2013 was a good year for NRIs when their dollars were earning more rupees with rupee depreciation. But this may not continue for long as dollar is stabilizing at 60 – 62 levels. But what are the “investment options for NRIs” to plan for or their short term and long term financial goals?
Investment Options for NRIs – How to Choose
NRIs have many options to choose from the simple banking products to equities. Let us discuss them in detail.
Banking Products for NRIs
There are 3 types of bank accounts for NRIs. They are
- NRE Account
Non Resident (External) Account or NRE Account is useful for crediting your overseas income. You can repatriate the amount in your NRE account. The amount is held in Indian Rupees. NRE account can be Savings account, Current account or even Term deposit. You can have nomination also. The attraction of NRE account is that, the interest earned in it is totally tax free.
- NRO Account
Once you become an NRI, your existing bank account will be converted to an NRO account (Non Resident – Ordinary). NRO account can be Savings account, Current account or even term Deposit. This account is useful to deposit your income from Indian sources like pension, rent, dividends etc. You can use this account to make payments like EMIs in Indian Rupees. The interest income from NRO account is taxable. You can have nomination in this account.
- FCNR Account
If you don’t want to be affected by the exchange rate risk, you can open Foreign Currency Non Resident Account (FCNR account).You can have this account in any foreign currency, which is freely convertible. Deposits from 1 year to 5 year are available in this account. You can open this FCNR account by transferring money from your NRE account. Amount in the FCNR account can be freely repatriated outside India. You can have nomination facility also. The interest is tax free in India, but you may have to pay tax in the country of your residence.
Property Investment for NRIs
Most NRIs are investing predominantly in Indian properties. Property is a good investment option for the long term. NRIs can invest in residential and commercial property. But NRIs cannot invest in agricultural land, plantation property or farm house. But property investment has certain problems like liquidity. It may take long time to sell a property in case of any need.
Equity investment for NRIs
NRIs can invest in equities through direct equities and Mutual Funds
- Direct Equities
NRIs can invest in shares directly if they open a portfolio investment scheme (PIS) account. NRIs can designate their NRE or NRO account as PIS account. They have to open a demat account and trading account to transact in shares. NRIs cannot participate in day trading but can invest through delivery based transactions. You can participate in IPO also. NRIs can invest in the ADR or GDR of Indian companies listed in foreign stock exchanges.
- Mutual funds
Mutual funds will be the better way for NRIs to invest in equities, because it doesn’t require daily monitoring of the market. There are many offshore funds started by Indian companies abroad. Here NRIs can invest in their currencies. The other option is to invest in Indian mutual fund using NRE or NRO account. But if you are residing in US or Canada, you cannot invest in Indian mutual funds.
Taxation for NRI Investments
You must plan your investments with taxation in mind to generate tax efficient returns. Though there is no difference in tax rate for NRIs and resident Indians, the tax is compulsorily deducted at source (TDS) in case of NRIs. Moreover TDS is at the highest applicable tax rate for each investment category irrespective of the actual tax liability. In most cases, this will result in excess recovery of tax and you have to file your tax return to get the refund of excess tax.