A Comprehensive Guide to Demat Account for NRIs: Investing in India Made Easy

Brokerage Free Team • February 26, 2024 | 21 min read • 713 views

 

India, with its rapidly growing economy, stands out as one of the most promising destinations for investments worldwide. This rings particularly true for Non-Resident Indians (NRIs), who find the Indian market increasingly favorable for investment in various sectors. As an NRI looking to tap into the opportunities offered by Indian companies, having a demat account becomes essential. In this article, we'll delve into the intricacies of demat accounts for NRIs, guiding you through the process step by step.

 

Understanding Non-Resident Indians (NRIs):

Before we dive into the specifics of NRI demat accounts, let's clarify who exactly qualifies as an NRI. According to the Foreign Exchange Management Act (FEMA), an NRI is an individual residing outside India who is either a citizen of India or a person of Indian origin (PIO). Taxation rules further define an NRI based on the duration of their stay in India during a financial year.

 

Types of NRI Demat Accounts:

NRI demat accounts cater to the investment needs of NRIs, PIOs (Persons of Indian Origin), and OCIs (Overseas Citizen of India) cardholders. These accounts function similarly to resident demat accounts, facilitating transactions in various financial instruments such as stocks, bonds, IPOs, and mutual funds. There are primarily two types of NRI demat accounts:

 

NRE Demat Account:

  1. Denominated in Indian rupees, this account offers full repatriability.
  2. Ideal for managing earnings from foreign sources, with easy transferability of funds.
  3. Enables seamless transactions and investments in the Indian market.

 

NRO Demat Account:

  1. Designed for managing income earned in India, held in Indian rupees.
  2. Allows for deposits and withdrawals in Indian or foreign currency.
  3. Interest earned is subject to taxation, with the principal amount repatriable after deductions.

 

Opening an NRI Demat Account:

The process of opening an NRI demat account involves selecting the account type (repatriable or non-repatriable) based on your preferences and eligibility. You can initiate the account opening process either online or offline through designated entities such as depository participants, stockbrokers, or banks registered with NSDL and CDSL.

Key documents required for opening an NRI demat account include:

  1. Duly filled account opening form
  2. Portfolio Investment Scheme (PIS) letter issued by RBI
  3. Passport-sized photograph with signature
  4. Scanned copy of PAN card
  5. Overseas address proof, Visa, and Passport copy
  6. Cancelled cheque of NRO/NRE bank accounts
  7. Nominee details (photograph and signature)

 

Benefits of NRI Demat Account:

Investing in the Indian market through an NRI demat account offers several advantages, including:

  1. Quick and easy access to the Indian stock market from anywhere in the world.
  2. Streamlined transactions with minimal paperwork.
  3. Reduced risk of document loss or forgery.
  4. Ability to invest in a diverse range of financial instruments.
  5. Flexibility to hold even a single share in the demat account.
  6. Charges Associated with NRI Demat Account:

While opening and maintaining an NRI demat account, certain charges apply, including:

  1. One-time account opening fee
  2. Annual maintenance charges (AMC)
  3. Debit transaction charges
  4. Additional fees for pledged securities or portfolio modifications

 

FAQs:

To address common queries regarding NRI demat accounts, here are some frequently asked questions:

Can NRI invest in shares in India through a stock exchange?

Non-Resident Indians (NRIs) have the opportunity to invest in the Indian stock market through the Portfolio Investment Scheme (PIS), which allows for both repatriation and non-repatriation investments. The PIS is a program managed by the Reserve Bank of India (RBI), permitting NRIs to buy shares or convertible debentures from the stock exchange using a bank account at a designated branch. However, according to the most recent guidelines, NRIs with Non-Resident Ordinary (NRO) accounts are not required to use the PIS scheme, as their investments are considered on par with those made by Indian residents.

 

Can NRI/PIO invests in other securities?

Yes, NRI/PIO can invest in other securities namely

  1. Dated Government securities (other than bearer securities) or treasury bills.
  2. Units of domestic mutual funds.
  3. Bonds issued by a public sector undertaking (PSU) in India.
  4. Shares in Public Sector Enterprises being disinvested by the Government of India.

 

Are NRIs allowed to invest in Exchange Traded Funds (ETFs)?

Non-Resident Indians (NRIs) are permitted to invest in Exchange Traded Funds (ETFs) on both repatriation and non-repatriation bases.

