If you are a Non-Resident Indian (NRI), Indian stock markets could be a very valuable and rewarding investment opportunity for you. The Indian stock market is the third-largest equity market in terms of investor base after the US and Japan. From foreign investors to retail investors, over 2 crore investors have invested in Indian equities and the number just keeps growing.
So, who is an NRI? NRI is basically a person of Indian origin living abroad. As per FEMA guidelines, any person who stays in India for over 60 days but less than 182 days in a given financial year is considered an NRI.
So, here's how you get started:
The first step is opening an NRE or NRO savings account.
NRE account is a Non-Resident External Rupee account. In this account, the currency deposited from any foreign nation is converted to a rupee depending on the latest currency rate and hence can be withdrawn as a rupee.
Meanwhile, a Non-Resident Ordinary (NRO) Account is non-repatriable. In this kind of account, you cannot move the money to the investor's country of origin. It is mainly suited for investors who already have a source of income in India like rent or pension.
The next thing you need to do is to get a (Portfolio Investment scheme) PIS letter. This is basically a permission letter given by the Reserve Bank of India (RBI) to an NRI to trade in Indian equities. This letter is generally facilitated by the bank which holds your NRI or NRO account.
Once you get the letter of approval, the next step is opening a Demat and a trading account with a broker of your choice. To open these accounts you will be asked for the PIS letter, so it is very important to keep it handy.
A number of other documentation is also required to open these accounts. Starting with a copy of the PAN card and FEMA declaration. The latter is important to verify the source of your funds. You will also need passport size photos, overseas address proof and a canceled cheque of your foreign bank account. You will also need a (Foreign Account Tax Compliance Act) FATCA declaration before your accounts are created.
In the case of an Indian passport, a copy of our passport and visa must be submitted and in the case of a foreign passport, a copy of the passport and PIO card notarized by the embassy officials will be needed.
Once your Demat and trading accounts are open, you can now link your NRE or NRO accounts to them and begin trading. If you have an NRE account, you can't trade in equity but with an NRO account, you can trade in both Equity and derivatives. However, one must note that only one of these accounts can be linked to your trading and Demat accounts.
Now, to transfer funds in your trading account, you'll first need to transfer funds from your NRE/NRO account to your trading account. Once the funds are transferred you can start buying stocks. During the actual transaction, your brokerage house sends a contract to your bank and to the PIS account for authorization. After that, the money from proceeds will be debited or credited to your PIS account.
While trading, most of the buying and selling process is mostly the same for both domestic and NRI investors. However, there are some exemptions for NRIs.
Firstly, there are some stocks and sectors NRIs are barred from investing in and one must check with the brokerage regarding the same. Any violation of this rule will lead to steep penalties for the investor.
Secondly, NRIs can invest in only up to 10 percent of the paid-up capital of an Indian company.
NRIs can also not trade in currency derivatives and commodities.
Fourthly, long-term gains tax and small-term gains tax on equities are the same for an NRI as for a domestic investor, however, in the case of mutual funds, TDS will be deducted from dividends.