How Can NRIs Invest in Indian Stock Market?

Non Resident Indians can invest with ease in Indian stocks through various intermediaries in the stock markets. There are guidelines specified for such investments by regulators like the Reserve Bank of India that have to be followed while making such investments. An NRI can invest in Indian stocks through a Portfolio Investment Scheme (PIS) account. A PIS account is required specially when there are foreign funds being used for investment on a repatriable basis. Alternately, NRIs can also use their Indian funds from a NRO account to invest in Indian stocks.

All NRI investments are governed according to the Foreign Exchange Management Act (FEMA).

Who is an NRI?

As per FEMA, an NRI is an Indian resident or a person of Indian origin who resides outside of India for employment, education or business, etc. NRI must also satisfy two other conditions:

• They should stay abroad for more than 183 days or more during the course of the preceding financial year

Or

• They need to be in India for a tenure of less than 60 days during the last year and less than 365 days during four years before the previous year, on an aggregate.

PIS account

PIS account stands for Portfolio Investment Scheme. A PIS Account enables NRIs to buy and sell shares and convertible debentures in Indian stock exchanges. It is used to route all NRI transactions in listed securities via valid banks that have to report back to the RBI on these investments.

Purchases are debited from the account while sales are credited. The RBI needs to provide a PIS permission letter to open a trading and demat Account. The PIS-enabled account can be an NRE or an NRO account. NRE accounts allow repatriation of funds, while NRO accounts do not allow the same. An NRI can choose between the two or choose both depending on their needs.

Trading and Demat accounts 

The RBI uses PIS accounts to track all NRI investments in India. NRIs also need Trading and Demat Accounts to operate in the stock market. These accounts have to be linked to the PIS account.

How does trading work?

Apart from these formalities, the actual trading process for NRIs is the same as Indian residents. However, a few considerations have to be kept in mind. The ceiling for overall investment for NRIs/PIOs is 10 per cent of the paid up capital of the Indian company. And the ceiling for individual investment for NRIs/PIOs is 5 per cent of the paid up capital of Indian company. A list of companies can be found on the RBI’s website.

NRIs are also not permitted to engage in intraday trading. They have to make investments that are delivery-based.

Tax implications on NRI

The Indian capital markets are attractive investment avenues. And so, they find investors from across the globe. Among this investor fraternity, NRIs occupy a significant portion. NRIs may migrate to affluent countries for employment, education, and business, but when it comes to equity investments, their home country remains one of their favourites.

Did you know that there are some tax implications for NRIs on the capital gains earned through equity instruments? And these implications could go on to disturb financial plans too. Hence, if you are an NRI, you ought to be aware of these implications before going deeper into equity investments.

Profits or gains arising from transfer of a capital assets are called "capital gains". Long Term Capital Gains (LTCG) refers to gains arising out of sale/transfer of financial assets held for more than 1 year and securities held for less than 1 year are subject to Short Term Capital Gains (STCG). However, long term capital gain from equity investments up to Rs. 1 lakh is exempted from tax.

In India, NRIs are charged long and short term capital gains tax and it is deducted at source. Below are the TDS rates as on 1st April 2022: 

Documents Required to Open NRI Trading Cum Demat Account?

As an NRI, you can engage in trading activities on the Indian stock market with the help of a trading and demat account. You can easily open one with an authorized bank or financial institution by submitting a few basic documents as listed below:

• Copies of your Indian Passport, Foreign Passport (if any), copies of PIO card, OCI card
• A valid copy of your Visa
• PAN Card
• FEMA (Foreign Exchange Management Act) declaration form
• FATCA (Foreign Account Tax Compliance Act) declaration form
• Overseas Address Proof
• Photograph
• KYC

You must submit these documents along with the account opening form to open a demat cum trading account.

Key Aspects NRI Must Remember While Trading 

As an NRI you can trade in the Indian stock market. However, one of the most important aspects to keep in mind is that since you will be living abroad, you require a party acting on your behalf. Thus, you can rely on the following three options while investing in the Indian equities market:

• Mandate Holder: You can nominate a mandate holder to help carry out your investments in India and manage your NRE and NRO accounts.
• Power of Attorney: You can also invest in stocks in India by appointing a power of attorney who is an Indian resident. Do note that you must complete the procedure and submit the corresponding documents to a bank if you want a power of attorney to act on your behalf.
• Brokerage Firm: You can also participate in trading in stocks in India via brokers if you complete the KYC procedure and fulfil other compliance guidelines.

You should also remember that you will have to pay capital gains tax similar to Indian residents. You will also be subject to TDS as far as dividends are concerned.

If you want to trade in Futures and Options, you will only be able to use a non-repatriable NRO Account and you will need your Custodial Participant code. NRIs are allowed to trade only on the delivery basis in Indian equities. Moreover, NRIs are not allowed to trade in the currency derivatives and commodities.

Conclusion

The Indian government welcomes all kinds of participants to invest in the stock markets. NRIs can invest in the stock market app as long as they follow the guidelines specified by regulators. If you are an NRI and want to open a Trading and Demat account, contact a SEBI-registered broker of your choice and get the formalities started.