India is the best place for NRI investors -by Naresh Gorantla

INDIA is a good place to invest, but a maze. Here are some tips:

       Are you a non-resident Indian looking to pep up your portfolio? India is a good option to consider not just for real estate investments, but also for mutual funds, initial public offers, equity and bonds.

       Top performing mutual funds investing in Indian stocks have come up with 18 percent returns in last one year.

        Plus, there have been one-off opportunities such as the MCX public offer. But can you participate in these options? If so, can you repatriate the returns from such investments?

         There are restrictions on the avenues on which NRIs can deploy money in INDIA. Nonresidents can subscribe to IPOs and also take up shares in public sector undertakings that are being disinvested. Repatriation is allowed provided taxes are paid.

         We spoke to few tax experts and money managers to put together the following do's and don'ts for NRI investors.

BANK DEPOSITS:

       NRIs can open and operate specialized bank account in India classified as NRE, NRO and FCNR accounts. While FCNR (foreign currency non-resident) is a foreign currency account and can be opened only as a term (fixed) deposit account, the NRE/NRO (non-resident external/nonresident ordinary) accounts  are denominated in rupees and can be opened either as a savings or a fixed deposit account.

           However, before approaching a banker, you have to be clear about the purpose for which you are opening the account, as that decides the type.If you want to invest in India, you need to have a bank account denominated in Indian rupees - basically either an NRE or NRO account. Again, if you intend repatriating the income from such investments, you need to make that investment only through an NRE account.

             An NRO account is normally only for making payments on dues in India and receiving rental and other incomes. It allows credit of funds from your overseas account too.However, what you need to note here is that there are several restrictions on repatriation of funds from this account.Money in this account can be repatriated within a limit of $1 million in a year on paying the applicable charges to the banker. An FCNR account, however, saves you from forex rate fluctuations by allowing you to hold the foreign currency without converting it into rupees.

             Now, let's move into the more interesting part - interest income. An NRE/NRO savings account earns an interest of around 4% per annum. Currently this is on a par with the savings accounts rate for resident Indians. On a term deposit of maturity period over 1year but less than 2years, these accounts earn around 9% a year. 2years back, an NRE account earned just 2.5-3% p.a. The current high interest rate is thanks to the RBI deregulating interest on NRE deposits in December 2011.On an FCNR account that is denominated in the US dollar, Kotak Mahindra Bank offers an interest of 2.73% p.a (94 basis points more than 2011 rates) with a maturity period over a year but less than 2years. The interest is based on LIBOR rates for the respective currency.

DEBT INSTRUMENTS:

          NRIs are permitted to invest in corporate deposits, non-convertible debentures, government securities and PSU bonds issued in India, both on repatriable and non-repatriable basis.

            However, in practice, companies or issuers need to specifically enable the 'NRI window' in an offer (with permission from the RBI). Among offers in the last 1year, Housing and Urban Development Corporation kept its bond door open to NRI investors, but not Dredging Corporation. Reading through the application form for each bond will tell you if the offer is open to NRIs.

EQUITY:

         

            Regulations allow NRIs to invest in the primary (initial public offers) and the secondary market.

            However, for investments in equity in the secondary market (as also convertible debentures), a non-resident is required to open a Portfolio Investment Scheme account (also called PINS account) with a bank.

            The RBI monitors all transactions of NRIs in the secondary market through PINS account. Individual Banks report on transactions in this account on the RBI

            The RBI website states that an NRI investor can purchase shares up to 5% of the paid-up capital of a company, however, cannot exceed 10% (this limit can, however, be raised by the companies by passing a special resolution)

            A PINS account is basically an NRE/NRO account. Transfers to/from NRE/NRO accounts, foreign inward remittances, and debit/credit from the stock broker are the only transactions allowed in a PINS account.

            A PINS account is in addition to opening an NRO demat and a trading account with an Indian broker, says B.Gopkumar, Head of Broking, Kotak Securities.

            NRI investors, however, need to know that broker may have internal restrictions on the clients to whom they may offer broking services, based on geography or other considerations. Check before you plan your investments.

REAL ESTATE PROPERTY:

       

            Investment by NRIs in immovable property in India is permitted provided it does not fall under the definition of agricultural land.

            NRIs can acquire any immovable property in India, other than agricultural property or plantation or a farm house under FEMA regulations.

            Now that you can parcel residential real estate through funds designated as real estate funds, can NRIs invest in them? Expert say: "While the RBI had expressed its concerns that investment by NRIs and FIIs could be tantamount to indirect foreign investment in the real estate sector, the Finance Ministry held that there was no specific restriction imposed upon NRIs o invest in real estate funds."

SORRY, NO ENTRY:

  

           There are certain investment classes that are completely shut for NRIs. These include investments in Public Provident Fund and post-office saving schemes. From the RBI's document on 'Facilities available to NRI for investment in India, it becomes clear that even on a non-repatriation basis investments are not allowed in bearer securities.

            The document, however, states that investments in National savings Certificates are permitted on a non-repatriation basis through an NRO account where the source of income is from India.

            A resident investor who subsequently becomes an NRI can, however, hold the above instruments till maturity.

CAN  YOU TAKE IT HOME?

  

            Apart from knowing what investment avenues are open to you as non-resident Indians, you may also want to know which of these carry repatriation benefits.

            According to the RBI, all investments in the equity market, including that in mutual funds, non-convertible debentures of a company incorporated in India and PSU bonds, are allowed on repatriation as well as non-repatriation basis for NRIs.

            The two things that however determine repatriation benefit on any investment are the source of funds for that investment and the discharge of tax liability. Tax experts explain: "Foreign capital appreciation if any, after the payment of applicable taxes and provided the investment was on a repatriable basis."

            So, it goes without saying that funds for the investments that you intend to repatriate should be drawn from only your NRE account.

            Investments made from an NRO account are non-repatriable.

            For the income that arises from investments in India, non-residents have to pay taxes in India, wherever applicable.