Can NRIs Buy Stocks in India and How?

Investing in the Indian stock market offers Non-Resident Indians (NRIs) an opportunity to participate in India’s economic growth. While generally permissible, specific regulations and procedures must be followed. This guide clarifies the pathways and requirements for NRIs investing in Indian equities.

Understanding NRI Investment Eligibility

A Non-Resident Indian (NRI) is defined under the Foreign Exchange Management Act (FEMA) as an Indian citizen or a Person of Indian Origin (PIO) residing outside India. This classification is crucial for determining eligibility to invest in the Indian stock market. The Reserve Bank of India (RBI) grants general permission to NRIs to invest in Indian shares and debentures, subject to certain conditions.

Overseas Citizens of India (OCI) and Persons of Indian Origin (PIOs) are largely treated on par with NRIs for investment purposes, allowing them similar access to Indian financial markets. This broad permission necessitates adherence to specific account structures and transactional guidelines.

Setting Up Necessary Accounts

Before investing in the Indian stock market, NRIs must establish several accounts, including specific bank and investment accounts. Adherence to Know Your Customer (KYC) norms is required.

NRIs must open either a Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) bank account, or both. An NRE account is for foreign earnings and allows full repatriation of principal and interest, with interest being tax-exempt in India. An NRO account manages income earned within India, such as rent or dividends, and funds are generally repatriable up to a certain limit after tax.

A Portfolio Investment Scheme (PIS) account is mandatory for NRIs to trade in listed Indian shares on recognized stock exchanges. This account, linked to an NRE or NRO bank account, routes all stock market transactions.

To hold shares electronically, a Demat account is essential, and a Trading account is required to place buy and sell orders. These accounts must be linked to the NRI’s NRE or NRO bank account. Documents required include:
A valid passport
Permanent Account Number (PAN) card
Proof of overseas address (e.g., utility bills or bank statements)
Proof of NRI status (e.g., valid visa or OCI card)

Photocopies of documents generally need to be self-attested.

Navigating Investment Regulations and Process

With accounts established, NRIs can invest in the Indian stock market, adhering to regulatory constraints. The Portfolio Investment Scheme (PIS) governs fund routing for stock market transactions. Funds for share purchases are channeled from the PIS-linked NRE or NRO bank account, and sale proceeds are credited back to this account.

NRIs are generally permitted only delivery-based trades in the equity segment, meaning they must take delivery of shares purchased and cannot engage in intraday trading. Futures and Options (F&O) trading is allowed only through an NRO account, using non-repatriable rupee funds. NRIs are prohibited from trading in currency and commodity derivatives.

Limitations exist on the types of securities and sectors NRIs can invest in. Restricted activities include lottery businesses, gambling, and certain real estate and agricultural investments. The overall investment by NRIs in a single Indian company is typically capped at 10% of the company’s paid-up capital, extendable to 24% with a special resolution. NRIs must convert resident Demat accounts to NRI Demat accounts if their status changes.

Tax Implications of Stock Investments

Stock investments by NRIs in India are subject to specific tax regulations concerning capital gains and dividends. Capital gains are categorized as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) based on the holding period of the investment. For listed equity shares and equity-oriented mutual funds, a holding period of 12 months or less results in STCG, while a period exceeding 12 months results in LTCG.

STCG on listed equity shares and equity-oriented mutual funds is generally taxed at a rate of 15%. For LTCG on these assets, gains exceeding INR 1 lakh are taxed at 10% without indexation benefits. For other assets, such as debt-oriented mutual funds or unlisted shares, the holding periods and tax rates can vary, with STCG typically taxed at the individual’s income tax slab rates and LTCG at 20% with indexation benefits.

Dividends received by NRIs from Indian companies are taxable in the hands of the shareholder. A flat tax rate of 20% is applicable to dividend income, which is further increased by applicable surcharge and a 4% Health and Education Cess. Tax Deducted at Source (TDS) is applied by the Indian company paying the dividend. Double Taxation Avoidance Agreements (DTAAs) between India and an NRI’s country of residence can offer a lower tax rate on dividend income, often ranging from 10% to 15%, depending on the specific treaty.

Repatriating Investment Proceeds

Repatriation refers to the process of transferring funds earned from investments in India back to the NRI’s country of residence. The ability to repatriate funds depends significantly on the type of account used for the initial investment. Funds from the sale of shares purchased through an NRE account under the PIS are generally fully and freely repatriable, meaning both the principal and gains can be transferred without specific limits.

Conversely, funds held in an NRO account are repatriable subject to certain conditions and limits. NRIs can typically repatriate up to USD 1 million per financial year from their NRO accounts, which includes income from investments, after paying all applicable taxes. Any amount exceeding this limit is generally non-repatriable without special permission.

For repatriation from an NRO account, specific documentation is required to ensure tax compliance. This usually includes Form 15CA, a self-declaration by the remitter, and Form 15CB, a Chartered Accountant’s certificate confirming that taxes have been paid on the funds. An A2 form, which is a FEMA declaration, and supporting documents proving the source of funds are also necessary for the transfer.