11 best NRI investment options | The complete NRI Investment Guide| North Loop Official Blog
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10 Sep 2020

11 best NRI investment options | The complete NRI Investment Guide

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Introduction-

Many questions come to mind if you are an NRI who wants to invest in India. One of the most common impediments to a successful investment journey is usually the confusion about your residential status, especially if you keep traveling to and from India or have just recently moved abroad.

To clear all your confusions and give you a better picture of your NRI status, benefits as well as different reasons and ways of investing in India, we have created a complete NRI guideline for you.

Table of contents

  • Do You Qualify as an NRI?

  • 7 Reasons for NRIs to Invest in India

  • Which NRI account to use - NRE or NRO?

  • 11 Ways to Make Investments in India

  • MF Investment Procedure and Documents for NRIs

  • Mutual Fund Regulations for NRIs

  • Tax Liabilities for NRIs

  • Double Tax Avoidance Agreement

  • Conclusion
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Credit: North Loop

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7 Reasons for NRIs to invest in India

  • Strong economic growth and demographics – India’s economy is the third-largest in the world based on purchasing-power-parity (PPP), and it ranks 5th as per nominal GDP. The country has shown considerable growth in the IT and business process outsourcing industries which continue to be among the largest sectors of the global economy. It ranks 12th in the world in terms of nominal factory output, and with one of the fastest-growing workforces in the world, India shows potential for further progress. Since it is always a wise decision to invest in a country that offers stability along with growth, India is amongst the countries you can do so. You can get exposure to a wide range of opportunities from consumer goods, energy, agriculture to pharmaceuticals, and infrastructure industries.


  • High-interest rates – The interest rates offered on bank deposits in India varies between 5-7.5% and is higher than those offered by most other countries of the world. This year, NRIs sent home $1.95 billion in their NRI deposit accounts which is the highest in 26 months. If you want to invest your savings lucratively, grow your wealth and receive high returns, it is best to invest in a country like India that offers high returns.
  • Quality of Investment Markets – The Bombay Stock Exchange (BSE) is the second oldest in the world and offers you a low-cost and well-governed environment to invest and grow. The Indian stock market has generated high investment returns in the past years, and according to experts, the rate is likely to increase further. Moreover, most of you must be familiar with the Indian market and its financial ecosystem, making it easy for you to understand various Indian best investment plans and financial products.
  • Demographics – India is one of the youngest countries in the world with a population of around 1.2 billion that possesses a strong work ethic and a high level of education. Further, the working-age population of India is likely to increase in the coming years creating a higher possibility for India to dominate the global economy in future years.
  • Capital Investment – The capital investment gets calculated as the purchases of new plant and equipment by firms as percent of GDP, and India’s latest value of 30.21 percent is an indicator of good long-term economic growth, as compared to the world average of 24.56 percent.
  • Financial Assets – If you plan your investments well, you can help achieve your long-term financial goals and build your financial assets. The Indian market offers a variety of investment options for all types of investors and choosing the right one based on your risk appetite, return expectations, and financial needs can help you to utilize your earnings and grow them effectively.
  • Retirement Plan – Creating a retirement plan well in advance is something many NRI’s are doing these days. Moreover, given the uncertainty in the global economy, it is a wise decision to invest and diversify your portfolio so that you can ensure a secure retirement plan. It can help calculate the rate of return you need on investments, how much risk you should take, and how much income you can safely withdraw to make sure your investment aligns with your plans.

Which NRI account to use? NRE or NRO?

If you are an NRI who wishes to repatriate funds that are generated overseas or maintain income earned in India, you must open an NRE or NRO account depending on your requirements.

What is a Non-Resident Rupee (NRE) Account?

An NRE account is a savings account where you can park your foreign earnings in Indian rupees. That means you can deposit money in your NRE account in any foreign currency, say US dollars, and withdraw it in Indian rupees.

NRE account allows you to repatriate your income earned abroad and also helps you to carry out business, banking, and investments in India. You can even transfer your funds to a foreign account from an NRE account without any hassles or restrictions.

Learn how to open a no-fee NRE account with North Loop.

What is a Non-Resident Ordinary Rupee (NRO) Account?

An NRO account allows you to manage your income earned in India that includes rent, dividend, interest, pension and others. While the interest earned in an NRE account is tax-exempt, that from the NRO account is taxable at 30% according to the Income Tax Act, 1961. You can apply for an NRO account jointly with a resident Indian or even another NRI and also transfer money from your current NRE account.

