How NRIs Can Invest in the Indian Stock Market: NRI Demat Account, PIS and Rules

Many Indians living abroad want to invest in Indian shares. They can, but the rules are a little different from those for resident Indians. This article explains how an NRI can invest in the Indian stock market, which bank and NRI demat account you need, what the rules allow and do not allow, and how tax and repatriation work.

In short: An NRI (non-resident Indian) can invest in Indian shares through an NRE or NRO bank account, a linked NRI demat account and an NRI trading account. If you want to take the money back abroad freely, you use the repatriable route through an NRE account, usually with PIS (Portfolio Investment Scheme) permission from a designated bank. NRIs can buy and sell shares on a delivery basis, but intraday trading in shares is not allowed. Tax is deducted at source on capital gains.

Under the Foreign Exchange Management Act (FEMA), a non-resident Indian is an Indian citizen who lives outside India, usually for work, business or other long stays. Overseas Citizens of India (OCIs) can also invest through similar routes.

Once you become an NRI, you should not keep investing through your old resident accounts. You need to change their status or open NRI accounts, and inform your bank and broker.

Your stock market money flows through an Indian bank account. NRIs can open two main types.

PIS stands for Portfolio Investment Scheme. It is an RBI framework under which a designated bank tracks NRI investments in listed Indian companies. The bank reports these to the RBI, so that ownership limits set for NRIs are not crossed.

• For repatriable investment through an NRE account, you usually need a PIS account with a designated bank.

• For non-repatriable investment through an NRO account, many banks and brokers offer a non-PIS route.

Your bank will tell you which route fits your case.

Next, you open an NRI demat account and an NRI trading account with a SEBI-registered broker and depository participant. These are linked to your NRE or NRO bank account.

• An NRE-linked NRI demat account holds shares bought on a repatriable basis.

• An NRO-linked NRI demat account holds shares bought on a non-repatriable basis.

You may need a separate NRI demat account for each route.

If you already held shares in a resident demat account before moving abroad, you do not need to sell them. You can ask your depository participant to change the account status, or move the shares into an NRO-linked NRI demat account. Shares bought while you were a resident are generally held on a non-repatriable basis.

When you come back and become a resident again, you need to inform your bank and broker. Your NRI demat account is then converted to a resident account, and the NRE and NRO accounts are changed as per RBI rules. You can learn about demat account in general, or see how an NRI demat account works.

KYC rules apply, and some documents may need to be attested. Each bank and broker has its own exact list.

A few points in simple words:

• Delivery only: Every share you buy must be taken into your NRI demat account and held there. You cannot buy and sell the same share on the same day.

• F&O: Derivatives trading for NRIs needs extra registration through the broker and is allowed only with NRO funds. Check with your broker before you start.

• Ownership limits: RBI rules cap how much of a single listed company NRIs can own, both individually and together. Your PIS bank tracks this for you.

As per the rules at the time of writing, NRIs pay the same capital gains tax rates on listed shares as residents. The difference is that tax is deducted at source (TDS) when you sell.

Surcharge and cess apply on top. Dividends from Indian companies are also taxed in India, with TDS.

Some points to know:

• DTAA: India has Double Taxation Avoidance Agreements with many countries. These can help you avoid paying tax twice on the same income, but you may need a Tax Residency Certificate.

• Filing a return: If TDS is more than your actual tax, you can claim a refund by filing an income tax return in India.

• Tax in your country: Your country of residence may also tax this income.

Our article on LTCG tax on shares explains how long-term capital gains are worked out. This is as per the rules at the time of writing. Please check the current position before you invest.

• From an NRE account: Money from investments made on a repatriable basis can be sent back abroad freely, after taxes.

• From an NRO account: You can repatriate up to USD 1 million per financial year from your NRO balances, after taxes and with the required forms (Form 15CA and, where needed, Form 15CB from a chartered accountant).

Your bank handles the transfer and the paperwork.

• Continuing to trade from a resident demat account after becoming an NRI, instead of an NRI demat account.

• Linking an NRE-route NRI demat account to NRO money, or the other way round.

• Mixing NRE and NRO money in the wrong way.

• Trying intraday trades in shares, which NRIs are not allowed to do.

• Ignoring TDS certificates and not filing a return to claim excess tax back.

• Forgetting to update the overseas address and tax residence with the bank and broker.

An NRI can invest in Indian shares through an NRE or NRO bank account, a linked NRI demat account and an NRI trading account. The NRE route, usually with PIS permission, lets you take your money back abroad freely, while the NRO route is mainly for India-sourced money. NRIs can buy shares on a delivery basis but cannot do intraday trading in shares, and F&O is allowed only with NRO funds. Capital gains are taxed at the same rates as residents, but with TDS. Check the details with your bank and broker before you start.

Ans. Yes. NRIs can invest in Indian shares through an NRE or NRO bank account, a linked NRI demat account and an NRI trading account. For the repatriable route, a PIS permission from a designated bank is usually needed.

Ans. An NRE account holds money earned abroad and is fully repatriable. An NRO account holds money earned in India, such as rent or dividends, and has limited repatriation. NRE deposit interest is tax free in India, while NRO interest is taxable.

Ans. No. NRIs cannot do intraday trading in shares. All share purchases must be on a delivery basis and taken into the NRI demat account. Short selling is also not allowed.

Ans. As per the rules at the time of writing, long-term gains on listed shares are taxed at 12.5 percent above Rs 1.25 lakh a year, and short-term gains at 20 percent. Tax is deducted at source when you sell, and surcharge and cess apply.

Ans. Yes. Money invested on a repatriable basis through an NRE account can be sent back abroad freely after taxes. From an NRO account, up to USD 1 million per financial year can be repatriated after taxes, with the required forms.