Best investment options for NRIs: Bank deposits, stocks and mutual funds, insurance

If you are among such NRIs, you would want to put the money to productive use by investing in high return generating instruments. Despite the ongoing slowdown, India continues to offer numerous investment opportunities for foreign investors, who do not enjoy such high rates in their country of work. The current volatility has created attractive entry points for NRIs across a range of asset classes. If you are looking to invest in India, what are the options you should consider? Before we delve into the choice of investments, let us consider the formalities and procedures that NRIs have to follow to be able to invest in India.

How to begin?

If you wish to invest in India, the first step is to open a savings bank account. There are three basic types of bank accounts for NRIs.

Go for a non-resident external (NRE) rupee account if you are looking to remit overseas earnings to India and hold them in rupees, as also repatriate the proceeds of your investments back to your home country without any restrictions. An NRE account is completely tax-free and no tax is payable on the interest earned on the balance.

But you cannot put income from rent, salary and dividends in the NRE account. For that you need a non-resident ordinary (NRO) account. However, the interest earned on the NRO account is taxed at the marginal rate of 30% plus surcharge and cess. The balance in the account is also subject to wealth tax.

The advantage is that NRO accounts can be jointly opened with a resident Indian. If you do not wish to be exposed to exchange rate risk, you can instead open a foreign currency non resident (FCNR) account with a local bank, where your funds are held in the foreign currency, and not converted to rupees.

In order to open an account, you can either visit the nearest branch of the Indian bank in your home country, if any, or send the completed application form (you can get it online) along with the documents to any of the branches in India (see box).

Tax liability for NRIs

You should be aware of the tax implications on investments in Inida. Although there is no difference in the tax rates for NRIs and resident Indians, the tax is compulsorily deducted at source in case of NRIs. So your share broker, mutual fund and bank will deduct tax before giving you the redemption proceeds.

Worse, the TDS is charged at the highest applicable tax rate for that investment category irrespective of the actual liability (see table). For instance, you may not have any tax liability due to losses incurred on another investment but your broker will still deduct the tax.

You may end up paying a higher rate at the time of sale of your investment and can get the excess tax refunded only after you file your income tax return.

Where to invest?

For many NRIs, property is the primary choice of investment. The bulk of their money is directed towards real estate investments. However, some experts feel this is not the ideal route for all NRIs.

"Often, NRIs lock-up a chunk of their money in property, which remains unused. This leaves no scope for liquid investments. They would be better off making liquid financial investments." Also, real estate investments here involve a lot of hassles and the lack of transparency makes it a tough proposition to find a desirable property. If you are willing to look beyond property, there are a lot of options to park your funds. While considering any of these options, the major deciding factor should be the expected return, and not the exchange rate, asserts.

"NRIs stand to benefit from investments here when the rupee appreciates against the dollar. Since the exchange rate can go either way, you should focus more on taking a long term view and picking high-return instruments,"

High-yield deposits

As a start, NRIs should take advantage of the superior rates of interest offered on deposits in India. Interest rates are at high levels but are expected to come down in the near future.

This is a good opportunity for NRIs to lock in at high interest rates for long tenures. NRE and NRO deposits are currently offering assured rates between 8.5% and 9.5% across a range of tenures. These are also reasonably liquid, so you can withdraw funds at any time (subject to interest rate penalty) in order to invest in better opportunities elsewhere.

One can also invest in FCNR deposits, to eliminate the risk of depreciation in the local currency. The rates on FNCR deposits differ widely depending on the choice of foreign currency. For instance, the rate for a one year FCNR deposit in US dollar would be in the range of 3-4% while the same for a deposit in Australian dollar would be 6-7%.

Direct equities

NRIs can also invest in equities to participate in the growth of Indian companies. financial planner , says, "For those NRIs willing to take on some risk, Indian equities offer potential for stellar returns." But experts point out that stocks require a longer investment horizon. "India remains a great investment destination for foreign equity investors. However, it is advisable to have patience and invest for the long haul to truly gain from the growth of some of the fast growing Indian companies."

You can either buy shares directly, or through an equity mutual fund. To be able to invest directly, NRIs will need to designate their NRE or NRO account as a portfolio investment scheme (PIS) account.

Each transaction in the PIS account is reported to the RBI, as the central bank ensures that the aggregate level of NRI holding in any Indian company does not exceed 10% of its paid-up capital. To be able to transact in Indian equities, NRIs will have to open a demat account and trading account (linked to your PIS account) with a local stock broker registered with Sebi.

