How Can NRIs Trade in the Indian Stock Markets?
NRIs are a group of people settled outside India having several rights similar to resident Indians. One of them is the right to participate in stock market investment; it is perfectly legal for NRIs to invest in the Indian equity markets. However, there are separate procedures and rules laid out for them.
Many non-residents have enormous wealth and are always looking to invest their surplus funds in the Indian stock markets as it is viewed as a lucrative investment avenue with upside potential. They can put their money in Indian share markets through a portfolio investment scheme (PIS) regulated by the Reserve Bank of India (RBI).
Let’s see the procedures and type of accounts required for NRIs to invest in Indian stock markets.
Who Are NRIs?
Non-resident Indians are those Indian citizens who live abroad or are persons of Indian origin (PIO). An Indian citizen residing in India for more than 60 days but less than 182 days comes under the definition of NRI.
If an individual fulfils this condition, he/she will be regarded as a non-resident even if that individual had stayed in India for 365 days or more in the past four financial years. You can also come under non-resident Indian status if you are deputed to a foreign country for more than 6 months.
How Can NRIs Invest in Stock Markets through PIS?
Non-resident Indian investors will have to open an account with any RBI-approved banks to start their investment journey.
Here are three accounts the facilitate NRI investments in India’s equity markets:
- NRE account
The non-resident external account (NRE) is a repatriable account. Under this, one can deposit money in any currency, which can be converted subsequently into an equivalent amount of Indian Rupees. This means that an individual can put his/her money in US Dollars or British Pounds, and this money will automatically get converted into Indian Rupee subject to the prevailing foreign exchange rate.
One can open an NRE account in different formats. This includes savings, current, and recurring deposits. However, all these accounts are subject to currency fluctuations.
- NRO account
A Non-resident ordinary (NRO) account is a useful way of managing income earned in India, like dividends, pensions, rent, etc. NRIs can either deposit the Indian rupee or any foreign currency in this account. However, they can only withdraw Indian rupee from this account as it does not allow free repatriation into foreign money.
PIS are portfolio investment accounts. They allow NRIs to purchase or sell shares and convertible debentures in India’s share markets. All NRI transactions in listed securities are conducted through accredited banks which route these transactions in PIS accounts.
The RBI provides a PIS permission letter to non-residents that allows them to open trading and Demat accounts in India. The PIS-enabled account can be either NRE or NRO. An NRI can choose between the two depending on their needs.
How Can NRIs Manage Their Accounts?
They can manage their accounts in three ways which will further enhance their experience while investing in the Indian Stock markets markets:
- Appointment of Mandate Holder
They can appoint a mandate holder who will carry out all transactions related to NRE and NRO accounts on their behalf. NRIs can send an application letter to their respective bank branch requesting the appointment of certain individuals as mandate holders.
One needs to submit all relevant proof along with the specimen signature of the mandate holder.
- Power of Attorney
Another way is offering an individual with the power of attorney who will have the right to execute or redeem investments in India on the NRI’s behalf. The respective parties need to prepare and sign this agreement on stamp paper. Moreover, according to Foreign Exchange Management Act (FEMA), it should be notarised before submission.
With the rise of digitisation and online trading activity gaining pace, several brokerage houses are offering online trading and investment facilities to their NRI clients. For this, one must complete the required KYC verification and submit the necessary documents.
Documents Required for Opening NRI Stock Trading Account
Here are the documents required for opening a non-resident trading account:
- Permanent Account Number(PAN) of the applicant.
- Passport, copy of Visa and birth certificate. The place of birth must be India.
- Letter of permission granted by designated banks for PIS.
- Overseas residential proof, which could be a driving licence, bank statement, utility bills, etc.
- Proof of depository account and bank account.
- Passport-size photograph of the NRI Investor.
- Power of attorney (POI) duly signed by the non-resident Indian in favour of designated entities. These entities can use this for obtaining RBI approval, buying or selling of shares or debentures, collection of dividends, redemption of investment, and keeping shares in safe custody on behalf of the NRI.
It is important to note that Non-Resident Indians cannot participate in day trading, margin trading and short selling in the Indian stock markets. They must take control of the physical delivery of shares bought and sold during trading.
Tax Implications of Stock Market Investments for NRIs
All gains from the sale of capital assets are considered capital gains.
There are two types of capital gains as per the holding period of the assets – long-term capital gains (LTCG) and short-term capital gains (STCG).
If the holding period of the concerned asset is 12 months or more, gains shall be taxable under long-term capital gains tax. NRIs are not required to pay any taxes on LTCG. On the other hand, if the holding period of the respective asset is less than 12 months, gains shall be taxable as short term capital gains tax. The rate of STCG is 15% plus cess and surcharges.
Maximum Limit on Investment in Stock Markets for NRIs
NRIs can invest in stock exchanges through NRE or NRO accounts. As NRE is an external account, it is 100% repatriable. At the same time, NRO is a domestic account and is not repatriable beyond USD 1 million for every financial year.
NRIs can also invest in stock exchanges through a portfolio investment scheme. As per this scheme, they can invest in a listed company for up to 5% of the paid-up capital of each share. However, they can purchase a maximum of 10% of the share’s net paid-up capital. This limit can increase to 24% via a special resolution passed by the Indian company.
NRIs can invest in India’s stock markets subject to certain regulations as approved by the RBI. They can open trading and demat accounts with designated brokerage and appoint an individual on their behalf who will oversee all trading activities in India.
Frequently Asked Questions
Q1. What is PIS approval for NRIs?
Ans. After completing formalities related to opening a bank account, NRIs will have to get the portfolio investment scheme (PIS) approval from the Reserve Bank of India.
The RBI will give a permission letter to non-residents allowing them to open a trading and Demat account with brokers. Therefore, the PIS approval letter is a mandatory ask for starting equity investment.
Q2. What is the difference between NRO and NRE accounts?
Ans. A major difference between NRO and NRE accounts is that the former does not allow the facility of free repatriation as it deals with sources of income from India. In comparison, the latter is an external account and allows free repatriation.
Q3. Is it possible for NRIs to invest in Indian equity without PIS?
Ans. Yes, a few instances allow non-residents to participate in Indian stock markets without a Portfolio Investment Scheme. These include investing in initial public offerings and receiving shares as a gift. Shares bought as Indian residents will not come under PIS.
Q4. Can NRIs participate in intraday trading?
Ans. No, as per RBI guidelines, non-resident Indians cannot participate in day trading. The main objective is to secure them from the high volatility of these markets.