The interest in an NRO account can get repatriated without any limits although you can remit the principal amount only up to USD 1 million in a financial year.

Note: You can choose between the two accounts based on your requirements – if you have foreign income that you want to repatriate to India and withdraw in Indian currency, you can choose to open an NRE account. However, if your total income includes money earned in India that you want to manage within the country, you can opt for an NRO account.

See how an NRE account differs from an NRO account.

11 Ways to Make Investments in India in 2020

It is imperative to create a personal finance plan that aligns your requirements, return expectations, and financial needs with your risk appetite. A well-devised plan that considers all of the above is necessary to choose an NRI investment option that ensures you remain financially secure. It can also provide you with enough savings to create a safety net in case of emergencies and ample funds for your long-term goals or even retirement.

Here we have created a list of the eight most popular and safe and best investment options available in India for NRIs (non-residents of India)-

1. Bank Fixed Deposits – Investing in bank fixed deposits is one of the safest and most popular investment options. It helps to diversify your portfolio and increase your savings. If you are a risk-averse NRI, this is an ideal option as bank fixed deposits ensure guaranteed returns that are not affected by market fluctuations. You can invest in bank fixed deposits with your NRE or NRO account and earn a high fixed rate of return. Check best NRI FD rates here. There are three types of fixed deposit accounts –

  • NRE Fixed Deposit Account – This is one of the most common options to choose from and allows you to convert your foreign earnings into Indian currency, deposit them as savings and earn interest on them. The interest rates offered by the various banks vary between 5-7.50% with North Loop offering the industry-highest rate of 7.5%. You can open this account jointly with other NRIs as well, and both the principal and interest earned here is tax-free and can get repatriated. Also, NRE FDs get covered under DICGC insurance (Deposit Insurance and Credit Guarantee Corporation).
  • NRO Fixed Deposit Account – If you receive rent, dividend, pension funds or interest payments in India and want to invest that money to grow your savings, you can choose to open the NRO FD account. These accounts can be jointly held with another resident Indian as long as they fulfill the criteria of being a relative (as per Section 6 of the Companies Act, 1956). Unlike NRE FDs, income tax applies to the interest earned on the principal amount in the NRO account. The rates offered here are often the same as domestic deposits, and the interest earned is taxable at a rate of 30%.
  • Foreign Currency Non-Resident (FCNR) Fixed Deposit Account – If you want to protect yourself against currency fluctuations and forex rate risks, FCNR accounts are a good option. You can hold your deposit in various currencies in this account and also repatriate both the principal and interest amount fully without any restrictions. It can be opened jointly with other NRIs as well, and you can also avail overdraft facility on your NRO savings/ current account against your FCNR FD account. Moreover, you can enjoy tax-exemption in India on the entire deposit and interest amount in your FCNR FD account.


2. Direct Equity – If you are an Indian staying overseas and want to take advantage of the growth and economic prospects in your country, you can do so with the help of direct equity investment that is, investing in the Indian stock markets. Direct equity in India can be a great way to diversify your portfolio, and you can do easily under the portfolio investment scheme (PIS) of the Reserve Bank of India (RBI). Under this scheme, you must open an NRE/NRO account with an Indian bank that is authorized by the RBI because your aggregate investment cannot exceed 10% of the paid-up capital in an Indian company and the PIS account helps RBI ensure that this limit is maintained.

Moreover, you need to open a trading account with a registered broker and a Demat account that holds your shares in an electronic form to trade in stocks on the National Stock Exchange (NSE) of India.

If you are an NRI, the main difference between investing in stocks for you and resident Indians is the tax liability as you are liable to TDS (Tax Deducted at Source) while they are not.

3. Real Estate – Real estate in India is an ever-growing industry and holds significant prospects in sectors like hospitality, commercial, housing, manufacturing, and retail. They are also moderately-liquid investments and are quite popular because the risk involved is low while the return received is very high as real estate property prices keep increasing.
There are several ways you can opt for a real estate investment, some of which are – commercial properties, residential properties, and Real Estate Mutual Funds. Investments in commercial spaces such as offices or shops can help you generate considerably high returns but make sure that you research the properties thoroughly and do not make decisions in a hurry.
You can even use the services of a real estate broker who can get all the work done and manage everything seamlessly for you.

An important thing to note is here that if you are an NRI, you are only allowed to invest in residential or commercial real estate properties, and not agricultural land.