Keep in mind that NRIs are only allowed to trade shares in India on a delivery basis. This means that you cannot participate in daytrading or short-selling activities. NRIs can also buy through IPOs of Indian companies, for which they do not have to go through the PIS account. You only need the NRE or NRO account and a demat account to invest in such IPOs. It is the responsibility of the company offering the IPO to inform the RBI how much number of shares they are allotting to NRIs.

Besides these, NRIs can also invest in the American Depository Receipts (ADR) or Global Depository Receipts (GDR) of Indian companies listed in foreign stock exchanges. Prominent Indian companies such as Dr Reddy's, HDFC Bank, Infosys and Tata Motors have ADRs listed on US bourses.

Mutual funds

Investors can also buy mutual funds. Investment advisor said "Mutual funds are the right way for NRIs to play Indian equities as these are diversified by nature and offering a degree of safety. Besides, there are several funds which have a proven track record of performance.

Any decent diversified equity fund has offered 13-14% return over the past 10 years." The first option is to invest in any of the India-focused offshore mutual funds or ETFs operating in your home country. These India-dedicated mutual fund schemes invest in a diversified basket of Indian companies, usually with the help of research inputs from their Indian subsidiaries or other Indian fund houses. Several Indian fund houses also peddle their offshore funds abroad.

These include fund houses such as UTI Mutual Fund, Kotak Mahindra Asset Management Company, Reliance Capital Asset Management and Birla Sun Life Asset Management Company "The advantage of investing through these offshore funds is that you can invest in your own currency. But the downside is many of these funds charge a steep entry load to investors".

Besides these, NRIs can also invest in mutual funds domiciled within India, using your NRE or NRO account. These funds do not charge any entry load, but the investment is in rupees. "NRI investors should be cognizant of the exchange rate risk while investing in rupee terms. The recent sharp slide in the rupee, for instance, has eaten away most of the returns of these funds."

If you are based in US or Canada, you can't invest in certain funds. These countries have placed certain restrictions on solicitation of funds from their residents for investment in the securities market. "There is a rule laid out by the US securities market regulator which says only those fund houses, globally or locally, registered with it can accept a US based person's money. In light of that, AMCs in India have chosen to not accept funds from investors residing in the US."

For these NRIs, India-dedicated offshore funds are the only way to go. However, NRIs from most of other countries can freely invest in Indian mutual funds. investment advisor suggests that NRIs with a slightly higher risk appetite can invest in a mix of large-cap, mid-and-small cap oriented equity funds, while others can distribute money between equity and debt funds.

NRI can invest or buy insurance policy in India

The Indian Insurance Industry has matured over the years and self-awareness for insurance and its important has slowly crept into the minds of the pro-active financial planners across the globe. This in fact has been triggered by the recent fall in premium for online Term Plans. The surge of interest of Non Resident Indians to purchase a Life Insurance Product in India has given a platform to many insurance companies to re-strategize and capitalize on the huge potential of tapping the NRI or the Person of Indian Origin, PIO,

Since Term Plans are pure protection plans, it is a great choice for family security. Most Term Policies offered by most insurance companies in India can be purchased by a Non Resident Indian, NRI or a Person of Indian Origin, PIO simply by filling an additional NRI Questionnaire. They are not separate policies but the same policies that are offered to resident Indians as well.

However, only a few companies have actually streamlined their processes for issuing insurance policies to NRIs. They will help you with documentations and other requirements for medical tests, etc. as well. Some of the companies who have managed to stream line their NRI centre are:

  • Life Insurance Corporation of India (LIC)
  • ICICI Prudential Life Insurance
  • Max Life Insurance
  • Kotak Life Insurance

There is a choice of insurance plans available to an NRI which depends on the country of residence, age and other relevant details.

However, there are some basic things to know if you are an NRI or a PIO and you wish to purchase a Life Insurance Policy in India, like:

  • Location- It is not necessary for the NRI or the PIO to be present within the geographical location of India while purchasing a Life Insurance Policy. However, if the policy involves medical examination, it would have to be done at the policyholder’s expense if he were out of India at the time of the policy inception.
  • No Additional Premiums charged- The premiums are the same for Resident and Non-Resident Indians if the risk involved is the same. The premium would increase only if the associated risk increases and not otherwise.
  • Online Payment- An NRI can make Online Payment by any of the following modes:
    • Remittance in foreign currency
    • NRO bank account
    • NRE/ FCNR bank account

Even the death and maturity benefit can be paid out to any of the mentioned Bank Account details and the same are repatriable to the extent of premium paid in foreign currency in relation to the total premium paid. Thus, if the premiums are paid in Foreign Currency, then the proceeds are fully repatriable but if is paid in INR through the NRO Account, then the same would be considered as an earning in India and would not fully repatriable. However, this does not affect the working of the plan and the status of the proceeds whatsoever.