Every Indian overseas investor has to meet certain eligibility criteria to invest in Indian stocks. First, be it an Indian or a non-resident Indian (NRI), every investor has to open demat and trading accounts. Opening a demat account for NRIs can be challenging in terms of resources and time spent in the process. Additionally, they need to stick to the guidelines laid down by the Foreign Exchange Management Act (FEMA).
Before opening a demat account, an NRI must understand that they are allowed investments in stocks and bonds of companies listed on stock exchanges in India on either a repatriable or non-repatriable basis. Investment on repatriation basis means the proceeds from the sale of securities and profits from investments can be transferred outside India and NRIs have to open a non-resident external (NRE) savings account with a banking institution approved by the Reserve Bank of India (RBI).
NRIs are allowed to invest in India through the portfolio investment scheme, or PIS—a scheme that enables them to purchase and sell shares of listed Indian companies on recognised stock exchanges by routing such transactions through their NRE or non-resident ordinary (NRO) savings account. Only a few branches of each authorized dealer bank can conduct business under PIS on behalf of NRIs. This PIS-enabled NRE account has to be linked with demat and trading accounts of the NRI investor for stock trading. Under this, account holders have limited investment options such as stocks, bonds, NCDs, etc.
In the case of non-repatriable investments, there are restrictions on transferring money outside India and NRI investors have to open a NRO savings account with an RBI-approved bank. The investment needs to be maintained in a demat account linked to the NRO bank account. NRIs are not required to seek the PIS permission from RBI and can approach the broker directly to start trading and investing. It allows them to invest in stocks, initial public offers (IPOs), bonds, and Esops (Employee stock ownership plans). As for mutual funds, they can simply use their NRE or NRO savings accounts and get their KYC verified to start investing in these.
NRIs will be liable to pay capital gains tax, similar to resident investors. As far as dividend income is concerned, tax is deducted at the rate of 20%, subject to the DTAA (double taxation avoidance agreement), if any. After relevant tax deductions, the corpus is directly credited to the respective NRE or NRO bank account of the investor.
Several documents are required as proof in order to qualify for opening an NRI demat or trading account. These include an account opening form, besides copies of PAN card, passport, OCI (Overseas Citizenship of India)/ PIO (Person of Indian origin), foreign as well as Indian address proof, one cancelled cheque of NRE/NRO savings account and passport size photos. All documents have to be self-attested and attested (verified) by the Indian Embassy /consulate or notarised, court, magistrate, judge or by the local banker.
Every NRI investor pouring money into the Indian stock market is levied with certain trading accounts charges such as trading account opening fee, brokerage charges that vary depending on the broker, platform access fees, call and trade fee, exchange transaction charges and other taxes, including stamp duty fee, goods and services tax, Sebi charges, etc. These charges are usually similar or slightly higher as compared to resident investors.
Brokerage charges vary as some of them charge a flat fee, besides trading fee that can range from ₹100 to ₹200 per trade, while others charge a percentage of 0.5% to 1.25% of the total transaction value.
The maximum total investment by NRIs in an Indian company is limited to 10% of the company’s paid-up capital. An NRI demat or trading account is an intermediary between the bank account and financial investment tools—equity shares, bonds and other assets. While a demat account needs to be opened to hold various types of securities, asset management companies don’t require investors to use a demat account to buy mutual funds.
Mudit Vijayvergiya is a founder of SBNRI, a tech-platform that manages banking, investments, taxation & documentation for NRIs.
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Published: 21 Jun 2023, 11:08 PM IST