TDS on sale of property by NRI – Know your taxes

4. Bonds and Non-Convertible Debentures (NCD) – If you want to diversify your portfolio beyond bank deposits and explore opportunities in the financial market you can do that through bonds and debentures.

A bond is a unit of corporate debt issued by a company and is referred to as a fixed-income instrument as it pays a fixed interest rate to debt-holders. Bond prices are inversely correlated with interest rates and have specific maturity dates for repayment of the principal amount.

There are three main categories of bond that you can invest in –

  • Non-Convertible Debentures (NCD) - An NCD is a fixed deposit used by public companies in India to raise funds without diluting their equity. They give a fixed rate of interest for a specific period, and the debentures offered by these companies cannot get converted into shares. These are a good option if you are looking for secure long term options beyond stock and mutual funds and want to diversify your portfolio with low risk and ample liquidity investments. Also, the NCD market is well regulated, the investment process is exclusively online, and the allotted NCDs get credited to your Demat account.
  • PSU Bonds – Public Sector Undertaking Bonds (PSUs) are medium or long term debt instruments issued by public sector undertakings. PSU’s require funds for their regular working capital or capital expenditure and to meet these requirements they issue PSU bonds. All PSU bonds have a specific maturity date and have a built-in redemption. If you have an average risk appetite and are looking for double-digit returns, this is a good investment option for you. The market for PSU bonds has grown substantially over the past few years, and many high net worth investors are now opting for PSU bonds.
  • Perpetual Bonds – These are bonds that do not have a maturity date and are not redeemable. However, they pay a steady stream of interest and have a perpetual bond cash flow. You can trade these bonds in the open market and to make a profit using these bonds, market conditions and your willingness to sell them play an important role.


5. Government Securities – The Reserve Bank of India has recently allowed non-residents to invest in specified Government of India dated securities without any quantitative limit. This option came into effect from 1st April 2020 and got introduced under a separate channel called ‘Fully Accessible Route’ (FAR).

As an NRI, you get permitted to invest in Government securities under the debt regulations which makes you eligible to invest under the FAR as well. Some types of dated government securities you can opt for long-term investment strategies include –

  • Fixed-rate government bonds – The interest rate on these bonds are fixed.
  • Floating rate government bonds – The interest rate here changes according to market fluctuations.
  • Capital Index Bonds (CPI bonds) – These bonds have coupon payment rates that are adjusted based on the current inflation rates in the Indian market.


6. Certificate of Deposits (CDs) – A Certificate of Deposit is a type of money market instrument issued against the funds deposited by you with a bank in a Demat form for a specific tenure. Even as an NRI, you can subscribe to Indian CDs, however, only on a non-repatriation basis. That means you cannot endorse it to another NRI in the secondary market. CDs get regulated by the Reserve Bank of India and usually used as short-term investments.

7. National Pension Scheme (NPS) – If you want to plan for your retirement and are looking for a long-term investment with equity exposure in your portfolio as well as pension benefits, NPS is a good option for you. In NPS, you get various choices like equity investment, government securities, and other fixed-income instruments. But you can invest in NPS only if you are an Indian citizen. Also, when investing in NPS, the savings get locked in, and you get a lump sum amount only after retiring while the rest gets used for a pension. Therefore, you should opt for NPS after careful consideration based on your long-term retirement plans and financial goals.

There are two types of NPS accounts –

  • Tier 1 Account – All payments and funds are locked in this account until retirement. If you retire before the age of 6o years, you receive 20% of your investment. The rest of it gets invested into an annuity. If it is after the age of 60 years, you are allowed to take 40% of the investment as cash and the rest must get invested.
  • Tier 2 Account – These accounts offer more flexibility concerning deposit and withdrawal of funds but can get opened only if you already are a Tier 1 account holder. Tier 2 accounts allow you to decide your own portfolio structure and that can be achieved by using a diversified investment strategy.


8. ULIP - Unit Linked Insurance Plans (ULIPs) are offered by insurance companies and give you both insurance and investment options under a single integrated plan. If you are looking for secure returns and also have long-term financial plans, you can opt to invest in ULIPs investing plans. When investing in this option, you have to pay a premium either on a monthly or annual basis. A part of it gets used for providing insurance cover, and the rest of the amount gets invested in the fund chosen by you like equity, debt, or hybrid.

