Funding and Repatriation Options

Repatriation and funding options are crucial for Non-Resident Indians (NRIs) and foreign investors looking to manage their financial assets in India. This guide will delve into the various funding sources, repatriation rules, and necessary documentation required for NRIs and foreign investors in India.

Contributing Advisor

Neeraj Khatri

Manager, Business Advisory Services

Types of Funding Accounts for NRIs

When managing finances across borders, Non-Resident Indians (NRIs) have several options to handle their earnings and investments efficiently. The most commonly used accounts include the Non-Resident External (NRE), Non-Resident Ordinary (NRO), and Foreign Currency Non-Resident (FCNR) accounts. Each of these accounts serves a distinct purpose and offers varying degrees of flexibility in terms of fund repatriation and taxation. Here’s a detailed look at these options:

Non-Resident External (NRE) Account

Primarily used for managing foreign earnings and income earned outside India, the NRE account allows NRIs to hold their income in  Indian banks while retaining the ability to fully repatriate both the principal and the interest.

Key features

• The interest earned on an NRE account is completely exempt from Indian income tax, making it an attractive option for NRIs looking to avoid double taxation.
• Both the funds deposited and the interest earned can be repatriated to the NRI’s overseas account without any restrictions. This makes it ideal for those who plan to eventually move funds back to their home country.
• Since the NRE account is denominated in Indian Rupees (INR), funds are typically converted from foreign currency, offering flexibility for day-to-day expenses or investments in India.

Who should use it? NRIs with foreign income sources who want easy repatriation and tax benefits should consider opening an NRE account.

Non-Resident Ordinary (NRO) Account

This account is suited for managing income generated within India, such as rental income, pensions, dividends, or interest on fixed deposits. Unlike the NRE account, the NRO account caters specifically to income that originates in India.

Key features

• NRO accounts allow the repatriation of funds, but with a cap. NRIs can repatriate up to USD 1 million per financial year, subject to certain conditions, such as completing tax formalities.
• The interest earned on an NRO account is subject to Indian income tax at applicable rates, which typically range around 30 percent. Taxes must be paid before repatriation, making it crucial for NRIs to consider tax implications.
• Funds can be deposited in either INR or foreign currency. However, foreign currency deposits are subject to conversion into INR, and repatriation will occur in INR unless converted back into foreign currency.

Who should use it? NRIs earning income from Indian sources, such as property or investments in India, should opt for an NRO account.

Foreign Currency Non-Resident (FCNR) Account

The FCNR account is designed for NRIs who prefer to hold their funds in foreign currency to mitigate the risk of currency fluctuation. This account typically holds fixed deposits in various foreign currencies, such as USD, GBP, or EUR.

Key features

• NRIs can repatriate both the principal and interest from an FCNR account without any restrictions, offering complete flexibility for overseas financial planning.
• Like the NRE account, the interest earned on FCNR deposits is exempt from Indian income tax, providing an additional tax benefit for those who hold foreign currency.
• Since FCNR accounts are maintained in foreign currencies, they provide protection against the risk of depreciation in the value of the Indian Rupee, making them an attractive option for long-term savings in stable foreign currencies.

Who should use it? NRIs looking to maintain foreign currency deposits while enjoying tax-free interest and unrestricted repatriation should consider opening an FCNR account.

Repatriation rules and limits

These rules, primarily governed by the Foreign Exchange Management Act (FEMA), are designed to safeguard both the legitimacy and taxation of funds moving in and out of India.

FEMA Guidelines

The Foreign Exchange Management Act (FEMA) governs the repatriation process for NRIs, ensuring that only legitimate and taxed funds are allowed to cross borders. FEMA establishes strict rules for how and when funds can be transferred from India to an NRI’s overseas account.

NRO account repatriation limit

NRIs can repatriate up to USD 1 million per financial year from their Non-Resident Ordinary (NRO) accounts. This limit applies to the principal amount, excluding any interest earned, which can be repatriated separately. The USD 1 million limit covers income such as rent, salary, dividends, pensions, and proceeds from the sale of immovable property.

