Can NRIs Trade in the Indian Stock Market?

Non-Resident Indians (NRIs) can participate in the Indian stock market, though their investments are governed by specific regulatory frameworks. These frameworks are established by the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Foreign Exchange Management Act (FEMA). These regulations ensure that foreign currency transactions and investments remain compliant with Indian laws. Understanding these rules is important for NRIs looking to invest in India’s dynamic financial landscape.

Eligibility and Account Requirements for NRI Trading

An individual qualifies as a Non-Resident Indian (NRI) under the Foreign Exchange Management Act (FEMA) if they are an Indian citizen or a Person of Indian Origin (PIO) residing outside India. This status applies if a person lives abroad for employment, business, or any other purpose indicating an intention to stay outside India for an uncertain period, or if they have spent more than 182 days outside India during the preceding financial year. Persons of Indian Origin include citizens of any country (excluding Pakistan and Bangladesh) who held an Indian passport, or whose parents or grandparents were Indian citizens, or who are spouses of such individuals.

To engage in Indian stock market trading, NRIs must set up specific bank accounts. The Non-Resident External (NRE) account allows for the deposit of foreign earnings into India, with both the principal and interest being fully and freely repatriable. In contrast, the Non-Resident Ordinary (NRO) account is for managing income generated within India, such as rent or dividends, and funds in this account are generally not fully repatriable.

For direct equity investments in the Indian secondary market, NRIs need a Portfolio Investment Scheme (PIS) account. This PIS account links with either an NRE or NRO bank account to facilitate stock market transactions. A PIS account is required for trading listed shares, but not for investing in Initial Public Offerings (IPOs) or mutual funds.

NRIs also need to open a demat account to hold securities in electronic form and a trading account to execute buy and sell orders. Common documents include a valid passport, visa, proof of NRI status (such as an Overseas Citizen of India (OCI) or PIO card), Permanent Account Number (PAN) card, and proof of address.

Permissible Investment Options and Regulations

NRIs are permitted to invest in a variety of securities on Indian stock exchanges. These include equity shares of Indian companies, mutual funds (both equity and debt-oriented), and Exchange Traded Funds (ETFs). NRIs can also participate in Initial Public Offerings (IPOs).

Investment in derivatives, specifically Futures & Options (F&O), is allowed for NRIs, but with certain conditions. Such transactions must be undertaken through an NRO account and are on a non-repatriable basis. NRIs are restricted to delivery-based trades in the equity segment, meaning they cannot engage in intraday trading. They are also not permitted to trade in currency or commodity derivatives.

Specific regulations apply to NRI investments. An individual NRI is allowed to invest up to 5% of the paid-up capital of an Indian company. The collective investment by all NRIs in a single company is capped at 10% of its paid-up capital, though this limit can be increased to 24% if the company’s general body passes a special resolution. Certain sectors may also have specific restrictions on foreign investment, and investments in properties like agricultural land, plantation property, or farmhouses are not allowed for NRIs.

Taxation of NRI Investments in India

Capital gains from the sale of Indian securities by NRIs are subject to taxation, with rates depending on the asset type and holding period. Short-Term Capital Gains (STCG) on listed equity shares and equity-oriented mutual funds, held for less than 12 months, are taxed at a rate of 20%. For other assets, such as unlisted shares or debt mutual funds, if held for less than 24 months, STCG is taxed at the NRI’s applicable income tax slab rates.

Long-Term Capital Gains (LTCG) on listed equity shares and equity-oriented mutual funds, held for more than 12 months, are taxed at 12.5%, with an annual exemption of ₹1.25 lakh specifically for these gains. For other capital assets held for more than 24 months, LTCG is taxed at 20% with the benefit of indexation, which adjusts the cost of acquisition for inflation.

Dividend income received by NRIs from Indian companies is taxed at a flat rate of 20%. This tax is typically deducted at source (TDS) by the company paying the dividend before the funds are credited to the NRI’s account. TDS applies to capital gains, dividends, and other income streams.

India has Double Taxation Avoidance Agreements (DTAAs) with many countries. These agreements prevent NRIs from paying tax on the same income twice. Under a DTAA, an NRI can benefit from a lower tax rate on certain incomes, such as dividends, than the standard Indian tax rate. NRIs are required to file an income tax return in India if their TDS deducted is higher than their actual tax liability to claim a refund.

Fund Repatriation for NRI Investors

The ability to repatriate funds varies depending on the type of account used for investment. Funds held in an NRE (Non-Resident External) account are fully and freely repatriable. This means both the principal amount invested and any earnings can be transferred abroad without specific limits.

For funds in an NRO (Non-Resident Ordinary) account, repatriation is subject to limitations. There is an annual overall limit for capital funds and proceeds from the sale of movable or immovable assets. NRIs can repatriate up to USD 1 million per financial year (April to March) from their NRO accounts, after all applicable taxes have been paid. This limit includes income from various sources like investments, sale of properties, and rental income.

To repatriate funds from an NRO account, the NRI needs to submit a request to their bank, along with Form 15CA and Form 15CB. Form 15CA is a self-declaration of payment details for income liable to taxes in India, and Form 15CB is a certificate from a Chartered Accountant affirming that all applicable taxes have been cleared. Banks allow repatriation only after confirming tax compliance. Investors should consider potential impacts of currency fluctuations when planning fund repatriation, as changes in exchange rates can affect the repatriated amount.