Investing in India can help NRIs diversify internationally
Investing in India can help NRIs diversify internationally - Equity MFs, direct equity through PIS scheme and NCDs by PSU companies are good options..[…]
Home country bias refers to the tendency for investors to favor investments from their own country over those from other countries or regions, due to comfort and familiarity of companies, brands, business environment, regulations, etc. It is considered as a negative in behavioral finance, as it reduces international diversification in investment portfolios and leads to missed opportunities and higher risk.
Most Non-resident Indians (NRI) though, along with the country that they reside in, also consider India as 'home' and, thus, home country bias actually helps them diversify internationally, as they attempt to include India in their investment portfolio. Their portfolio stands to gain from India's structural growth story, as it is the fastest growing economy of the world . This growth should translate into handsome equity market returns for investors in the years ahead.
NRIs prefer fixed income assets due to higher yields, real estate is preferred largely due to emotional connect it provides.
To gain exposure to these asset classes, there are a plethora of attractive investment vehicles for NRI investors in India:
Mutual funds (MFs) are emerging as the most popular instrument to invest in Indian equity markets. Taxation is the same as for resident Indian, however, for NRIs tax is deducted at source (TDS). It is because of this that debt MFs may not be as lucrative as NRE fixed deposits on post-tax returns basis. It is important to note that some MF companies don't accept investment from NRI's based in USA/ Canada.
Direct Equity investment can be done by NRIs in the stock market through Portfolio Investment scheme (PINS) of the Reserve Bank of India. A demat and brokerage account with a SEBI-registered brokerage firm and a Portfolio Investment Scheme (PIS) bank account needs to be opened. Only one PIS Account per individual is allowed. RBI publishes the list of stocks that are eligible for NRIs to invest.
Investors can also to invest in direct equity through Discretionary Portfolio Management Services (PMS), where an expert fund manager invests and manages a direct stocks portfolio on investor's account, based on the investment strategy of the portfolio.
Bank NRE (Non Resident External) Fixed Deposits These are held in rupee and currently earn interest of around 7 to 8% per annum for one to five year terms. Principal and interest earned is not taxable in India and can be easily repatriated anytime.
Government Securities, and bonds and non-convertible debentures issued by private and public companies. Interest is tax free and repatriable if credited to NRE account.
National Pension Scheme (NPS) NRIs who want to retire in India can register for NPS, if they have a PAN or Aadhar card. NPS follows the EET (Exempt-Exempt-Tax) structure for taxation.
Real estate NRIs can purchase residential and commercial properties. Purchasing agricultural lands, farm house or plantations is not allowed - it can only be owned through inheritance or gift. However, there are FEMA (Foreign Exchange Management Act) restrictions if you want to sell a property and repatriate the proceeds. Hence legal and professional assistance is advisable while undertaking such transactions. Further, structural reforms like RERA (Real Estate Regulation Act) have ensured protection for buyers from malpractices by builders, which is important for NRI investors as they are not physically present in India.
While investing in India is attractive, it is important to take note of some rules and regulations:
TDS (Tax is deducted at source) for some transactions. For instance, interest on NRO bank account, MF gains, and on sale of real estate. In case of real estate, buyer is liable to deduct TDS from the sale proceeds.NRIs should check if their country of residence has a DTAA (Double Taxation Avoidance Agreement) with India, as this will help them avoid double taxation on their income from IndiaNRIs are not allowed to invest in government schemes like PPF, NSC, Post-office Saving Scheme, Senior Citizen Scheme.
WHERE TO INVEST
- Equity MFs, direct equity through PIS scheme and NCDs by PSU companies are good options
- Can buy residential, commercial property
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