Investing in the stock market can be rewarding. It offers opportunities for wealth creation and financial growth. For Non-Residential Indians (NRIs) looking to invest in the Indian stock market, there are certain considerations and precautions to keep in mind. In this blog, we will explore some essential tips for NRIs planning to invest in Indian stocks.
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Tips for NRIs Planning to Invest in Indian Stocks
There are a few things NRIs must know before they dive into the share market. Here they go:
Convert Your Existing Bank Account into an NRO Account
Once an individual becomes an NRI, he/she must convert their resident bank account into an NRO account. Additionally, updating the KYC details of their trading account or Demat account is necessary. Converting their INR Demat account into an NRE/NRO Demat account is preferable, and this conversion should take place within 30 days of changing their status from an Indian resident to an NRI. Failure to do so may result in penalties imposed by the Reserve Bank of India (RBI).
Individuals who violate the act may face penalties of up to three times the amount involved or Rs. 2 lakh (if the exact sum is not quantifiable). Additionally, in case of violation, the account holder will be required to pay a penalty of Rs. 5,000 per day from the first day of the violation until the penalty is settled.
Therefore, before investing in the Indian Stocks, NRIs should convert their resident bank account to an NRE/NRO account upon acquiring NRI status.
Open an Account Specifically for Investing
To effectively manage their Portfolio Investment Scheme (PIS) accounts, NRIs must open an NRE or NRO account with a bank authorized by the RBI. PIS accounts enable NRIs to invest in shares and convertible debentures of Indian companies. An NRE account offers the advantage of repatriating funds back to the home country, while the PIS account ensures seamless transactions in compliance with RBI regulations.
Choose Suitable Investment Products
Unlike Indian residents, NRIs have restrictions on the sectors in which they can invest, as outlined by the RBI. They are also prohibited from participating in products such as Currency Derivatives, Commodities, and Intraday Trading. NRIs can invest solely in delivery-based products. These restrictions exist to protect the country’s economy and encourage responsible investments. The list of prohibited sectors is subject to change and is available on the official RBI website.
Assess Financial Ratios Before Investing
Prior to investing, it is essential to analyze various financial ratios, including the Debt to Equity Ratio, Price to Earnings Ratio (P/E), and Return on Capital Employed (ROCE). Additionally, examining the Free Cash Flow, which represents the cash earned from core business operations after investing in fixed assets, is crucial. A higher cash flow indicates better company performance. Evaluating the Quality of Earnings is also important, with a focus on income derived from core operations rather than other sources. Financial statements can help identify any red flags.
Understand Tax Regulations
Taxation on capital gains from shares in India depends on the duration of holding. Shares sold within 12 months are considered Short-Term Capital Gains (STCG) and are taxed at 15%. On the other hand, shares sold after a year qualify as Long-Term Capital Gains (LTCG) and are taxed at 10% if the profit exceeds ₹1 lakh in a financial year. NRIs need to be aware of the tax laws of the country they reside in, as they may have to pay taxes accordingly. India has Double Tax Avoidance Agreements (DTAAs) with many countries, ensuring that income is not taxed twice.
Seek Professional Advice
To maximize capital gains, achieve future goals, and minimize risk factors, NRIs should seek professional advice rather than relying solely on family members or acquaintances for financial guidance.
Regularly Monitor Your Investments
Continuously monitor the performance of your investments and review your portfolio periodically. Stay updated with market trends and news that may impact your investments. Make adjustments to your portfolio as needed, based on your investment goals and market conditions.
NRIs should focus on diversifying their investment portfolio rather than concentrating all investments in one area. A well-diversified portfolio prioritizes quality over quantity, reduces risks, and mitigates potential losses.
What are Stocks?
Stocks are a form of securities that represent an ownership share in companies. Investors purchase stocks with the anticipation that their value will appreciate over time. When an investor buys stocks, they acquire a partial ownership in the corresponding company. NRIs have the opportunity to invest in Indian stocks through the RBI’s Portfolio Investment Scheme (PIS) on a repatriable basis or through Non-PIS on a non-repatriable basis.
How can NRIs Invest in Stocks?
NRIs have multiple avenues to invest in stocks in India. Here are the various methods available:
Portfolio Investment Scheme (PIS)
NRIs can opt for the Portfolio Investment Scheme (PIS) to invest in Indian stocks. This scheme enables NRIs to buy and sell shares and debentures of Indian companies on recognized stock exchanges. To participate in the Indian equity market, NRIs must open a PIS account with a bank. This account needs to be linked to their NRE/NRO account. PIS accounts can be opened at designated branches of major banks in India.
NRIs can utilize a Non-PIS account to trade equity shares, mutual funds, and IPOs of Indian companies on a non-repatriation basis. To proceed, NRIs need to link their NRE/NRO bank account with a Demat account. By transferring funds from the NRE/NRO account to the Demat account, NRIs can initiate buying and selling transactions on Indian stock exchanges.
NRIs can also invest in Indian stocks through mutual funds. Numerous mutual funds in India focus on stock investments, offering NRIs the opportunity to invest a lump sum amount or opt for Systematic Investment Plans (SIPs).
Benefits of NRI Investment in Stocks in India
Investing in stocks in India can offer several benefits to NRIs (Non-Residential Indians). Here are some advantages of NRI investment in stocks in India:
Long-Term Potential for High Returns
Stocks offer the potential for substantial long-term returns, enabling NRI investors to build wealth and achieve their financial objectives.
Portfolio Diversification for Risk Reduction
By investing in a diverse range of stocks, investors can effectively diversify their portfolios, thereby reducing the overall risk of potential losses.
Attractive Returns in the Indian Stock Market
The Indian stock market has demonstrated a track record of delivering attractive returns over extended periods. This makes investing in Indian stocks a potentially rewarding option for NRIs, as compared to traditional investment choices like fixed deposits and bonds.
Regulatory Protection by SEBI
The Indian stock market operates under the regulation of the SEBI, ensuring a certain level of protection for investors. This regulatory framework helps instill trust in NRI investors, knowing that their investments are subject to oversight and investor safeguards.
Before investing in the Indian market, NRIs must consult market experts to make informed decisions. You can get detailed mutual fund advisory from experts at SBNRI. You can download SBNRI App from the Google Play Store or App Store to ask any questions related to investment in stock market/ mutual funds, NRI account opening online and tax filing in India. To ask any questions related to Mutual Funds, click on the button below. Also visit our blog and YouTube channel for more details.