To attract investments from Non-Resident Indians , the Government of India has come up with investment policy favorable to the Non-Resident Indians.

In this section , we proposes to present in brief avenues availables to Non - Resident Indians .

As per the Income Tax Act, 1961, an individual is a Non - Resident when he is " not a Resident " or " Ordinarily Resident " of India.

An individual is said to be " Resident " in any year if he has been in India in that year:

- for a period of 182 days or more; or

- for a period of 60 days or more and has also been in India within the preceding four years for a period of 365 days or more.

- However a period of 60 days is increased to 150 days in case of citizen of India or a person of Indian origin who has been outside India & comes on a visit to India, and to 182 days in case when a citizen of India who leaves India for purpose of employment outside India or as a member of a crew of an Indian ship.

A person is treated as " not ordinarily resident " when any of the following condition is satisfied :

- If he has been resident in India in nine out of 10 preceding years.

- If he has been in India for a period of 730 days or more during the preceding seven years.

Non Resident Indians fall under the following broad categories:

Indian citizens who stay abroad for employment or for carrying on a business or vocation or for any other purpose in circumstances indicating an indefinite period of stay outside India.

Indian citizens working abroad on assignments with foreign Governments/government agencies or International/Regional Agencies like the UNO, IMF, World Bank, etc.

Officials of the Central and State Governments and Public Sector Undertakings deputed abroad on temporary assignments or posted to their offices (including Indian Diplomatic Missions) abroad.

A citizen of any country (other than a citizen of Bangladesh or Pakistan) is deemed to be of Indian origin, if,

he, at any time, held an Indian passport, or

he or either of his parents or any of his grand parents was a citizen of India by virtue of the Constitution of India or Citizenship Act, 1955 ,or

a spouse (not being a citizen of Bangladesh or Pakistan or Sri Lanka) of an Indian citizen or of a person of Indian origin is also deemed to be PIO.

Non - Resident Indian accounts can be opened with the Banks approved by Reserve Bank of India as an authorised dealers i.e. holding an authorised dealer's license issued by the Reserve Bank of India to deal in FOREX. Authorised dealers are authorised to open both rupee or foreign currency accounts .

Certain authorised Co-operative / commercial banks are also providing NRI account opening facility & are permitted to deal only in Rupee accounts.

NRIs can maintain their accounts in rupees as well as in foreign currency.

NRI accounts can be broadly categorised into two:-

1. Rupee accounts

2. Foreign Currency Accounts.

Rupee Accounts

NRI account which holds deposits in ruprres are termed as " Rupee account " .

Funds which do not qualify under the Exchange Control Regulations for remittance outside India are credited to NRO accounts and not in NRE accounts.

Rupee accounts are further classified into 3 categories.

A. Non-Resident (external) Rupee Accounts (NRE accounts)

Non-Resident (external) Rupee Accounts (NRE accounts). is an account opened by  Non-Resident Indian opens an accounts with the funds remitted from abroad in the form of foreign currency notes , travellers cheques etc..

These funds can otherwise be remitted abroad to the account holder.

The foreign currency is converted into rupees at the prevailing market rates ,
for crediting into Non-Resident (external) Rupee Accounts (NRE accounts).

In case , if the amount of foreign currency notes , credited into Non-Resident (external) Rupee Accounts (NRE accounts) , equals or exceeds US $ 2500 and when the amount of total currency i.e. both currency notes and travellers cheques are in excess of US$10000 , the an NRI is required to give a declaration on the Currency Declaration Form (CDF) .

In case of travellers cheques, they should be presented by the accountholder himself and discharged by him in the presence of the concerned Bank.

An NRE accountholder can issue / appoint a Power of Attorney (POA) , for operating the account. The Power of Attorney holder can operate the account for making local payments on behalf of the NRI account holder. But the Power of Attorney holder has no right to make credits into his own account.

Non - Resident Indian can transfer funds from one NRE account to another. Funds can be freely transferred from NRE account to NRO account.

The rate of interest on deposits , in NRE accounts ,is fixed by Reserve Bank of India.

Non-Resident Indian can avail facility of nomination for NRE account .

B. Ordinary Non-Resident Rupee accounts (NRO accounts)

When Non-Resident Indian opens an accounts with the funds remitted from abroad  & which do not qualify for remittance outside India, are required to be credited to NRO accounts.

Money once credited into NRO account cannot be transferred back to NRE account. Amount once transferred to NRO account will become non-repatriable.

