Wealth management is an essential aspect of financial planning, especially for Non-Resident Indians (NRIs) looking to invest in India. With a growing economy, diverse investment avenues, and a welcoming regulatory framework, India presents lucrative opportunities for NRIs. However, understanding the available options and the tax implications involved can make a significant difference in maximizing returns and avoiding potential pitfalls. Here’s an overview of various NRI investment options in India and the related tax implications for wealth management.
1. Fixed Deposits (FDs)
NRIs can invest in the fixed deposits of India which come with special accounts in the Indian banks including the Non-Resident External account (NRE) and Non-Resident Ordinary account (NRO) accounts. NRE accounts are most appropriate for amounts whose repatriation is unrestricted and income earned thereon is free of tax liability in India. NRO accounts are meant for income earned in India, for instance through rent or pension and the interest accrued on the NRO deposit attracts TDS. For banking, there are tax-free NRE deposits to tax-exempt deposits that can be beneficial for NRIs with an idea of repatriation while NRO accounts may prove beneficial for those who wish to re-invest their Indian income.
2. Mutual Funds
NRIs can invest in mutual funds in India; they provide a variety of alternatives, including balanced equity and debt. Selecting this type of investment product involves diversification, and qualified fund management, which is why people prefer to invest in mutual funds while accumulating wealth. There will be variations in the taxes exercise depending on the type of fund. Redemption from equity funds that have been held for more than one year doesn’t attract any tax up to ₹ 1 lakh and is taxed at 10% for any gains beyond this. 15% tax is applied to income that has been kept for less than a year. Debt funds attract 20 per cent tax with indexer benefit in case of long-term investment say for more than three years, while short-term gains are added to the total income of the NRI and taxed accordingly. Nevertheless, the investments in the mutual fund provide an efficient direction for growth; however, these tax liabilities should be planned.
3. Direct Equity Investments
Through the Reserve Bank of India’s (RBI) built-in Portfolio Investment Scheme (PIS), non-resident Indians (NRIs) can make direct investments in Indian stocks. This enables the NRIs to buy and sell stocks on the Indian stock markets trading free of charge. Based on the holding period, capital gains tax is effective as follows; taxes are charged at 10% on any gain per the individual’s income tax slab on holding an asset for more than one year while, on holding capacity within one year of selling the asset, taxes are charged at 15%. Equity investments come with relatively high risk but with elevated return; this makes equity investment suitable for wealth management only under specific risky strategies.
4. Government Bond and NRI Bond
They are also safer securities than equities for an investment strategy that is more interested in Wealth Management in terms of capital preservation. That is why some reserved NRI bonds offer fairly high interest rates if compared to other bonds and if they are either fully or partially repatriable bonds. Interest for government bonds is taxed through TDS, hence, the NRIs should verify whether or not they are eligible for tax deductions under the DTAA between India and the country of residence.
5. National Pension System (NPS)
The National Pension System (NPS) is a defined investment plan, which aims at accumulating corpus for retirement with an understanding of systematic investment and tax advantages for NRIs. Donations to the NPS are exempt under section 80C for a maximum of ₹1.5 lakh over a given fiscal year and hence also make for a good investment in the areas of wealth management. When it comes to monetary disbursement, 40 percent of the corpus is exempted from taxes while the rest of them are liable for taxes. NPS is quite structural and investment in NPS gives tax advantages which prove beneficial for Wealth creation in the long run.
Understanding tax implications
Foreign investors investing in India need to be conversant with tax deductions at source because most of them are adjusted automatically by the Indian government. Also, NRIs need to know about the taxes they need to pay in India in case, the person has Income from House Property or Income from Other sources like Interest or Dividends etc. Most countries have a mechanism of DTAA agreements with India, therefore Indian earnings are not double-tapped for taxation.