India has one of the world's fastest expanding economies. With more than 20 million investors, India's stock markets are the third largest in the world, after the United States and Japan. As a result, it is considered favourable for investment, particularly by NRIs in Indian firms.
Being an NRI, investing on Indian stock exchanges is a regular sight, and it can be extremely profitable. Ofcourse, because they are based in another country, they must adhere to a more stringent set of rules and regulations.
NRIs can engage in Indian stock markets through the Portfolio Investment Scheme, which is governed by the Foreign Exchange Management Act (FEMA). Let's have a look at how NRIs can invest in Indian stocks.
Who is considered as a NRI?
You must be a Person of Indian Origin (PIO) or an Indian citizen residing overseas to be classified as an NRI.
In a given fiscal year, your stay in India should be longer than 60 days but shorter than 182. Even if you spent 365 days or more in India in the preceding four financial years, you will still be considered an NRI if you meet this criteria.
If you are deputed to a foreign country for more than six months, you can apply for NRI status.
Can NRIs invest in Indian stocks through a stock exchange?
On a repatriation or non-repatriation basis, a Non-Resident Indian (NRI) can invest in the Indian stock market by purchasing shares through the Portfolio Investment Scheme (PIS). In addition, the Reserve Bank of India's (RBI) PIS plan allows NRIs to purchase shares or convertible debentures from the stock exchange using a bank account at a designated branch. The PIS plan is not necessary for NROs (Non-Resident Ordinary), according to the newest guidelines, because they will be recognised as investments by residents.
What is a PIS Account ?
Following the completion of the bank account opening processes, the NRI must open a PIS account. The Portfolio Investment Scheme (PIS) is a clearance letter from the Reserve Bank of India that allows NRIs to invest in Indian stocks and open trading and demat accounts with a broker. The bank where the NRI's bank account is located will handle this PIS letter. After submitting the required paperwork and receiving the PIS letter, the NRI is ready to create a trading cum demat account with a broker. For stock market investing, you can only have one Portfolio Investment Scheme( PIS) Account.
What is a NRE Account?
The NRE account is a repatriable and external account. The funds you put in this account as an NRI will be converted to Indian rupees. This implies you can deposit funds in any currency and withdraw them in India Rupees. Any funds placed in an NRE Account, including principal and interest, are fully reversible. An NRE account can be opened in a variety of ways, including savings, current, or recurring deposits. This account is vulnerable to currency fluctuations.
What is the distinction between an NRE and an NRO account?
Unlike NRE accounts, NRO accounts don't offer free repatriation. NRIs with sources of income in India, such as dividends, pensions, rental income, and so on, should open an NRO Account. The government has made it mandatory to create an NRO account since depositing money generated in India in the NRE allows for tax-free money transfers outside the nation. According to new government legislation, investing in stock markets through the PIS does not require a Non-Resident Ordinary (NRO) Account.This is due to the fact that any investment made through an NRO Account will be considered an investment made by an Indian resident.
What are the steps to be followed before beginning trading as a NRI?
Open an NRE or NRO savings account
Opening an NRE (Non-Resident External Rupee), NRO (Non-Resident Ordinary Rupee), or FCNR (Foreign Currency Non-Residential) savings account in India is a must. Most people prefer to create an NRE savings account over an NRO savings account.
Obtain RBI approval
After you've opened your Indian savings account, you'll need to obtain a permission letter from the Reserve Bank of India (RBI). Before you open your trading and Demat accounts, make sure you complete this step.
Receive a PIS letter
The Portfolio Investment Scheme (PIS) letter must be obtained from the RBI. This is usually handled by the bank that maintains your NRE/NRO/FCNR savings account.
Create a Demat and a Trading account
Finally, as an NRI in India, you must create a Demat account as well as a trading account. This can be done with any brokerage that best matches your needs. You will be required to provide your documentation along with the PIS letter given by your bank when applying for these accounts.
What is a NRI trading account?
NRI trading accounts allow Non-Resident Indians to invest in and trade stocks, IPOs, bonds, and mutual funds listed on the NSE and BSE. NRIs who want to invest in Indian companies listed on the stock exchange must have a trading account. The trading account is used to make online stock market investments and is the hub for all stock market operations involving a bank account, a Demat account, stock exchanges, and the NRI investor.
What is a demat account ?