 

Can an NRI hold a Demat Account?

In India, both resident Indians and non-resident Indians (NRIs) have the option to maintain a demat account for equity trading. However, NRIs seeking to open a demat account must comply with the regulations outlined in the Foreign Exchange Management Act (FEMA). NRIs are eligible to open both Repatriable and Non-Repatriable demat accounts.

 

To participate in secondary markets as a Non-Resident Indian (NRI), obtaining Portfolio Investment Scheme (PIS) licenses from designated banks is necessary for operating a demat account and making investments in India.

 

Under the guidelines of the Reserve Bank of India (RBI), an NRI is limited to holding a maximum of 5% of the paid-up capital in an Indian company. NRIs can participate in Initial Public Offers (IPOs) using an NRE demat account for repatriable investments. For non-repatriable investments, the NRO account and NRO demat account are utilized.

 

If an individual already possesses a demat account before becoming an NRI, they can convert it to the NRO category for trading after becoming an NRI or opt to open a new account. Furthermore, any shares previously held will be transferred by the existing brokerage firm to the new NRO holding account.

 

Which demat account is best for NRI?

There are many brokerage firms and banks that provide demat account facilities. With so many options, investors get confused about which one to choose. However, the following are the things to keep in mind while opening a demat account –

  • There is an ease of opening the account. It is always suggested to go through a SEBI registered intermediary depository.
  • One should also check for the expenses and maintenance charges of brokers. The one with low charges is good to go.
  • There should also be a seamless interface between the bank account and demat account. Also, online trading should be effortless through websites or apps.
  • The depository participant should also provide analytics related to profitability, diversification, valuation and direct call of action to traders.
  • The depository or broker should also provide some additional services that can differentiate them from others.
  • Therefore, an NRI investor can decide which demat account is best for them based on these things.

 

Do I need to get RBI approval before opening my Demat Account?

To invest and trade in the Indian stock market on a repatriation basis, NRIs require a PIS permission letter from the RBI. This letter grants NRIs the ability to buy and sell shares on the Indian stock exchange, with all transactions conducted through the NRE bank account. The bank where the NRI account is held assists in obtaining this permission.

 

Conversely, if the investment plan is on a non-repatriation basis, an RBI PIS permission is not necessary. In this scenario, only an NRO account linked to a demat and trading account is required.

 

Who can open NRE and NRO account?

NRIs (Non-Resident Indians) as well as PIOs (Persons of Indian Origin) have the option to open NRE and NRO accounts.

 

Can I have both NRE and NRO account?

Certainly, Non-Resident Indians (NRIs) have the opportunity to possess both NRE and NRO accounts concurrently. Each of these accounts serves distinct purposes, as discussed previously.

 

Is NRE and NRO account mandatory for NRI?

While it's not obligatory for NRIs to open either an NRE or NRO account, it's recommended to do so for efficient financial management in India.

 

What are the tax implications on NRE and NRO account?

NRE Account: The interest accrued on balances in an NRE account is not subjected to taxes in India. Furthermore, both the principal amount and the interest earned are exempt from wealth tax and gift tax.

NRO Account: The interest earned on balances in an NRO account is taxable under income tax regulations in India. The tax rate depends on the individual's income bracket. Nevertheless, NRIs have access to specific deductions and exemptions that can help lower their tax burden.

 

What is the taxable limit of NRO account?

The interest earned on the balance of an NRO account is liable to income tax. The taxable threshold is determined by the individual's income bracket and the current tax regulations in India.

 

Is there any tax on NRO account?

Indeed, the interest accumulated on an NRO account is taxable under income tax laws in India, with the tax obligation determined by the individual's income bracket.

 

Which account is better, NRE or NRO?

The decision between opting for an NRE or NRO account is contingent upon the specific needs and preferences of the individual. If an Non-Resident Indian (NRI) desires to retain and oversee foreign income in India with complete repatriation flexibility, an NRE account is the preferable choice. Conversely, if the NRI possesses earnings generated within India that require management, an NRO account would be the suitable option.

Which is tax-free, NRE or NRO?

Interest accrued on an NRE account is exempt from taxation in India, whereas the interest gained on an NRO account is liable to income tax. Consequently, the NRE account enjoys tax-free status concerning interest earnings.

 

How can NRIs invest in shares in India?

