NRI investment in securities – FEMA and Income tax in India

Shares and securities form one major avenue for investment by NRIs. In this article, we wish to give a general overview of two major economic laws i.e. FEMA and income tax in India via-a-vis investment in securities.

Broad provisions of FEMA:

  • Fresh issue by the Indian company – Foreign Direct Investment:

An NRI can directly invest in fresh issue of equity shares, compulsorily convertible debentures, compulsorily convertible preference shares and share warrants of an unlisted Indian company subject to entry routes (i.e. automatic or approval route), sectoral caps, pricing guidelines etc. and other FEMA regulations. In case, the investee company is a listed company, there are certain SEBI Regulations also required to be followed.

  • Purchase and sale on stock exchange:
    • NRIs are also permitted to purchase and sell listed equity shares, share warrants, fully and compulsorily convertible debentures, fully and compulsorily convertible preference shares on recognised stock exchange in India.
    • Monies can be paid from NRE(PIS) account or NRO account. PIS stands for Portfolio Investment Scheme.
    • Where payment is made from NRO account, the sale proceeds should be credited to NRO account only. Funds lying in NRO account can be remitted outside India upto a limit of USD 1 million in a financial year.

Broad provision of Income tax Act:

  • Since the securities will be held as investment, gains on sale of securities will be taxable as ‘capital gains’.
  • Capital assets are further classified as – long term capital assets and short term capital assets. Capital gains are also classified accordingly – long term capital gains and short term capital gains.
  • In case of sale of unlisted shares, one also needs to comply with valuation rules under Income tax Act.

Investment chart – Income tax and FEMA implications:

Investment Income tax FEMA – whether permissible

(subject to other FEMA regulations, if any)
  Period of holding

(a)

Income tax on short term capital gains

(b)**

Income tax on long term capital gains

(c)**

Listed shares 12 months *15%

 

10% on capital gains above Rs. 100,000*

 

Yes
Units of equity oriented mutual funds Yes
Units of listed REIT / InVITs 36 months *15% 10% on capital gain above Rs. 100,000* Yes
Any other listed securities (other than units) 12 months Slab rate 20% (with indexation)*

10% (without indexation)*

Depends on the type of security
Units of Unit Trust of India 12 months Slab rate 10% if unlisted (without indexation)* Yes
Unlisted shares 24 months Slab rate 10% (without indexation)* Yes
Units of debt fund (unlisted) 36 months Slab rate 10% (without indexation)* Yes
Units of debt fund (listed) 36 months Slab rate 20% (with indexation)* Yes
Immovable property 24 months Slab rate 20% (with indexation)* Yes
Any other asset 36 months Slab rate 20% (with indexation)* Depends on type of asset
  • The rates in the above chart are subject to applicable surcharge and education cess
  • Chapter VIA deduction – not available
  • Rebate under section 87A – not available to non-residents
  • *Benefit of basic exemption – not available to non-residents
  • **An asset is a long term capital asset if period of holding is more than what is mentioned in column (a) in above table. Else it will be a short term capital asset.

Frequently Asked Questions:

  1. Can NRIs invest in convertible note issued by a start up?

Yes. A convertible note is an instrument issued by a start-up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

  1. Can an NRI become partner in partnership firm in India?

Yes. The disinvestment proceeds, amount contributed to the capital of the firm and any capital appreciation thereon will have to be credited to NRO account only irrespective of the type of account from which the initial contribution was made.

  1. Can an NRI invest in Rights shares / bonus shares issued by an Indian company at a discount?

Yes. Acquisition of rights shares should be subject to pricing guidelines under FEMA.

  1. Can NRI invest on stock exchange using both NRE and NRO account?

Yes. The demat account for both the accounts needs to be different. Also, a separate NRE(PIS) account needs to be maintained, if one wishes to invest on repatriation basis.

  1. What if a person has made investment in shares when he was a resident and subsequently he becomes a non-resident under FEMA?

As per section 6(5) of FEMA, NRI can continue to hold the assets  which he/she had purchased as a resident Indian, even after he/she has become a non-resident Indian. The sale proceeds will have to be credited to NRO account only.

  1. In case a non-resident Indian becomes resident in lndia subsequently, is he/she required to do any compliance on this front?

Yes. He needs to inform his designated authorised bank where he is maintaining NRE(PIS) / NRO account and Demat account about change in his residential status.

  1. Can an NRI invest in domestic mutual funds?

Yes. Under FEMA, there is no prohibition. However, in case of USA residents, only few mutual fund houses accept investments from them.

  1. Can NRIs invest in Government dated securities / treasury bills / PSU Bonds?

Yes

  1. Are there any sectors / activities where foreign investment is prohibited?

Foreign investment is completely in following sectors:

    1. Lottery Business including Government/ private lottery, online lotteries.
    2. Gambling and betting including casinos.
    3. Chit funds (except for investment made by NRIs and OCIs on a non-repatriation basis).
    4. Nidhi company.
    5. Trading in Transferable Development Rights (TDRs).
    6. Real Estate Business or Construction of Farm Houses.
    7. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
    8. Activities/ sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations
    9. Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities

 


Leave a Reply

Your email address will not be published. Required fields are marked *