Procedural requirements

The repatriation of funds from an NRO account requires compliance with specific documentation and procedural formalities, including tax clearances. NRIs must ensure they have filed necessary forms like Form 15CA and Form 15CB, which confirm the payment of applicable taxes.

For NRE and FCNR accounts, the repatriation process is more straightforward. These accounts allow for full repatriation of both the principal and interest earned, with no financial caps imposed by FEMA.

Tax implications

One of the most critical aspects of fund repatriation from India is understanding the tax implications, especially for NRO account holders. Funds in NRO accounts, which typically consist of income earned within India, are subject to Indian income tax before repatriation.

NRO Account Taxation

Repatriated funds from NRO accounts are taxed at applicable Indian income tax rates, which generally range around 30 percent. This taxation applies to the income earned within India, such as rental income, interest on deposits, or dividends.

Double Taxation Avoidance Agreement (DTAA)

To avoid being taxed in both India and their country of residence, NRIs can take advantage of DTAAs. These bilateral agreements between India and other countries allow NRIs to claim tax benefits, reducing or eliminating their tax liabilities on repatriated funds. If their country has a DTAA with India, NRIs can potentially lower their tax burden significantly.

NRE and FCNR accounts, on the other hand, offer significant tax advantages. The interest earned on these accounts is generally exempt from Indian income tax, providing an incentive for NRIs to manage foreign earnings through these channels.

Necessary documents for repatriation

The repatriation process involves specific forms and certificates to ensure that the funds being transferred have met all legal and tax obligations. Below is a breakdown of the required documents for repatriating funds from NRO, NRE, and FCNR accounts.

NRO Account repatriation documents

When repatriating funds from an NRO (Non-Resident Ordinary) account, the process involves more stringent documentation compared to NRE and FCNR accounts due to the tax implications. The key documents required are as follows:

• Form 15CA: This is an undertaking by the NRI to remit funds abroad. It serves as a self-declaration by the remitter, confirming that appropriate taxes have been deducted on the funds being transferred. This form needs to be filled out and submitted online through the official Tax Information Network (TIN) portal.
• Form 15CB: A Chartered Accountant's certification that the necessary taxes have been paid on the funds being repatriated. The report validates the tax details mentioned in Form 15CA, ensuring compliance with tax laws.
• Form A2: The Foreign Exchange Management Act (FEMA) declaration form, which is mandatory for any foreign exchange transaction. This form provides details of the transaction, confirming that the funds are being remitted for a legitimate purpose.
• Bank Request Form: A standard request form provided by the bank where the NRO account is held. This form officially initiates the repatriation process and includes details such as the amount to be repatriated and the destination bank account overseas.

Additionally, supporting documentation, such as proof of income or investments related to the funds being repatriated, may be required by the bank to confirm the source of the funds.

NRE/FCNR Account repatriation documents

For NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) accounts, the repatriation process is relatively straightforward as these accounts offer full repatriation without the tax complications associated with NRO accounts. The required documents are:

• Request Application: This form is submitted to the bank to initiate the repatriation process. It includes the amount to be repatriated and the account details of the overseas destination.
• Form A2: Similar to the NRO repatriation process, the FEMA declaration form is required for NRE and FCNR accounts. This form ensures that the remittance is for a legitimate purpose and complies with FEMA guidelines.

Since NRE and FCNR accounts involve foreign earnings and are exempt from Indian taxes, the process is quicker, and fewer forms are needed compared to NRO accounts.

Investment options with repatriation benefits

For Non-Resident Indians (NRIs) seeking investment opportunities in India, several options offer the convenience of full repatriation of both the invested capital and returns. Here are key investment avenues that cater to the needs of NRIs:

Equity Investments through PIS

The Portfolio Investment Scheme (PIS) is a special scheme regulated by the Reserve Bank of India (RBI) that permits NRIs to invest in the equity shares and convertible debentures of Indian companies. Through PIS, NRIs can purchase or sell shares on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) directly from their NRI bank account.