According to the regulations set forth by the Reserve Bank of India (RBI), NRIs interested in investing in Indian shares via a stock exchange must contact the designated branch of any authorized dealer (bank) authorized by the RBI to manage the Portfolio Investment Scheme (PIS). This is to open either an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account under the scheme for channeling their investments.

 

What is a designated bank branch?

The Reserve Bank of India has designated specific branches of each authorized dealer bank to carry out operations under the Portfolio Investment Scheme for NRIs. NRIs are allowed to choose only one authorized dealer bank for their investments under the Portfolio Investment Scheme and are required to conduct transactions through the designated branch of the chosen authorized dealer bank.

 

What is a Portfolio Investment Scheme (PIS)?

The Portfolio Investment Scheme (PIS) is an initiative by the Reserve Bank of India that allows Non-Resident Indians (NRIs) to buy/sell shares or convertible debentures of Indian companies on Stock Exchanges under this scheme. To participate, NRIs/PIOs must submit an application to a specified branch of a bank authorized to handle Portfolio Investment. All buying/selling transactions must be conducted through this designated branch.

 

Who is a person of Indian Origin?

For the purposes of investments in shares/securities in India, person of Indian origin means a citizen of any country other than Pakistan or Bangladesh, if

  • he at any time, held an Indian passport; or
  • he or either of his parents for any of his grand parents was a citizen of India by virtue of the constitution of India or Citizenship Act, 1955 (57 of 1995); or
  • the person is a spouse of an Indian citizen or a person referred to in clause (a) or (b).
  • 9. Who is an overseas citizen of India (OCI)?

Under OCI Scheme operational from 02nd Dec 2005 government of India decided to grant overseas citizenship of India (OCI) commonly known as “dual citizenship”. A foreign national, who was eligible to become a citizen of India on 26.01.1950 or was a citizen of India on or at anytime after 26.01.1950 or belonged to a territory that became part of India after 15.08.1947 and his/her children and grand children, provided his/her country of citizenship allows dual citizenship in some form or other under the local laws, is eligible for registration as an Overseas Citizen of India (OCI). Minor children of such person are also eligible for OCI. However, if the applicant had ever been a citizen of Pakistan or Bangladesh, he/she will not be eligible for OCI.

 

Can PIO (Person of Indian Origin) as well as OCI (Overseas Citizen of India) also invest in shares in India?

Indeed, Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) enjoy equal treatment with Non-Resident Indians (NRIs) regarding the amenities accessible to NRIs in economic, financial, and educational domains, barring the acquisition of agricultural or plantation properties.

 

What is an Overseas Corporate Body (OCB)?

An "Overseas Corporate Body" refers to an entity such as a company, partnership firm, society, or other corporate body that is owned directly or indirectly by Non-Resident Indians (NRIs) to the extent of at least sixty percent. This definition also encompasses overseas trusts in which Non-Resident Indians hold not less than sixty percent beneficial interest directly or indirectly, with the condition of irrevocability.

 

Can Overseas Corporate Body (OCBs) also invest in shares in India?

OCBs are no longer permitted to make investments under the Portfolio Investment Scheme since they were de-recognized as an investor entity class effective September 16, 2003. However, OCBs that have already invested under the PIS are permitted to retain these shares or convertible debentures until they are sold on the stock exchange.

 

What are the documents required to be collected from Investor to open a NRI/PIO/OCI trading account?

List of documents to be taken while registering NRI/PIO/OCI Clients as may be applicable

  1. Document ensuring status of entity
  2. In case of Indian passport - Valid passport, Place of birth as India, Valid Visa – Work/Student/employment/resident permit etc.
  3. In case of foreign passport : Valid passport and any of the following
  4. Place of Birth as India in foreign passport
  5. Copy of PIO / OCI Card as applicable in case of PIO/OCI
  6. PIS Permission Letter from the respective designated bank
  7. PAN Card
  8. Overseas Address: Driving License/ Foreign passport /Utility Bills/Bank statement (not more than 2 months old)/ Notarized copy of rent agreement/ leave & license agreement/ Sale deed.
  9. Photograph of Investor.
  10. Proof of respective bank accounts & depository accounts.

 

What are other client registration formalities to be taken care while registering NRI/PIO/OCI Clients?