A demat account is a type of account that keeps electronic records of financial assets which allows the smooth purchase and sale of financial securities. It also holds dematerialized equity shares, debentures, bonds, government securities, ETFs, mutual funds, and other securities. When you purchase or sell shares of a corporation, your demat account is credited or debited in the same way that your bank account is.
Can an NRI open a demat account?
Both residents and non-resident Indians can open a demat account in India to trade in stocks. However, if an NRI wants to open a demat account, they must adhere to FEMA regulations (Foreign Exchange Management Act). Both repatriable and non-repatriable demat accounts are available to NRIs. For a Non-Resident Indian NRI to trade in secondary markets, they must first get Portfolio Investment Scheme (PIS) licences from authorised banks before making investments in India.
Is there a difference between an NRI trading account and a demat account?
An NRI trading account is distinct from an NRI Demat account. The trading account is used to trade stocks on online stock exchanges via stock brokers. To invest in the Indian stock market, you can register a NRI account with a well known stock broker.
On the other hand, an NRI Demat account is used to house stocks purchased via electronic trades. NRIs can open both Demat and Trading accounts with some brokers.
What documents are necessary for an NRI to open a Trading and Demat Account?
You will be asked to present the following set of documents when you open your NRI trading account and Demat account.
- A duplicate of your PAN card
- PIS Letter Copies
- FEMA Declaration Copy
- Form for FATCA Declaration
- A passport-sized photograph
- Utility bills, driver's licence, passports, and other proof of overseas address
- Proof of Indian address (if available)
- Bank account proof
- P.O.Box declaration in your country of residence
- In the event of an Indian passport, a copy of the passport and a copy of the visa are required.
- In the case of a foreign passport, a copy of the passport and a copy of the PIO card are required.
What is the procedure of trading for NRIs?
- First, you must transfer the required amounts to your PIS from your NRE/NRO/FCNR savings account.
- You can then purchase any stock after the bank deposits the money into your NRI trading account. At the end of the trading day, the stockbroker would deliver the bank a contract. Your PIS account would be further debited by the bank.
- If you sell a stock, your brokerage will send a contract note to your bank, which will credit your PIS account with the proceeds from the sale.
How can NRIs trade derivatives?
To trade futures and options, make sure your NRO (Non-Resident External Rupee) account is linked to your trading account. You can trade derivatives with an NRO account because it is non-repatriable. In addition, as an NRI, you'll need a CP (Custodial Participant) code to trade futures and options. Stockbrokers frequently collaborate with a variety of entities to help arrange and assign the CP code.
What role does taxation play in NRI investments?
The tax obligation differential between an Indian resident and an NRI investing or trading in the Indian stock exchange is one of the most important distinctions. The tax is deducted at the source for an NRI investment.
However, many people wonder if NRIs will be subjected to double taxation: being taxed first in India and then in their home country. This is largely dependent on the NRI's home country. The NRI would not have to pay taxes twice if the Indian government has an ADTT (Avoidance of Double Taxation Treaty) with the NRI's resident country.
In what ways can NRIs invest in Indian stocks?
Because the NRI will be based outside of India, they will be able to choose a mandate holder to manage their NRE / NRO accounts in India. The NRI must submit a "Appointment of Mandate Holder" application to the bank, together with the required documentation and the mandate holder's specimen signature. This is the first step in the process.
The NRI can also appoint a power of attorney (POA) in India to carry out the actual execution and redemption of the investments. Before being filed as a mandate for investment, a POA agreement must be signed on stamp paper and notarized.
Because of the widespread adoption of internet trading, brokers are now allowed to provide online trading services to their NRI clients, as long as they follow all of the appropriate compliance and KYC criteria. Most brokers now provide this service to NRIs.
Will a non-resident Indian be entitled to modify the status of his or her holding from non-resident to resident if he or she becomes a resident in India?
Yes. It is the NRI's responsibility to notify the designated authorised dealer branch, through which the investor made the Portfolio Investment Scheme investments, and the DP with whom he or she has created the demat account, of the change of status. After that, a new resident demat account must be formed, securities must be moved from the NRI demat account to the resident account, and the NRI demat account must be closed.
NRIs can use an NRI trading account to trade on the Indian stock exchange, taking advantage of the large disparity in conversion rates. However, because there is a lot of paperwork to fill out, the procedure can be a little laborious. You can start trading as an NRI on the Indian stock exchange in a short period of time if you follow a few easy steps in a timely and structured manner.