To invest through PIS, NRIs must first open a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account with a designated bank that offers PIS services. The type of account chosen will influence the repatriability of funds:

• NRE Account: Investments made through this account are fully repatriable, meaning both the capital invested and any profits can be transferred abroad.
• NRO Account: Investments are non-repatriable, although the principal and gains can be transferred within India. However, there are some limits on repatriation for funds in this account.

Once the account is set up, the bank issues a PIS permission letter, which allows the NRI to begin investing in Indian stocks. An NRI can invest up to 5 percent of the paid-up capital of an Indian company’s equity shares. This is subject to specific sectoral caps and regulatory approvals. The total investment by all NRIs in a single company cannot exceed 10 percent of the paid-up capital, although this can be raised to 24 percent with shareholder approval.

Tax implications

• Short-Term Capital Gains (STCG): Gains from the sale of shares held for less than one year are taxed at 15 percent.
• Long-Term Capital Gains (LTCG): Gains from shares held for more than one year are subject to 10 percent tax, provided the gains exceed INR 1 lakh in a financial year.
• Dividend Income: Dividends received from Indian companies are taxable as per the NRI’s income tax slab rate.

Banks offering PIS services typically deduct Tax Deducted at Source (TDS) on capital gains and dividends, simplifying the tax process for NRIs.

For investments made from an NRE account, both the invested capital and profits are fully repatriable, allowing NRIs to transfer their funds back to their country of residence without restrictions. For NRO accounts, there is a limit of US$1 million per financial year on repatriation, and the NRI must fulfill tax liabilities before transferring funds abroad.

Key benefits of PIS

• NRIs gain direct exposure to Indian stock markets, benefiting from the country’s fast-growing economy.
• When investments are made through an NRE account, NRIs enjoy the convenience of repatriating both their principal and returns without restrictions.
• PIS accounts are linked to designated banks that assist with the automatic deduction of TDS, ensuring NRIs remain compliant with Indian tax regulations.

Limitations

The PIS only permits investments in equity shares and convertible debentures. NRIs cannot use this scheme for fixed income securities, bonds, or other financial instruments. Certain industries, such as defense and media, have sector-specific restrictions on foreign ownership, and NRIs must be mindful of these limits when investing. As with any equity investment, PIS investments are subject to market risk and volatility, which NRIs should consider before committing funds.

Mutual funds

A mutual fund is a pooled investment vehicle where money from multiple investors is collected and managed by a professional fund manager. This pool of money is invested in various securities such as stocks, bonds, money market instruments, or a combination of these, depending on the fund’s objective. For NRIs, mutual funds provide a convenient way to invest in India’s growing markets without having to directly manage individual securities.

NRIs can choose from a variety of mutual funds, depending on their financial goals, risk appetite, and time horizon. The major types include:

• Equity Funds: These funds primarily invest in stocks of companies and are suitable for NRIs looking for higher returns with a higher risk appetite. Equity funds can be categorized into large-cap, mid-cap, small-cap, or sector-specific funds.
• Debt Funds: These invest in fixed-income instruments like government bonds, corporate bonds, and money market instruments. They are lower in risk compared to equity funds and are ideal for NRIs seeking stable returns with lower volatility.
• Hybrid Funds: Hybrid funds invest in a mix of both equities and debt instruments, offering a balanced approach. This is suitable for investors who want to balance growth and stability.
• Tax-Saving Funds (ELSS): NRIs can invest in Equity Linked Savings Schemes (ELSS) to benefit from tax deductions under Section 80C of the Income Tax Act. These funds have a lock-in period of three years.
• Index Funds: These funds replicate a stock market index, like the BSE Sensex or NSE Nifty, offering exposure to the entire index's performance with lower management fees.