Non-Resident Indian can overdraw his Ordinary Non-Resident Rupee accounts  upto the limit drawn by the authorised dealer. An Non-Resident Indian can raise a loan against his NRE fixed deposits for investments in India on non repatriation basis. But this loan amount can be re-paid out of NRO funds.

No funds can be transferred from NRO account to NRE account.

(1) The Amount balance at the credit of NRE accounts can be repatriated abroad freely .

No Amount at the credit of NRO accounts can be remitted abroad .Funds of NRO account is permitted to be utilised only for local payments in rupees.

(2) Non - Resident Indian can held NRO accounts jointly with residents .

However Non - Resident Indian can not held NRE accounts jointly with residents.

(3) The Reseve Bank of india fixes Rate of Interest for NRE accounts .

The Rate of Interest for NRO accounts , are fixed as in the case of domestic deposits.

(4) Non - Resident Indian can credit into NRE accounts , with the local source funds only if , such funds are of repatriable nature.

C. Non-Resident (Non-repatriable) Rupee Deposit accounts (NRNR)

An Non - Resident Indian can opens an NRNR accounts by remitting funds from abroad in any convertible foreign currency with an authorised dealer .

In this account rupee deposits can be kept for periods ranging from 6 months to 3 years. Non - Resident Indian may open such accounts by transferring funds from his existing NRE / FCNR accounts.

Banks are authorised to fix interest rate payable on NRNR deposits , at their own discretion.

The Principal Deposit of NRNR cannot be repatriated outside India by Non - Resident Indian , however interest on earned NRNR , could be repatriated or utilised for opening fresh NRE / FCNR deposits or for crediting funds to a existing NRE accounts.

When Non-Resident Indian wish to maintains his deposits of Foreign Currency in Foreign Currency account , such an account is termed as Foreign Currency Account.

There are 2 types of foreign currency accounts.

A. Foreign Currency (Non-Resident) Account (FCNR account)

B. Resident Foreign Currency Account

Foreign Currency (Non-Resident) Account (FCNR account) :

Non Resident Indians are permitted to open Foreign Currency (Non-Resident) Account (FCNR account) in foreign currency with the authorised dealers in India.

Foreign Currency (Non-Resident) Account (FCNR account) are maintained in US dollar, Japanese Yen, Deutsche Mark, Pound Sterling.

Foreign Currency (Non-Resident) Account (FCNR account) can be held only in the form of Term Deposits i.e. a deposit for a fixed period of time ranging from 6 months to 3 years.

Generally premature withdrawl of the Foreign Currency (Non-Resident) Account (FCNR account) term deposit is subject to heavy penalty. Interest rates in FCNR deposits are fixed by RBI.

An FCNR account can be debited for making local payments. An FCNR account is a freely repatriable account. An FCNR account holder can nominate a person.

1. He should open a Demat Account with a Depository Participant to hold his shares.

2. He needs to register with a broker to execute his buy / sell orders on the stock exchange(s).

Portfolio Investment Scheme means a scheme of the Reserve Bank of India defined in Schedule 3 of Foreign Exchange Management Act 2000 under which :

The " Non Resident Indians (NRIs) " , " Person of Indian Origin (PIOs) " and " Overseas Corporate Bodies (OCBs) " can purchase and sell shares and convertible debentures of Indian Companies on a recognized stock exchange in India by routing all such purchase / sale transactions through their account held with a Designated Bank Branch.

All investments in Indian equity markets under the Portfolio Investment Scheme should be routed through only one dedicated NRE and NRO account opened with any one of the designated branch of authorised banks.

Though , Non Resident Indians can open multiple NRO and NRE account with different banks / branches , the investments under Portfolio Investment Scheme should not be made through more than one NRE or NRO account maintained with the designated bank branch.

We have summerised for the benefits of site visitors Important steps required to be fulfilled for Investment in Portfolio Schemes.

1. An Non-Resident Indian should have a bank account with designated bank branch which is approved by Reserve Bank of India for making investments in capital markets.

Reserve Bank of India , has authorised a few branches of banks to conduct the business under Portfolio Investment Scheme on behalf of Non-Resident Indians / Overseas Corporate Bodies.

Investment in the Scheme must be routed through only one dedicated NRE and NRO account opened with any one of the designated branch of authorised banks.

Non-Resident Indians are allowed to invest under the Portfolio Investment Scheme i.e. buying through the secondary market or through the Direct Subscription route i.e. Investments though IPOs / Private Placements in Indian Companies.All investments in Indian equity markets under the Portfolio Investment Scheme must be routed through only one dedicated NRE and NRO account opened with any one of the designated branch of authorised banks.