For the registration of NRI/PIO/OCI clients, it is necessary for the client themselves to execute the required documents, and not through a Power of Attorney Holder. During the in-person verification process of these clients, members can collect attested KYC documents from them, which can be attested by any of the following entities: Indian Embassy/Consulate General in the client's residing country, Notary Public, Court, Magistrate, Judge, or Local Banker.

 

Is it mandatory for a client to provide local (Indian) address?

During the client registration process, the client must furnish their foreign address along with documentary evidence to verify it. If the client wishes, they can choose to use their local address as the correspondence address. In this case, they must also provide documentary evidence to support their local address.

 

Can two separate trading accounts namely (NRE & NRO) can be opened by NRI?

Certainly, clients have the option to maintain two distinct trading accounts based on NRE (Non-Resident External) and NRO (Non-Resident Ordinary) status.

 

What are the additional requirement with respect to contract notes?

Original contract notes for both purchase and sale transactions must be submitted within the specified timeframe set by the designated bank. This submission allows the designated banks to report the transactions to the Reserve Bank of India.

 

What precautions trading member needs to take while dealing with NRI Clients?

Trading member need to ensure that

  • Securities are not in RBI ban list before executing the order.
  • Clear funds are available for purchases.
  • Securities are available before executing any sell order.
  • Depending upon whether the purchases are made on repatriation / non-repatriation basis pay-out of the securities needs to be transferred to respective de-mat account.
  • Purchase/Sale transactions in cash segment should be settled by delivery only.

 

Is there any ceiling on the Investments under the Portfolio Investment Scheme?

NRIs have the authorization to invest in shares of listed Indian companies on recognized Stock Exchanges through the Portfolio Investment Scheme (PIS).

 

Under the PIS route, NRIs can invest via designated Authorized Dealers (ADs) on both repatriation and non-repatriation bases, up to a limit of 5 percent of the paid-up capital or paid-up value of each series of debentures of listed Indian companies.

 

Furthermore, the total paid-up value of shares or convertible debentures purchased by all NRIs cannot surpass 10 percent of the company's paid-up capital or paid-up value of each series of debentures.

 

This overall limit of 10 percent can be increased to 24 percent if the General Body of the Indian company passes a special resolution to that effect.

 

How payments could be made by NRIs for shares purchased on stock exchange?

For buying shares and/or debentures on a repatriation basis, payment must be made via inward remittance of foreign exchange through regular banking channels or from funds held in NRE/FCNR(B) accounts maintained in India. If the shares are acquired on a non-repatriation basis, NRIs can also utilize funds from their NRO accounts in addition to the aforementioned options.

 

How NRIs/PIO can remit Sale proceeds?

For NRIs/PIOs, if the shares sold were held on a repatriation basis, the sale proceeds (after deducting taxes) can be deposited into their NRE/FCNR(B)/NRO accounts. However, if the investment was non-repatriable, the sale proceeds can only be credited to their NRO accounts.

 

Can an NRI transfer shares purchased under PIS to others under private arrangement?

Shares acquired under the Portfolio Investment Scheme (PIS) on a stock exchange must be sold exclusively on a stock exchange. These shares cannot be transferred through private sale arrangements or as gifts, except in cases where NRIs transfer them to their relatives as per Section 6 of the Companies Act, 1956, or to a registered charitable trust in India. Any transfer to a resident or non-resident individual outside of these exceptions requires prior approval from the Reserve Bank of India.

 

Can an NRI purchase securities by subscribing to public issue? What are the permissions/approvals required? How can those shares be sold?

Certainly. The issuing company has the authority to issue shares to NRIs based on specific or general permission from the Government of India (GoI) or Reserve Bank of India (RBI). Therefore, individual NRIs do not need to obtain any separate permission. However, when requesting the credit of sale proceeds to their NRE/NRO account, the designated bank must be furnished with details such as the date of allotment and cost of acquisition to calculate any applicable taxes.

 

Can NRI do Intra-day transactions in cash segment?

No, NRI investors are required to take delivery of the shares they have purchased and give delivery of the shares they have sold. Short selling is not allowed for NRI investors.

 

Can NRI trade in futures & options segment of the Exchange?

Certainly, NRIs have the permission to invest in the futures and options segment of the exchange using Rupee funds held in India on a non-repatriation basis, as long as they adhere to the limits set by SEBI.

 

Can NRI trade in Currency derivative segment of the Exchange?