To invest in mutual funds, NRIs need to follow a few simple steps:

• NRI Bank Account: NRIs can invest through either an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account. The choice of account determines the repatriability of the invested amount and returns.
• NRE Account: Investments made through this account are fully repatriable, meaning both capital and returns can be transferred abroad.
• NRO Account: Investments through this account are non-repatriable, although the invested amount and returns can be freely utilized within India.
• Know Your Customer (KYC) Compliance: NRIs must complete KYC formalities, including submitting documents such as a copy of their passport, visa, overseas address proof, and a photograph.
• Investment Mode: NRIs can invest in mutual funds through lump-sum investments or via a Systematic Investment Plan (SIP), which allows them to invest small amounts regularly, helping to average out market volatility over time.

Repatriation rules

For investments made through an NRE account, both the capital and the gains are fully repatriable. For investments made through an NRO account, the repatriation is subject to the limit of US$1 million per financial year, including any income earned in India, such as rental income or interest.

Taxation of mutual fund returns

Mutual fund returns for NRIs are subject to taxation, though tax rules differ depending on the type of fund and holding period:

• Equity funds:
• Short-Term Capital Gains (STCG): If equity fund units are sold within one year, gains are taxed at 15 percent.
• Long-Term Capital Gains (LTCG): Gains exceeding INR 1 lakh from equity funds held for more than one year are taxed at 10 percent without indexation benefits.
• Debt funds:
• Short-Term Capital Gains (STCG): Gains from debt fund units held for less than three years are added to the NRI’s income and taxed as per their income tax slab.
• Long-Term Capital Gains (LTCG): Gains from debt funds held for more than three years are taxed at 20 percent with indexation benefits, which adjust for inflation and reduce the taxable amount.
• Dividend Distribution Tax (DDT): While dividends received from mutual funds were previously tax-free in the hands of the investor, they are now taxable as per the NRI’s income tax slab, and the fund house withholds the applicable Tax Deducted at Source (TDS).

Benefits of investing in mutual funds for NRIs

• Mutual funds are managed by experienced fund managers who make investment decisions on behalf of investors. This eliminates the need for NRIs to constantly monitor the market.
• Mutual funds invest across various sectors and asset classes, which reduces risk and enhances the chances of stable returns.
• Mutual funds offer NRIs an easy way to invest in India’s growing economy without the complexities of directly trading in equities or bonds.
• Investments made through an NRE account offer full repatriation of both capital and returns, providing financial flexibility to NRIs.
• Mutual funds can be easily bought and sold, making them a highly liquid investment option, allowing NRIs to access their funds when needed.

Some mutual funds impose an exit load, a fee charged when an investor redeems units before a specified period. Additionally, funds charge an expense ratio to cover management and administrative costs, which can impact returns.

Government securities

Government securities are bonds or promissory notes issued by the central or state governments. When NRIs invest in these securities, they essentially lend money to the government in exchange for periodic interest payments and the return of the principal amount at maturity. NRIs can invest in various government securities, each offering different terms and interest rates:

• Ideal for short-term investors, T-bills come in maturities of 91 days, 182 days, and 364 days. Since T-bills do not offer interest payments, they are sold at a discount and redeemed at face value.
• Dated Government Securities are long-term bonds with fixed or floating interest rates. They are available in maturities ranging from 5 to 40 years and are typically issued by the central government.
• State Development Loans (SDLs) issued by individual Indian states to finance their spending needs. These provide slightly higher yields than central government bonds due to the relatively higher risk associated with state governments.

NRIs can invest in government securities through directly during auctions conducted by the Reserve Bank of India (RBI), or NRIs can also buy and sell government securities that are already in circulation through stock exchanges or authorized brokers.

To invest, NRIs need to have a NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account. Investments made through an NRE account are fully repatriable, while those through an NRO account have restricted repatriation limits.

Repatriation rules

Government securities offer the advantage of full repatriability for both the principal and the interest earned, provided the investment is made through an NRE or FCNR (Foreign Currency Non-Resident) account. For investments made via an NRO account, the repatriation is subject to the annual limit of USD 1 million, including other income sources in India.