Is it worth investing in ULIPs?ULIP or Mutual funds? Know the differences and what to go for.

9. Gold - Investments in gold can be done in various formats such as gold bars, gold ETFs, gold mutual funds, gold deposit schemes, and others. If you are willing to invest in gold and are a conservative investor with a low-risk appetite, you can opt for gold ETFs or Gold Exchange Traded Funds. These instruments function as a mix of both stock and gold investments and get traded on the National Stock Exchange (NSE). Gold ETFs are completely transparent in terms of pricing and can be bought and sold like any other company stock.

10.ETFs - ETFs or Exchange Traded Funds are marketable securities that track stock elements and mirror an underlying index. As an NRI, you can invest in ETFs with minimum portfolio management and a low transaction fee structure to gain exposure to a myriad of Indian equities or debt. ETFs are a cost-effective way for you to quickly invest in the Indian stock market as you get access to a portfolio of Indian stocks that mirror indexes such as the Nifty 50. ETFs can help you diversify across sectors and companies in an easier manner as compared to direct investment in individual Indian companies. Moreover, given how ETFs are highly liquid investments, they have become one of the most popular ways of investment in India for NRIs.

There are three types of mutual funds –
  • Debt Funds – These funds invest only in fixed income instruments and are a reasonable choice if you want to move out of the realm of bank deposits and bonds while still avoiding high risk like in direct equity investments. If you sell your mutual fund investment within three years, it will be taxable as per the Income-tax slab rate applicable to you. However, if you sell it after three years, it will be taxed at 20% with indexation benefits.
  • Equity Funds - These funds invest only primarily in equity instruments with more than 65% of the fund containing stocks (equity). If you invest in equity mutual funds and sell them in less than one year, the fund returns are treated as Short Term Capital Gains (STCG) and get subjected to STCG tax at 15% (plus 4% cess). If you redeem them after one year, they get considered as Long Term Capital Gains (LTCG), and your gains over Rs.1 lakh get taxed at 10% (plus 4% cess), without any indexation benefit.
  • Hybrid Funds - These are funds that divide investments between equity and debt to create a balance. If you want to mitigate risks by creating a balanced portfolio, hybrid mutual funds are a popular investment choice. These funds distribute your investment corpus across different asset classes in a well-planned manner to minimize risk and generate capital appreciation. For long-term income generation, hybrid funds invest in equity stock of companies while for short-term gains, it focuses on debt instruments and government bonds.


Here are 8 major differences of investing in mutual funds & fixed deposits.

Documents Required for NRIs to invest in India

Before we begin talking about the process of mutual fund investing in India, it is necessary to understand the meaning of KYC or “Know Your Client”. KYC is a procedure laid down by the SEBI for its financial institutions, intermediaries, and depositories. To be KYC compliant, whether you are an NRI or a resident individual, you must fulfill all the eligibility criteria laid down by the KYC procedures that allow you to invest in India. The purpose of KYC is to ensure that money laundering or illegal activities do not take place.

Now let us discuss the mutual fund investment procedure for NRIs –

Self or Directly – You can invest in MFs in India directly through your NRE or NRO bank account. If you are living abroad, you can get soft copies of the Mutual Fund KYC forms online through the websites of different mutual fund companies to submit them and proceed with your investment. The bank may even require an in-person verification, which you can comply with by visiting the Indian Embassy in your resident country.

What is an In-Person Verification (IPV)? IPV is the process of physically meeting the official representative of the mutual fund house where you intend to invest with your original documents. If you are an NRI, In-Person Verifications become a mandatory step and can get done through video conferencing. However, in that case, you have to upload your documents on the asset management companies’ website before starting your online video call verification process.

Power of Attorney – If you have appointed a Power of Attorney to invest in India on your behalf, then both of you should be KYC compliant in India. Moreover, both your signatures should be present on the KYC documents that you submit to your respective mutual fund company.

Mutual Fund Regulations for NRI –

1. Documents required to be submitted along with application form –

  • Recent passport-sized photograph
  • Identity Proof like your passport, driving license, or PAN card.
  • Address proof. That can include your residential electricity bills, bank account statement, or even Life Insurance Policy.


All the above documents need to get attested by any of the following - Official of the overseas branch of scheduled commercial banks registered in India, public notary, or Indian Embassy/Consulate General of the respective country where you reside.

