How and where to invest in India?

Non resident Indians or NRIs are looking more and more towards their home country to invest their money. NRI is defined as anybody who resides outside India for major part of the year because of his employment. Since 1950s, Indian economy has been growing steadily and investors from all over the world have expressed interest in taking advantage of this growth. After the reforms of 1990 with the commencement of the era of liberalization, India has become one of the favorite investment destinations of NRIs.

Why invest in India?

NRIs will find it beneficial to invest in India because of the following:

·         Since liberalization, regulations have been relaxed and scope for investment has increased significantly. Taxation policy now favors NRIs.

·         Indian economy shows steady growth based on real advancement. Unlike tax havens the growth of the country is based on tangible results and investors are likely to earn high returns.

·         The process of investing has become much easier as most transactions are now net based.

·         Many Indian banks provide necessary loans to NRIs like home loans.

·         Sentimental reasons are also active, especially for those who have close relatives living in India.

The procedure

In order to invest in India, the following steps will have to be taken:

·         If you decide to invest in mutual funds, then you will first have to select the fund house through which to invest. If you are living in USA, finding a good fund house may be difficult. This is because, according to US law, if a fund house has more than 15 clients residing in USA, it has to follow American regulations in addition to that of SEBI. Fund houses therefore avoid American residents to avoid this dual regulation. If you are living in any other country, you can choose your fund house easily. If you live in America, your choice will be restricted to only those fund houses which take American clients.

·         The next step is to open a NRE or NRO account through which you can carry out your investments.

·         Open a demat account with a broker of your choice – someone who can advise you regarding investment in India.

·         Keep track of the money. This can be difficult, especially if the portfolio is well diversified. A common practice is to confer power of attorney on a local representative.

·         Finally, keep in mind your tax obligations, both in India and the country where you are currently residing.

In order to complete any of the steps, you must first obtain a PAN from India. As an NRI, this is offered at

Where to invest in India?

Now that you know broadly how to invest in India, you need to find out which market you should put your money in. the choices are as follows:

1.    You can open your own account in Indian banks as permitted by the Reserve Bank of India. Then these accounts can be used to invest in various savings and investment schemes. This option is particularly suitable for those who have blood relatives living in India like elderly parents because joint account holding is also permitted. In addition to saving and deposit schemes, this account can also be used to buy properties in India.

2.    NRIs can invest in various growth and long term investment options including mutual funds, shares, debentures, Government securities, National Savings Certificate and IPOs. However, you need to check the current regulations to know more about limit of investment, type of company etc.

3.    Finally, land and property are the best investment if you are looking for security. NRIs cannot buy agricultural land in India. However, you can buy houses, bungalows, flats and other properties – both private and for business.

Tax rates on Mutual Fund Investment for NRIs.

India is one of the favourite investment destinations for investors all over the globe and especially for NRI’s. India has seen a huge jump in the investments made by NRI’s in India and one such instrument is investments in Mutual funds.

The only thing that restricts lot of NRI’s to invest is the lack of knowledge relating to the taxation rules with respect to NRI investment in Mutual funds. All investors should have the basis knowledge about taxation which will help them in choosing the product they want to invest in more prudently.

Here is an attempt to cover Mutual Fund Taxation for NRIs specifically.

Income from Mutual Fund can be divided into 1. Capital Gains or 2. Dividends. So taxation of Mutual Funds in India can be divided in 2 parts Capital Gain & Dividends.

Taxation on Capital Gains

In order to understand the taxation rules with respect to capital gains it would be wise to understand what capital gains mean. Capital gains can be defined as “the appreciation in value of the investment with respect to the investment originally made is called Capital gains”.

So let’s say an investor invests INR 100,000 in a mutual fund and is able to sell it for INR 150,000 the extra 50,000 that he made after selling his units is termed as capital gains.

If the investors sells the allotted mutual fund units before 365 days of making the investment it is termed as Short Term Capital Gains; and

If the investors sells the allotted mutual fund units after 365 days of making the investment it is termed as Long Term Capital Gains.

The taxes on the capital gains are also dependent on the kind of fund the investment is made in and can be divided in two parts Capital gains in Equity funds and Capital gains in Debt funds.

Capital Gain Tax on Equity Mutual Funds

Any fund that has more than 65% holding in equities will be termed Equity Fund and the rest are termed as debt funds.

Long term capital gains on equity funds is tax free whereas short term capital gains in equity funds attracts 15% TDS in case of NRIs.