Government securities are generally treated as debt instruments for tax purposes. The taxation on these investments depends on whether they are held for the short term or long term:

• Short-Term Capital Gains (STCG): If government securities are sold within three years, the gains are added to the NRI’s total income and taxed according to the applicable income tax slab.
• Long-Term Capital Gains (LTCG): If held for more than three years, long-term gains are taxed at 20 percent with indexation benefits, which adjust the purchase price for inflation, reducing the taxable gains.
• Interest Income: The interest earned on government securities is fully taxable in India, and tax is deducted at source (TDS). The TDS rate for NRIs is 30 percent for investments in rupee-denominated bonds and 20 percent for investments in foreign currency bonds.

Benefits of investing in Government Securities

• Government securities are one of the safest investment options, as they are backed by the Indian government. This makes them highly attractive for risk-averse NRIs.
• Long-term bonds offer regular interest payments, providing a stable income source for NRIs.
• Investments made through an NRE account are fully repatriable, allowing NRIs to transfer their funds and interest earnings back to their country of residence without any restrictions.
• Government securities can be traded on the secondary market, providing liquidity if NRIs wish to sell before maturity.
• G-Secs can be a great addition to a diversified portfolio, especially for NRIs looking to reduce risk by balancing equity investments with safer options.

How to invest in Government Securities

NRIs can invest in government securities through the following avenues:

• RBI retail direct scheme: Launched by the Reserve Bank of India, this platform allows retail investors, including NRIs, to invest directly in government securities without intermediaries.
• Mutual funds: NRIs can also gain exposure to government securities through debt mutual funds, which invest a portion of their corpus in G-Secs and other fixed-income instruments.
• Stock exchanges: NRIs can buy and sell G-Secs on Indian stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), using their NRI trading account.

Real estate (with limitations)

Real estate is a popular investment option for NRIs (Non-Resident Indians) due to its potential for significant returns, steady rental income, and the personal value of owning property in one’s home country. However, real estate investment in India comes with certain restrictions and repatriation rules that NRIs need to be aware of.

Under the Foreign Exchange Management Act (FEMA) regulations, NRIs are permitted to invest in certain types of real estate in India, with the following restrictions:

• NRIs can purchase both residential apartments and standalone houses. There are no restrictions on the number of residential properties an NRI can own.
• NRIs can also invest in commercial properties such as office spaces, retail stores, and industrial units. Commercial real estate can offer higher rental yields compared to residential properties.

However, NRIs are not allowed to purchase:

• Agricultural Land;
• Plantations; and,
• Farmhouses.

Ownership of these types of properties is prohibited for NRIs unless they inherit such property or it is gifted to them by a resident Indian.

Repatriation rules for Real Estate Investments

One of the key concerns for NRIs investing in Indian real estate is the ability to repatriate the capital and profits. The rules for repatriation are as follows:

• NRIs are allowed to repatriate the proceeds from the sale of property, subject to certain conditions:
• They can repatriate up to two residential properties.
• The amount repatriated cannot exceed the original amount paid for the property.
• The funds used for purchasing the property must have been remitted through NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) accounts.
• Any capital gains from the sale of property are subject to applicable taxes and must be settled before repatriation.
• Rental income earned from residential or commercial properties can be repatriated freely after paying applicable taxes. NRIs can transfer the rental income to their overseas accounts using their NRO (Non-Resident Ordinary) accounts.
• If the property was purchased using funds from an NRO account, repatriation is restricted to US$1 million per financial year, including any other remittances such as income from dividends, interest, or other sources.

Taxation is a critical factor in real estate investments, and NRIs must comply with Indian tax laws. The main tax considerations are as follows:

• Rental income is taxable in India, and NRIs are required to pay tax at the applicable income tax slab rates. This income can also be repatriated post-tax.
• Short-Term Capital Gains (STCG): If the property is sold within two years of purchase, the profit is treated as short-term capital gains and taxed at the NRI’s applicable income tax slab rate.
• Long-Term Capital Gains (LTCG): If the property is held for more than two years, the profit is taxed at 20 percent with indexation benefits. Indexation allows the investor to adjust the purchase price for inflation, reducing the taxable gains.