2. FIRC (Remittance Certificate) – To confirm the source of funds, you must attach a foreign inward remittance certificate (FIRC) along with your application form. If you have not made the payment via a cheque or a draft and do not have access to FIRC, then you can even submit a letter from your bank to confirm your transaction.

5 things to consider before you remit to India

3. Redemption – Different fund houses follow different procedures for redemption by NRIs but usually when you redeem your fund units, the asset management company credits your investment and gains after deducting applicable taxes, if any, to your account. You must maintain a bank account in India to invest in mutual funds in the country and redeem the units.

If you invest out of inward remittance or from funds held in your NRE/FCNR account, the maturity proceeds get credited to your respective account and can get repatriated by you. However, if you purchase mutual fund units from an NRO account, the maturity proceeds do not qualify for repatriation and only get credited to your NRO account.

Examples of some of the best MF in India to invest for NRIs -

SBI Mutual Fund
ICICI Prudential Mutual Fund
UTI Mutual Fund
HDFC Mutual Fund
Sundaram Mutual Fund
DSP Blackrock Mutual Fund
PPFAS Mutual Fund
L&T Mutual Fund

Tax liabilities for NRI

If you decide to diversify your portfolio and invest in India from abroad, then along with knowledge of the various investment options and their risks or benefits it is also crucial to understand their effect on your tax liability.

To begin with, if you have opened an NRE account in India, you can get assured that you will not have to pay any taxes in India. An NRE account is completely tax-free if you qualify as an NRI. There is no income tax on interest earned on an NRE account and also no application of any wealth or gift tax. As long as you continue to pay taxes on the income you earn abroad, any money transferred to India in your NRO account will not be taxable, whether they are interest earnings or even your NRE fixed deposits.

However, if you open an NRO account to save money earned in India, the tax must be paid according to the income tax slab applicable to you. Moreover, the interest income earned should get reported under the head ‘income from other sources’.

Do I pay taxes on mutual funds?

NRO accounts get taxed at a flat rate of 30% on the total earnings accrued in India which includes both the principal and interest amount, including an additional cess of 3% to the overall tax liability. If your bank has deducted TDS (Tax Deducted at Source) on your interest income, then that gets reflected in Form 26AS and can be included in your tax return.

To get taxation benefits, you can claim a deduction under Section 80TTA of the Income Tax Act, 1961 against the income earned from the interest in your NRO saving account up to a maximum limit of Rs. 10,000. However, certain tax deductions under Section 80 of the Income Tax Act available to Resident-Indians like medical treatment of disabled dependent, treatment of family members suffering from specified diseases, and are not allowed if you are an NRI.

Everything you need to know about foreign remittance tax.

Double Tax Avoidance Agreement (DTAA)

Double Tax Avoidance Agreement or DTAA is an agreement between countries to prevent the same income getting taxed twice in the country of origin and the country of residence for a non-resident individual. The objective of DTAA is to grant relief to individuals from double tax payments on a particular income and avail credits on the tax paid by them in one country. The purpose of DTAA also includes tax avoidance and prevention of discrimination between taxpayers. It also attracts foreign investments by providing relief from dual taxation and at the same time promotes the exchange of goods and services between countries.

How can you benefit from DTAA?

India has signed a comprehensive DTAA with several countries like USA, UAE, UK, Singapore, and others. With the help of this treaty, you can eliminate double taxation on the interest income earned on your NRO savings bank account by claiming credit for foreign taxes paid while filing your return of income in India. As per DTAA, a particular income may either be tax exempted in any one country or taxed at a lower rate in your home country.

Conclusion

India is a fast-growing country, and to invest here can be rewarding in many ways. If you have funds lying idle in your saving accounts, you can choose a suitable investment option in India based on your long-term financial goals, return expectations, and risk appetite to grow your wealth. It is not only a smart investment opportunity but also aids in increasing the country’s foreign exchange pool. Currently, around 25% of the total foreign exchange reserves in India are due to remittances by NRIs like you, and this is a significant factor for the overall growth and economic development of the country.

Some other points to remember when investing in India –

  • Find out if you are a resident of any of the 90 countries that have signed the Common Reporting Standard (CRS). CRS is a global reporting system to combat tax evasion.
  • When applying for investment options like mutual funds, submitting proof of residence in your current country is mandatory. Therefore, you must attach attested proof along with your application.
  • Certain countries have more stringent compliance requirements involving financial transactions. So, read the FATCA (Foreign Account Tax Compliance Act) guidelines and proceed accordingly.


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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.