Capital Gain Tax on Debt Mutual Funds

A fund that is not an equity fund can be termed as debt fund and in case of NRIs the mutual fund companies deduct a TDS of

30% in case of short term capital gains and

20% in case of long term capital gains.

Taxes on Dividends

In order to understand the taxation rules with respect to dividend it would be wise to understand what dividends mean. Dividends can be defined as “the payment received from the mutual fund companies at regular intervals when an investor chooses the dividend option instead of the growth option”.

As Capital gains taxation on dividends and dividend distribution taxes are based on the type of Mutual Fund the investment is made – Equity or Debt.

Taxes on Dividends from Equity Mutual Funds

Dividends in case of an equity fund are tax free at the hands of the investors and there is no dividend distribution tax for the mutual fund companies for equity funds.

Similarly there is not tax on the dividends received from debt mutual funds but the Mutual fund companies are liable to pay dividend distribution tax to the Income tax department.

Dividend Distribution Tax on Debt Mutual Funds

There are no taxes on dividend distribution in case of equities mutual fund.

Dividend Distribution Tax on Debt Mutual Funds

The dividend distribution taxes are again based on the type of fund the investment is made in.

Dividend Distribution Tax on Liquid/Money Market Schemes

Any fund which invests in money market instruments or in securities that have maturity of less than 90 days is called Liquid/Money Market Schemes.

Mutual fund companies are liable to pay 27.038% tax (25% Tax + 5% Surcharge + 3% Cess) and hence the same is deducted from the dividends.

Dividend Distribution Tax on Debt Funds other than Liquid/Money Market Schemes

Here 13.519% tax (12.5% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

NRI Tax on Indian Mutual Funds

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FII registration process for a company outside India – Foreign Institutional Investor.

One of the major difficulties in the path of economic development of the developing countries is a serious shortage of capital. That is why most developing countries encourage the flow of foreign investment capital into the country. In India, the original regulations restricted the inflow of foreign capital with a view to protecting the domestic economy. However, this idea has largely been modified and foreign capital and investments are now actively encouraged.

Click for a free consultation to FORM A FII IN INDIA

Foreign institutional investor or FII refer to an entity which invests capital in India but is registered in some other country. They bring valuable capital into the country but can leave as fast as they entered. That is why FII are often referred to as hot money.

Terms and procedures regarding the FII

How does a FII function in India?

  • ·         The Securities and Exchange Board of India has the authority to register a financial entity as a FII.
  • ·         The entities which are eligible for the above registration include banks, endowments, foundations, mutual funds, insurance companies, investment trusts, pension funds etc.
  • ·         The FII which seek to register with SEBI may be broad based. This means that it should have at least twenty investors with no individual holding more than 10% shares. However, foreign corporate, foreign individuals or proprietary entities need not be broad based to seek registration.
  • ·         The FII will have to fill up form A provided by SEBI regulations 1995. Several supporting documents have to be supplied with the application. These include certified copy of those clauses in the Article of association which permit the stated activities, the audited financial statements as well as the annual reports. Other documents include declaration of having entered into custodian agreement with domestic custodian and signed declarations at the end of the agreements.
  • ·         The FII has to submit a registration fee of $5000. This registration is granted within seven days of submission of the completed form and will be valid for five years at the end of which period the FII will have to apply for re-registration. The process is same as the original registration.
  • ·         The SEBI grants registration to only well established reputed foreign entities. These should be duly registered with the appropriate foreign regulatory authority. Other factors of consideration include professional fairness and integrity, experience and track record.
  • ·         With the aim of increasing the inflow of foreign capital into the domestic market, the investment limit of the FII has been raised from $6 billion to $15 billion.
  • ·         There are certain prescribed forums where the FII is allowed to invest. These include commercial papers, dated government securities, mutual funds, debentures, shares and warrants of different companies.

Sub accounts and FII

A perusal of the FII remains incomplete without understanding the concept of sub accounts. These are essentially the organizations for which foreign direct investment is made in India.

  • ·         A sub account is the entity on behalf of which the FII makes the investment. It can be corporate, individual or institution but it has to be registered outside India.
  • ·         The sub account has to be registered with the SEBI with the submission of annexure B and the payment of $1000.
  • ·         In order to carry on trading, the FII has to enter into an agreement with a designated bank which has been authorized by RBI to act as the banker to the FII.
  • ·         You should know that NRI are not eligible to get registered as sub accounts and FII.

·         There are several regulations regarding name change, transferring a sub account from one FII to another etc. Careful study is required to set up the entire operation of the FII.