In cases where NRIs reside in countries that have signed Double Taxation Avoidance Agreements (DTAA) with India, they can offset taxes paid in India against the taxes in their country of residence.

Funding Real Estate Purchases

NRIs can fund their real estate investments through the following methods:

• NRIs can use their savings and transfer funds from their overseas accounts to India via an NRE or NRO account.
• Indian banks and financial institutions offer home loans to NRIs for purchasing residential or commercial properties. However, the loan amount can only be credited to an NRO account, and loan repayments must be made through inward remittances or funds from an NRO, NRE, or FCNR account.

Registration and compliance

For NRIs purchasing property in India, certain legal and procedural steps must be followed:

• NRIs must verify the property title to ensure that the seller has legal ownership, and that the property is free from any disputes or encumbrances.
• A formal sale agreement should be signed between the buyer and seller, detailing the property price, terms of sale, and payment schedule.
• The property sale must be registered with the local sub-registrar, and stamp duty and registration fees must be paid. The rates vary by state but generally range between 5 percent to 8 percent of the property’s market value.

Additionally, NRIs should be aware of the Real Estate (Regulation and Development) Act (RERA), which ensures transparency and accountability in real estate transactions in India. The Act mandates that developers register their projects with RERA, providing details on project timelines, approvals, and the builder’s track record.

Specific investment products

In addition to traditional investment options like equities, mutual funds, and real estate, NRIs (Non-Resident Indians) have access to specific investment products designed to cater to their unique needs, including the ease of repatriation. These products offer flexible and structured opportunities for NRIs to diversify their portfolios while enjoying the benefits of repatriation.

Masala Bonds

Masala Bonds are rupee-denominated bonds issued by Indian entities in overseas markets to raise capital. These bonds are particularly attractive to NRIs due to their structure and benefits.

Masala Bonds are issued in Indian rupees (INR), but they are sold in foreign markets, meaning investors pay for the bonds in foreign currency (like USD or GBP). The returns, however, are in INR, which gives investors exposure to the Indian currency. Masala Bonds allow for the full repatriation of both the principal amount and the interest earned. This makes them an attractive option for NRIs looking to invest in India while retaining the ability to move funds back to their country of residence.

One of the risks associated with Masala Bonds is currency fluctuation. Since the bonds are issued in INR, investors bear the exchange rate risk, meaning if the Indian rupee depreciates against their home currency, the actual returns in foreign currency may be lower.

Masala Bonds generally attract lower withholding tax (around 5 percent) on the interest income for non-resident investors. Capital gains from these bonds are also subject to the applicable tax laws in India.

Overseas Direct Investment (ODI) Funds

Overseas Direct Investment (ODI) allows Indian companies to invest in foreign ventures and enterprises. However, there are specific ODI funds designed to offer NRIs investment opportunities in foreign markets through Indian financial institutions. ODI funds typically invest in foreign companies or ventures, allowing NRIs to gain exposure to international markets. These funds are structured to provide both diversification and growth potential.

NRIs can repatriate both their principal and returns from ODI funds, offering flexibility in managing their overseas investment portfolios.The risks in ODI funds include market risks related to the underlying foreign ventures or businesses. Since these funds are linked to international markets, they are exposed to foreign market volatility and exchange rate risks.

Income from ODI funds is taxable in India under the relevant tax provisions, but NRIs may benefit from Double Taxation Avoidance Agreements (DTAAs) between India and their country of residence.

Non-Resident External (NRE) Fixed Deposits

NRE fixed deposits are one of the most popular investment products for NRIs due to their ease of operation and repatriation flexibility. These deposits allow NRIs to hold their foreign earnings in India with certain tax and repatriation benefits. NRE fixed deposits are held in Indian banks, with the funds deposited in foreign currency and converted to INR at the time of deposit. The interest earned is also in INR.