Although Non - Resident Indian can have multiple NRO and NRE account with different banks / branches but Investments under Portfolio Investment Scheme can not be made through more than one NRE or NRO account maintained with the designated bank branch.

He should apply for a general approval for investment in Indian Stock Market through his designated bank branch.

An Non Resident Indian investor can make the investments in the following ways:

A) Government Securities / Units

A Non Resident Indians can invest in Govt. Securities / National Saving Certificates / Units of UTI ,  through authorised dealers.

He can can transfer/ sell securities through the authorised dealers.

He is authorised to purchase or sell , Units of Unit Trust of India  directly from UTI .

The securities which are purchased out of funds remitted from abroad or out of NRE / FCNR accounts , the sale proceeds from such securities can be repatriated .

The securities which are purchased out of funds  ,  held in NRO accounts , the sale proceeds cannot be repatriated abroad .The sale proceeds are be credited into the same NRO accounts.

The interest / income earned on above referred investments is fully repatriable.

The Income / Interest accruing during the financial year 1994-95 and onwards on Bank deposits and investments held by Non Resident Indians with Non-repatriation benefits will be eligible for repatriation under the following conditions :

 

Income / Interest accruing during the financial year 1994-95 and onwards on Bank deposits and investments held by NRIs with Non-repatriation benefits will be eligible for repatriation under the following conditions :-  (A) Upto US $ 1000 or its equivalent in full and 1/3 of the balance income earned during the financial year 1994-95. (B) Upto US $ 1000 or its equivalent in full a two-third of the balance income earned during the financial year 1995-96. (C) The entire income earned during the financial year 1996-97 and onwards. The investment / principal amount of deposits made / held on non-repatriation basis, will however be not allowed to be repatriated abroad.  For seeking repatriation in case of Government Securities and Units of UTI, NRI has to designate a branch of an authorized dealer through whom the remittance of income / interest is to be made. Secondly he has to make an application in "Form RCI" to Reserve Bank through the designated branch giving details of income earned during the previous financial years along with a Chartered Accountant's Certificate authorizing remittance of net amount (i.e. Total amount less payments of Taxes) or for crediting his NRE / FCNR accounts.

The Non Resident Indians can directly invest into proprietory / partnership concerns / debentures of the Indian companies.

He can also authorised to invest in portfolio investments i.e. Purchase of shares / debentures of Indian Companies through Stock Exchange(s) in India.

The Portfolio investments can be both on repatriation as well as non-repatriation basis.

I) Investment with  non-repatriation benefits :

a) As per general permission granted by Reserve Bank of India , the Non Resident Indians and individuals of Indian Nationality / origin , can invest by the way of capital contribution in any proprietary or partnership concern on non-repatriation basis.

As per the Guidelines prescribed by Reserve Bank of India , the Non Resident Indians are not permitted to make such an investment in an investee concern which is engaged in agricultural / plantation activity or real estate business . But Non Resident Indian can invest into real - estate development .

The Overseas Corporate Bodies can not avail this investment opportunity.

b) The General Permission is given to Non Resident Indians to make investments on non-repatriable basis in companies in the form of Shares / Convertible debentures by the way of subscribing to new / rights / bonus issues provided that the investee company is not engaged in the business of carrying an agricultural plantation activity and in real estate business (real estate department is excluded).

c) The Non Resident Indians can invest into domestic public / private sector mutual funds or money market mutual funds floated by commercial Banks and by public / private sector financial institution.

The OCBs are permitted to invest into Mutual Funds.

d) The Non Resident Indians can further investment into non-convertible debentures of Indian Companies after  seeking the necessary permission from  Reserve Bank of India in form ISD.

e) The NRIs is permitted to purchase existing shares / debentures of Indian Companies by private arrangement on non-repatriable basis.

However an approval from RBI in "Form FNC7" is necessary along with undertaking in form  "NRU"  for investment on non-repatriation basis.

The Non Resident Indian has to fulfill following formalities for availing benefits of non-repatriable investments.

1) The certificate from Chartered Accountant certifing the payment of Taxes on Income / interests earned on such non-repatriable investments will be repatriable fully from the year 1996-97.

2) The Declaration with Reseve Bank of India has to be made by Firms / Companies in Form DIN , detailing particulars of investments made, within 90 days from the date of investments.

Note :- If the resident Indian holding securities in Indian Companies later on acquires a status of Non-Resident Indian, then the person need not specially secure a permission from RBI for holding such securities.

