When we talk about NRI investment in India, USA and Canada based NRIs face certain restrictions due to onerous compliance requirements. Are you an NRI in the USA and looking to invest in Indian market? If so, the article will serve as an important guide on how to open a USA NRI trading account in India, investment products or options available to you, and applicable FATCA and SEC NRI trading rules & regulations.
India being one of the fastest-growing countries in the world offers a wealth-rewarding investment opportunity not only for residents but also for Non-Resident Indians (NRIs). FEMA regulations allow NRIs including US-based NRIs to invest in the Indian equity market.
If you are an NRI settled in USA, then the NRI investment process is not straightforward for you due to additional compliance with FATCA and US SEC guidelines.
Accounts required for US NRI trading in India
The account requirements are same for all NRIs to invest in the Indian equities listed on BSE and NSE. As an NRI residing in USA, you need below accounts to purchase and sell shares, F&O, and other investment products in India.
| Meaning and Purpose | Charges | |
| NRI NRE or NRO Bank account | An NRE (Non-Resident External bank account allows NRIs to manage the income earned overseas in USA whereas an NRO account is used to manage the income earned by them in India be it in the form of rent, pension, dividends, etc. NRE account allows US NRIs to invest on a repatriation basis whereas an NRO account is non-repatriable. Read differences between NRE and NRO account |
One-time NRI account opening fee, Bank service charges |
| PIS account | Portfolio Investment Scheme (PIS) is a RBI scheme to enable NRIs to transact in Indian stock exchanges. PIS is mandatory for investment via NRE bank account whereas PIS approval is not mandatory for trading through NRO savings account. RBI has authorized certain banks to provide PIS authorization to NRIs. | One-time PIS account opening fee, PIS annual account maintenance charges |
| NRI Trading Account | It is same as those of residents as a NRI trading account enables US residents to purchase and sell shares listed on BSE and NSE. An NRI can open a 3-in-1 account with banks (Trading + Demat + Bank with PIS account) for hassle-free investment or can open a 2-in-1 account (trading and demat) account and map it with either NRE or NRO account. | One-time NRI trading account opening fee, NRI trading brokerage, Transaction charges, etc. |
| NRI Demat Account | Securities bought will be transferred or credited in NRI demat account in an electronic form. Thus, it provides safety to all NRI investments and as an NRI can have 2 seperate demat account linked with NRE and NRO accounts. | One-time NRI Demat account opening fee, NRI Demat account maintenance charges per annum |
| Custodial Account | Only required to open if you want to trade in equity derivatives. | One-time custodial account opening fee, Clearing charges |
US NRI Trading Guide – Rules and Regulations
Though NRIs are allowed to invest in the Indian equity market, the process is not as easy as other NRIs. It is because, United States government laid down certain provisions, rules, and regulations under FATCA pertaining to NRI investment in India.
1. Foreign Account Tax Compliance Act (FATCA)
As its name suggests, the FATCA act by the US government makes it mandatory for all foreign institutions (financial and non-financial entities) to report all investments held by US residents.
The act has the clear purpose of better tax compliance by eliminating tax evasion by US taxpayers.
The provisions of FATCA law obligate all Indian financial institutions, banks, and mutual fund companies to report the investments held by US account holders in India. Asset management companies that allows US-based NRIs to invest in mutual funds also have to share mutual fund investment details held by NRIs in the USA.
Taxpayers living in the USA must file form 8938, if their total foreign investment exceeds a threshold limit (See below). The form must be attached to the annual income tax return. Here are the FATCA reporting requirements for NRI investment in India held by US taxpayers.
- Unmarried: If you are not yet married, and the total value of foreign assets or investment is above $50,000 on the last day of the taxation year or more than $75,000 at any point of time during the tax year.
- Married filing joint ITR: For married US taxpayers who file joint income tax returns, the aggregate value of foreign financial assets is more than $100,000 on the last day or more than $150,000 at anytime during the tax year.
- Married filing separate ITR: If any married person files a separate income tax return, the total investment threshold is $50,000 on the last day of the tax year or more than $75,000 anytime during the tax year.
If you do not comply with FATCA provisions and do not file form 8938, a penalty of $10,000 for non-compliance will be levied. Moreover, an additional penalty of upto $50,000 can be imposed for continued failure to file after IRS notification, and a 40% penalty for understatement of tax attributable to non-disclosed assets.
2. Restriction on Solicitation under SEC
U.S. Securities and Exchange Commission (SEC) restrain foreign institutions (who are not registered with SEC) to solicit investment from US residents. Thus, any Indian stockbroker cannot contact any US-based investor to ask for investment.
Thus, the SEC law prohibits brokerage houses and asset management companies of India to not directly or indirectly contacting NRIs in USA to invest money in the Indian market. Despite this, if a US resident still parks capital in Indian equities, he/she will not be protected by SEC law.
This means, any NRI in the USA who intends to buy shares of Indian companies can open a trading and demat account at their discretion but such investors' protection is not covered under the SEC. However, the Indian market regulator SEBI protects the interests of all investors be they residents in India or non-residents.
US NRI trading rules and regulations in India
RBI and FEMA are both regulatory bodies that allow non-residents to invest or trade in India under certain regulatory frameworks. The Indian government rules are the same for all NRI investments from any country. Here are the rules & regulations applicable to NRI investment in India:
- NRI needs a PIS-enabled NRE trading account to purchase and sell shares in the secondary market on a repatriation basis.
- In non-repatriable mode, NRI can have either an NRO PIS account or an NRO no-PIS account to invest in India.
- NRI investment in the primary market or IPO and mutual funds can be done through either non-PIS NRI account only (NRE or NRO).
- Equity F&O trading requires a CP code.
- NRIs are not allowed to trade in equity intraday.
- Short selling is not permitted for NRIs.
- NRI cannot trade in commodity derivatives.
- NRIs cannot trade in RBI-banned scrips or certain scrips like Nidhi company, chit funds, stocks under caution list, etc.
- NRI cannot invest more than 5% of the company’s paid-up capital.
- Aggregate NRI investment in a company shall not exceed 10% of total paid-up capital.
US NRI Investment Segments
- Equity
- Equity F&O
- Exchange Traded Funds (ETFs)
- Initial Public Offering (IPO)
- Mutual Funds
- Convertible debentures
- Bonds of Public Sector Undertakings (PSU)
- T-bills and government securities
- National Pension Scheme (NPS)
Taxation on US NRI Equity and Mutual Fund Investment
US-based NRI investments in stocks and mutual funds are taxed the same as NRIs from other countries are taxed. The capital gain on investment in India is classified as short-term and long-term capital gain. Here are the details:
Short-term capital gain: If an NRI sells shares or equity mutual funds within 1 year and debt mutual funds within 3 years, the profits derived are known as short-term capital gain.
Long-term capital gain: Profits or capital gain received on sell of stocks or equity mutual fund schemes after 1 year or debt mutual funds after 3 years is termed as long-term capital gain.
Here is the tax rate applicable on short-term and long-term capital gain on stocks and mutual fund investments held by NRIs.
| Short-term capital gain tax | Long-term capital gain tax | |
| Equity Shares | 15% | 10%) |
| Equity mutual funds | 15% | 10% |
| Debt mutual funds | 30% | 20% |
Like other non-residents, USA-based NRIs also have the tax benefits under DTAA (Double Taxation Avoidance Agreement). According to the rule, if an NRI has taxable income in India as well as USA, then the amount of capital gain on which TDS is deducted will be deducted from total income in both countries. And, the remaining amount will be considered as taxable income on which tax is levied.