No, participation in the currency derivative segment of the Exchange is limited to individuals classified as "residents in India" according to section 2(v) of the FEMA Act 1999.

 

Can trading account be opened for person’s resident outside India who had been allotted shares under ESOP scheme?

Listed Indian companies have the authorization to issue shares under the Employees Stock Option Scheme (ESOPs) to their employees or employees of their joint venture or wholly owned subsidiary abroad who are residing outside India, with the exception of citizens of Pakistan. A trading account can be opened for individuals residing outside India solely for the purpose of selling shares acquired under the ESOP Scheme.

 

Can rights/bonus shares be issued to NRI?

Under FEMA provisions, Indian companies are permitted to issue Rights or Bonus shares to their current non-resident shareholders, provided they comply with the sectoral cap that may be applicable.

 

What needs to be done by NRIs for trading in Futures & Options segment of the Exchange?

An NRI interested in trading on the F&O segment of the exchange must engage with a clearing member through whom they intend to clear their trades and obtain a custodial participant (CP) code. The clearing corporation will assign a CP code to each NRI based on the application submitted by their clearing member. Trading members are responsible for ensuring that the NRI's CP code is correctly entered into the CP Code field of the trading system at the time of order placement. Each NRI client is allowed to have only one clearing member at any given time.

 

What are the limits applicable to NRI in Exchange Traded Derivative Contracts?

Position limits are applicable to the combined position in all derivative contracts on an underlying stock at an Exchange. NRIs' position limits are aligned with the client-level position limits set by SEBI periodically.

 

For Index-based contracts, there's a disclosure requirement for individuals or entities acting together who collectively own 15% or more of the open interest of all derivative contracts on a specific underlying Index.

 

Regarding Stock option and single stock futures contracts, the gross open position across all derivative contracts for a security for each client should not exceed the higher of:

 

  • 1% of the free float market capitalization (in terms of shares) OR
  • 5% of the open interest in all derivative contracts in the same underlying stock (in terms of shares)
  • The security-wise client-level position limits are accessible to members on NSE's website (www.nseindia.com).

How Investment positions of NRIs are monitored?

The Reserve Bank of India (RBI) monitors the investment positions of NRIs/FIIs in listed Indian companies, as reported by designated banks, on a daily basis.

 

When the total holdings of NRIs/FIIs under the Scheme approach the limit of 2 percent below the sectoral cap, the RBI issues a notice (caution list) to all designated branches of designated banks, cautioning that any further purchases of shares of the particular Indian company will require prior approval from the RBI.

 

Once the shareholding by NRIs/FIIs reaches the overall ceiling, sectoral cap, or statutory limit, the RBI places the company on the Ban List. Once a company is on the Ban List, no NRI can purchase shares of that company under the Portfolio Investment Scheme. The list of caution/banned RBI scrips is available at http://www.rbi.org.in/scripts/BS_FiiUSer.aspx.

 

In case a person who is resident in India becomes a non-resident, will he/she be required to change the status of his/her holding from Resident to Non-Resident?

Under section 6(5) of FEMA, an NRI is permitted to retain the securities they purchased while they were a resident Indian even after they become a non-resident Indian, on a non-repatriable basis.

In case a non-resident Indian becomes a resident in India, will he/she be required to change the status of his/her holding from Non- Resident to Resident?

Indeed, it is the duty of the NRI to notify the designated authorized dealer branch, through which they made investments in the Portfolio Investment Scheme, and the Depository Participant (DP) with whom they opened the demat account, about the change in their status. Following this, they must open a new demat account in resident status, transfer securities from the NRI demat account to the resident account, and subsequently close the NRI demat account.

 

In case a non-resident Indian becomes a resident in India or vice versa, will he/she be required to open a new trading account?

Certainly, the trading member is required to open a new trading account and ensure that it is updated with the appropriate category code, which could be either "01 – Resident Individual" or "11 – NRI," depending on the applicability to the individual.

 

Conclusion:

Navigating the Indian financial landscape as an NRI involves understanding the nuances of demat accounts and investment regulations. By leveraging the right type of demat account and adhering to regulatory requirements, NRIs can efficiently manage their investments in India while maximizing returns. Whether it's for repatriable or non-repatriable investments, an NRI demat account serves as a gateway to the vast opportunities offered by the Indian market.

 

 

 

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