When an Indian citizen leaves India for carrying out employment, any business or vocation or for any other purpose indicating an intention to stay outside India for an uncertain duration or is deputed outside India for a temporary period, he/she attains the NRI status and is required to get the existing bank account designated as NRO account – Non-Resident Ordinary Rupee account. An NRI cannot have both normal saving as well as NRI status bank account. At the same time, if the individual regains the resident Indian status, then he/she will have to have a resident saving account opened and close NRE/NRO accounts.

Can NRIs invest in shares, debentures and units of mutual funds in India?

Yes, NRIs are permitted to make portfolio investments i.e. purchase of shares / debentures of Indian Companies through stock exchange and direct investments in shares /debentures of Indian companies as well as units of mutual fund. They are also permitted to invest in Term Deposits and NCDs of Indian companies. These facilities are granted both on repatriation and non-repatriation basis.

Note: NRIs are not permitted to invest in small savings or Public Provident Fund (PPF).

Non-Resident (Ordinary) Rupee Account (NRO Account) vs. Non-Resident (External) Rupee Account (NRE Account)

NRIs can open two types of accounts with any bank in India: NRO and NRE bank accounts. The money lying in the resident saving account can be transferred to NRO account. NRO accounts may be opened / maintained in the form of current, savings, recurring or fixed deposit accounts.

NRE account is an external saving bank account, opened for NRIs and the money lying in the account is fully repatriable. Money can be freely transferred from NRE account to NRO account but reverse is not permitted. NRO accounts pay an interest rate that is similar to domestic bank rates, while NRE accounts earn a maximum of 3.5-4%. NRIs from countries with low interest rates like U.S., Canada, Japan etc. can invest their money in an NRO account and get quite a decent return on it.

Taxation and Repatriation

Interest earned in NRE accounts is Tax Free whereas in NRO accounts it is not.

Short-term capital gains on transfer of units of equity oriented mutual funds or sale of equity shares on a recognized stock exchange attract a tax rate of 15% plus education cess. Long-term capital gains on equity or equity oriented mutual funds are tax exempt. Short-term capital gains on transfer of units of mutual funds other than equity oriented schemes attract a normal tax rate as applicable. Long-term capital gains here would be 20% with indexation or 10% without indexation, whichever is less.

Balances held in the NRE accounts are freely repatriable but in case of NRO accounts, there is a limit of up to $1 million per financial year.