The Reserve Bank of India has permitted Indian Companies to enter the overseas address of the shareholders in their books .

However , such company must obtaine an undertaking from the shareholders that they will not seek repatriation of any income earned as sale proceeds of the security.

II) Direct Investments (with repatriation benefits)

The Non Resident Indians can make direct investments in the Indian Companies with repatriation benefits by investing in new issues of Shares / Convertible Debentures through the following schemes.

- 24% Schemes

- 40% Schemes

- 100% Schemes

A ) 24% Schemes

As per 24% scheme , the NRIs are allowed to invest to the extent of 24% in the issues of shares and debentures of the companies engaged or proposing to engage in any activity relating to finance, hire purchase, leasing, trading, or other services etc. (except agriculture / plantation activities) .

B ) 40% Schemes

As per 40% scheme, the NRIs are allowed to invest to the extent of 40% in the shares and debentures of the companies involved or planning to get involved in the following activities:

- Industrial & Manufacturing units.

- Hotels with 3,4 or 5 star centres.

- Hospitals & Diagnostic.

- Shopping Companies.

- Development of Computer Software.

- Oil exploration services.

C ) 100% Schemes

As per 100% scheme, NRIs are allowed to invest fully in high priority industries.

Formalities to be fulfilled for getting the benefits of non-repatriable investments

1. The remittance of interest / dividend to NRI investor is freely allowed under schemes 24% and schemes 40% whereas under 100% schemes .

However , restriction on remittance is imposed in case of consumer goods industries where the outflow on account of dividend is required to be balanced by export earnings of the company either in the years of declaration of dividend or in the years prior to the declaration of dividend.

This requirement is enforced for a period of seven years from the commencement of commercial production.

2.  The Permission of Reserve Bank of India is not required for sale / transfer of government securities / units of UTI . The sale Proceeds of the securities can be repatriated abroad if the original investment was made from funds remitted from abroad or from the funds lying in NRE / FCNR accounts.

For rest of the cases the funds will be transferred to NRO accounts.

3. The Non Resident Indian is not required permission from Reserve Bank of India ,  for Transfer of Shares / Debentures of Indian Companies to another NRI .

However the NRI receiving the Share Certificate ( transferee ) is required to fill up form "FNC 7" seeking permission from RBI to purchase such shares.

4. As per general permission of Reserve Bank of India , Non Resident indian can  transfer or sell the shares / debentures / bonds held on non-repatriation basis to the Indian Citizens or a PIO or a company incorporated in India.

The sale proceeds of it are credited to NRO accounts.

5. The Non resident Indian is required to obtain permission from Reseve Bank of India in form TS4 , for Sale and Transfer of Shares / Debentures / Bonds held  with repatriation benefits to the Resident of India .

No special approval of Reserve Bank of India is required if such a sale or transfer is affected under Portfolio Investment Scheme.

6. Non resident Indian is required permission of Reserve Bank of India under form TS1 to execute a sale or a transfer deal to the residents by private arrangement route .

The income earned from the sale proceeds / transfer of securities is taxable under the head "Income from Capital Gains" under the Income Tax Act 1961.

Taxation Norms for NRI are prescribed at "First proviso of Sec. 48" , under the head "Income from Capital Gains" of the Income Tax Act, 1961.

Income earned by a Non Resident Indian in India is taxable. However , the NRI has can exercise option of not to file income tax return if : -

NRI's total income consists only of investment income or income by the way of long term capital gain or both and
TDS has been deducted from such income.

We have summerised herein below computation of Capital gains in case of transfer / sale of securities by NRIs -

The profit or gain arising on the sale or transfer of securities held by the NRIs can be either on repatriable or non - repatriable basis which is chargeable to Income- tax .

Income Tax Act has laid down concession for NRIs under Section (115 F) . However , NRI's are required to satisfy certain condition before having eligible for these concession , which are as below :

The securities of the Indian Company which is held  by the NRI should be acquired through the funds remitted from abroad. The word securities includes debentures also.

The asset may be short term or long term in nature.

Capital gains to the NRIs on the sale / transfer of securities will be calculated in the same foreign currency in which the shares were initially acquired for , eg. if the NRI has purchased the securities in dollar currency then the capital gain related to these securities will be computed in US dollars. The Capital Gain thus calculated in the foreign currency should be re-converted into Indian Currency.

No indexation benefit is available to NRI .If the funds generated by selling securities are re-invested into securities of another company , the capital gain arising on each of these re-investments will be chargeable to tax.