Both the principal amount and interest earned from NRE fixed deposits are fully repatriable, making them a convenient option for NRIs who want liquidity and repatriation flexibility. Interest earned on NRE fixed deposits is exempt from Indian income tax, making this a highly tax-efficient investment for NRIs. Additionally, there is no wealth tax or gift tax applicable to NRE deposits.

NRE fixed deposits typically offer competitive interest rates, higher than those available in foreign countries. The rates vary by bank and the duration of the deposit.

The main risk in NRE fixed deposits is the currency exchange risk. Since the funds are held in INR, any depreciation of the rupee against the foreign currency could reduce the actual return when repatriated.

Foreign Currency Non-Resident (FCNR) Fixed Deposits

For NRIs looking to avoid currency risk, FCNR fixed deposits offer a valuable alternative to NRE deposits. These deposits are held in foreign currency and offer repatriation and interest benefits. FCNR deposits are maintained in foreign currency, such as USD, GBP, EUR, and others. The principal and interest are paid in the same currency, which eliminates the risk of currency fluctuation for NRIs.

Like NRE deposits, FCNR fixed deposits allow for full repatriation of both principal and interest. This makes them highly attractive for NRIs who want to maintain their investments in foreign currency while enjoying high levels of repatriation flexibility. Interest rates on FCNR deposits are generally lower than NRE deposits due to the lower risk associated with currency stability. However, they still provide competitive rates compared to international markets.

Interest earned on FCNR deposits is also exempt from Indian income tax, making this an appealing option for NRIs. While FCNR deposits are considered safer in terms of currency risk, they may offer lower returns than NRE fixed deposits due to the interest rate differential.

Rupee Denominated Non-Convertible Debentures (NCDs)

NRIs can invest in non-convertible debentures (NCDs) issued by Indian companies. These are long-term debt instruments offering fixed interest rates, and they are often used by companies to raise capital.

NCDs are fixed-income instruments, meaning they provide regular interest payouts, and the principal amount is repaid at the end of the maturity period. NRIs can invest in both listed and unlisted NCDs issued in India. The repatriation of principal and interest from rupee-denominated NCDs is allowed, provided the investment is made through an NRE or FCNR account. However, repatriation is subject to the limits prescribed by RBI guidelines.

NCDs are not risk-free. The credit rating of the issuer determines the level of risk. A lower-rated NCD could offer higher returns, but it comes with a higher risk of default.

Interest from NCDs is taxable in India, and NRIs may also have to pay capital gains tax if they sell the debentures before maturity. However, NCDs offer indexation benefits for long-term capital gains.

National Pension Scheme (NPS) for NRIs

The National Pension Scheme (NPS) is a voluntary, long-term investment option for NRIs. It is a government-backed pension scheme designed to provide financial security after retirement. NRIs can invest in NPS to build a retirement corpus.

NPS allows NRIs to invest in a mix of equity, corporate bonds, and government securities. The allocation depends on the subscriber’s risk profile and investment choices. NRIs are allowed to repatriate the maturity proceeds of NPS investments, subject to compliance with RBI regulations. However, a portion of the corpus must be used to purchase an annuity, which provides a regular income post-retirement.

Contributions to NPS are eligible for tax deductions under Section 80C of the Income Tax Act, up to INR 1.5 lakhs. Additionally, partial withdrawals from NPS are tax-exempt, and the lump-sum maturity amount is also partially tax-free.

NPS investments in equities carry market risks, while investments in government securities and bonds are comparatively safer. The performance of the NPS is linked to the market, which means there can be fluctuations in returns.

Conclusion

Navigating the funding and repatriation options in India requires understanding the different account types, adhering to FEMA guidelines, and ensuring compliance with tax obligations. By staying informed and consulting with financial experts, NRIs and foreign investors can effectively manage their financial assets in India, maximizing the benefits of their investments. This comprehensive guide provides a detailed overview of the funding and repatriation options available to NRIs and foreign investors in India, covering various types of bank accounts, repatriation rules, necessary documentation, and investment options with repatriation benefits.