual’s income. These gains are then taxed at the applicable slab rate. The previous long-term capital gains tax benefits and indexation benefits on debt mutual funds no longer apply.
As you can see, tax implications of investments for NRI in India are essential to consider when investment planning.
DTAA method of taxation
NRIs may worry about double taxation if they earn in both their home country and India. Both countries could claim the right to tax that income.
The Double Tax Avoidance Agreement (DTAA) helps here. India has signed DTAA with several countries, like the United Kingdom, the United States, Canada, Australia, Russia, Saudi Arabia, Singapore and New Zealand. These agreements highlight clear rules about where and how taxes will be imposed on their income which helps NRIs avoid double taxation on the same income. This clarity is paramount for NRIs to understand their tax obligations in both countries. These agreements can help them ensure their income is taxed fairly and avoid the hassle of double taxation.
From investment insights to tax realities
While NRIs have various investment opportunities in India, tax consideration is equally important.To manage taxes effectively, it’s crucial to select the right banking partner with suitable NRI banking services. They may provide special rates for FDs, personalised investment management services, 24/7 support, and remittance options. NRIs may also get useful strategies for smart financial planning, like investment approaches, risk management tactics, and tax optimisation methods for long-term growth.