What NRIs should keep in mind before investing in India
When the talk is of investing in India, first you need to determine your residential status. Do you qualify as an NRI â€“ Non Resident Indian or are you still a Resident Indian?
By Lovaii Navlakhi, MD & Chief Financial Planner, International Money Matters
When the talk is of investing in India, first you need to determine your residential status. Do you qualify as an NRI – Non Resident Indian or are you still a Resident Indian?
It is the Income Tax Act that needs to be referred to for this purpose. According to it, an individual is said to be resident in India, if he satisfies at least one of the following basic conditions
- He is in India during the financial year for a period of 182 days or more
- He is in India for a period of 60 days or more during the year and 365 days or more during 4 years immediately preceding the year in question
The second condition is not applicable to the following:
- An Indian citizen who leaves India during the year for the purpose of taking employment outside India or an Indian citizen leaving India during the year as a member of the crew of an Indian ship.
- An Indian citizen or a person of Indian origin who comes on visit to India during the year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).
If he satisfies any of the above conditions a. and b., then there is further categorisation of his being an Indian resident into:
- Resident and ordinarily resident
- Resident but not ordinarily resident
Resident and ordinarily resident- ROR
If a resident further satisfies the following conditions, he will be a resident and ordinarily resident:
- He has been resident in India in at least 2 out of 10 years [according to basic condition noted above] immediately preceeding the relevant year.
- He has been in India for a period of 730 days or more during 7 years immediately preceeding the relevant year.
If he doesn’t satisfy one or both of these conditions he is treated as a Resident but Not Ordinarily Resident– RBNOR.
If an individual doesn’t satisfy either of the conditionsa. or b. stated in the beginning, then he is a Non-Resident – NR and since such an individual that we are talking of is Indian, he or she is a NRI – Non Resident Indian.
The next thing you need to consider are the banking requirements. You need to understand that to invest in India you must have a NRO, NRE or a FCNR account with a bank here. The Non-Resident (External) Rupee Account (NRE Account) and Non-Resident Ordinary Account (NRO Account) are denominated in rupees and can be opened either as a savings account or a fixed deposit account. A NRO account allows you to make payments on dues in India and receive rental and other income from your property here, if you own any and it also allows credit of funds from your overseas account. However, funds in this account can be repatriated within a limit of USD 1 million in a year on paying the applicable charges to the banker; plus this limit includes any receipts arising out of sale of property and investments. If you intend to repatriate the income arising from such investments, you need to make that investment from a NRE account. Accrued interest income and balances held in NRE accounts are exempt from income-tax and wealth tax, respectively.The FCNR (foreign currency non-resident) account on the other hand is a foreign currency account and can be opened only as a term (fixed) deposit account.
Since the rupee was depreciating against the Dollar rapidly the last year, the Reserve Bank of India (RBI) in an effort to bring more dollars into the country deregulated the interest rates on NRO savings accounts and term deposits, and NRE term deposits in December 2011. Subsequently, the RBI also freed up interest rates on the FCNR accounts. So now these accounts are an attractive option for investment, where you simply leave your funds in these accounts.
Currently, the interest rates are depending on amount and term7% -9% on NRO and NRE Term Deposits and on FCNR deposits, about 3%-4% on USD deposits, 3%-4.5% on Euro deposits and 4%-5% on GBP deposits.
However you need to consider the impact of tax:
Interest on the NRO account is taxable with tax deducted at source of 30%. If you live in a country that has a Double Taxation Avoidance Agreement (DTAA) with India, this TDS rate would be lower, but you would need to submit a tax residency certificate to the bank. The DTAA between India and the US lays down a TDS rate of 15% on interest from deposits in India. These deposits may also be taxed in the country of your residence. The US, for instance, taxes global income of its residents and citizens. However, if tax has been deducted at source in India, the investor will get a credit in the US for taxes paid in India.
Interest on the NRE account and FCNR account are tax free in India. But if you are a resident or citizen of the US, tax in levied on this income which will be a part of your global income.
If you are a resident of the Gulf countries, the NRE and FCNR option would be very lucrative for you. For residents of the US, the choice would depend on the tax slab applicable in the US.
So with this you are set to invest seriously in India.