Investing in the Indian stock market requires non-resident Indians, or NRIs, to open an NRE or NRO bank account that is PIS-compliant and demat and trading accounts. PIS or Portfolio Investment Scheme enables NRIs to invest in securities permitted by SEBI. These securities include equities, government dated securities, mutual funds, etc.
Eligibility & Regulatory Framework (FEMA, RBI, SEBI Rules)
Here are the rules to decide who can invest and what the regulatory bodies have to say about it:
Eligibility Criteria:
You are allowed to invest if you are an NRI or an Overseas Indian Citizen.
Required things:
- PAN card
- Passport
- Overseas visa or residence permit, where applicable
- Proof of your overseas address
- NRE or NRO bank account
- Demat and trading account
Regulatory Framework:
- FEMA 1999: FEMA sets the rules for foreign investments in India. It decides what kind of securities NRIs can invest in and how they can make these investments.
- RBI: They use the FEMA rules to regulate these investments. It also regulates NRE and NRO bank accounts and lists down the restricted sectors for foreign investment.
- SEBI: It regulates the securities market in India. It sets the rules for stock exchanges, brokerages and KYC requirements.
Accounts Required for NRI Investing
The accounts required depend on the type of investment they want to make.
NRE or NRO Bank Account
NRIs are required to open an NRE or NRO bank account to make monetary transactions. Foreign bank accounts and regular resident savings accounts cannot be used for investing in India.
- NRE Account: This account is used for money earned outside India. This allows NRIs to transfer money to their home country.
- NRO Account: This account is for the income generated in India. The income is taxable in India. Money can be sent abroad up to the limit allowed under RBI rules.
Portfolio Investment Scheme (PIS) Letter
A PIS letter is required for NRIs who want to buy and sell listed shares on a delivery basis. It is issued through an authorised bank and links the NRE or NRO account with the trading account.
Mutual fund investing or IPOs do not require a PIS letter.
NRI Demat Account
The demat account is for holding securities in digital form. It is required to be connected to the NRE and NRO bank accounts.
NRI Trading Account
An NRI trading account is used to place buy and sell orders in the Indian stock market through a registered broker. NRIs can trade only on a delivery basis in the cash market. Intraday equity trading and currency or commodity derivative trading are not allowed.
Step-by-Step Process to Start Investing
The steps for NRI investing in India are as follows:
| Step 1 | Check your eligibility | Make sure you qualify as an NRI, PIO, or OCI under FEMA rules. |
| Step 2 | Open an NRE and an NRO account | Open an NRE and NRO bank account with an Indian bank. |
| Step 3 | Obtain a PIS letter if required | Apply for a PIS letter through your bank if you want to invest in listed shares under the PIS route. |
| Step 4 | Open a Demat Account | Submit the necessary information to complete KYC. |
| Step 5 | Complete KYC verification | Transfer money to your bank account. Then connect it with your demat and trading accounts. |
| Step 6 | Add money and start investing | Once your accounts are active, you can invest in the permitted securities like equities and mutual funds. |
Investment Options for NRIs in India
NRIs can invest in the following in India under RBI and SEBI rules:
| Equity Shares | These are shares of companies listed in India. |
| Government Securities | These are bonds offered by the government. |
| Mutual Funds | NRIs can invest in mutual fund schemes that invest across various assets. |
| Exchange Traded Funds | These are funds that allocate capital across various assets like shares, gold, etc. |
| Equity Derivatives | These are contracts whose value depends on the price of shares. |
| PSU Bonds | These are bonds issued by companies owned by the government. They pay interest for a fixed period. |
| Infrastructure Debt Fund Bonds | These bonds help raise money for public and other infrastructure projects. |
| Non-convertible debentures and Preference Shares | These are investment products issued by companies. They usually pay a fixed income but do not give ownership like ordinary shares. |
| Bank Debt Instruments | These are bonds and other debt products issued by banks. They pay interest for a fixed period. |
Taxation Rules for NRI Investors
The table below reflects the latest tax rules applicable to NRI investors for common stock market investments:
| Income Type | Tax Rate | TDS Rate |
| Dividend Income | 20% with additional surcharge and cess. | 20% with additional surcharge and cess. |
| Listed equities and equity funds: | ||
| STCG | 20% | 20% |
| LTCG | 12.5% above ₹1.25 lakh capital gains in a financial year | 12.5% |
| Interest on NRE Account | Tax-free in case of an NRI | No TDS |
| Interest on NRO Account | Taxable at the applicable income tax rate | 30% with additional surcharge and cess |
Common Mistakes NRIs Should Avoid
The following common mistakes should be avoided:
- Using the wrong bank account: Do not use a regular resident savings account for investing. Always use an NRE or NRO account as required under RBI rules.
- Ignoring PIS rules: If your investment requires a Portfolio Investment Scheme (PIS) account, make sure you follow the rules before buying shares. Not following PIS rules can lead to compliance issues.
- Not reporting a change in residential status: If your residential status changes, inform your bank, broker, and mutual fund company. Using the wrong account after your status changes can create legal and tax problems.
- Ignoring tax rules: Do not ignore dividends, capital gains or interest tax rates. Also, check if you can claim benefits under Double Taxation Avoidance Agreement.
- Investing without checking restrictions: Some sectors and securities have special rules for NRIs. Always check whether you are allowed to invest before buying any investment.
Final Thoughts
Investing in the Indian stock market gives NRIs an opportunity to benefit from the growth of Indian companies. For this, it is important to understand the eligibility rules, open the right accounts and follow the tax and investment regulations before getting started.
FAQs
Yes. NRIs, Persons of Indian Origin, and Overseas Citizens of India can invest in the Indian stock market after meeting the eligibility conditions. They must open the required bank, Demat, and trading accounts and follow FEMA, RBI, and SEBI rules.
NRIs need an NRE or NRO bank account, an NRI Demat account, and an NRI trading account. A Portfolio Investment Scheme or PIS account may also be required for certain investments in listed shares.
No. NRIs cannot do intraday equity trading in India. They can buy and sell shares only on a delivery basis through an NRI trading account and must follow the applicable RBI and SEBI rules.
Yes. Dividend income, capital gains, and interest earned on some accounts may be taxable in India. The tax depends on the type of investment. NRIs may also claim benefits under the Double Taxation Avoidance Agreement, where applicable.
Money from an NRE account can be sent abroad without restrictions. Money from an NRO account can also be repatriated, but it is subject to RBI rules and the prescribed annual limit after meeting the required conditions.
Yes. Investing through SEBI-registered brokers and following RBI and FEMA rules makes investing safe. Before investing, understand the risks, choose suitable investments, and keep your documents and accounts updated.
