Every year, thousands of Indians migrate to foreign countries to explore better career opportunities. Over time, they settle abroad and attain the status of a non-resident Indian or NRI. However, the urge to invest in one’s homeland has been a perpetual quest for NRIs, and with good reason. Let’s consider some numbers to see why.
What makes India an attractive destination
Currently, India is the fifth largest economy at $2.7 trillion GDP. It is likely to overtake Germany and Japan by 2025 to become the third largest economy behind United States and China. Interest rates in India are traditionally higher than that of developed nations. Investing in debt instruments alone can therefore enhance NRI return potential by 1 to 2.5%. Now, let’s consider rate of return in other investments such as equity.
In mature markets such as the UK and US rate of interest on any investment varies between 7-8%. Comparatively, returns on Indian equity can be as high as 15%. Even you borrow money at 3% (rate of interest on a personal loan), you can make a profit of 12% on your investments (15%-3%). Obviously, you have to consider the exchange rate risk, but if you already have long term liabilities and other commitments in India. E.g. as a home loan, this is a smart way to earn a few extra percentage points as returns.
Indian stock markets have outperformed global peers by a surplus of 40% over the past five years. Indian market cap is projected to register 10.1% CAGR over the next 10 years registering the fastest growth globally. Thus, NRI investors can construct a robust stock portfolio that can bring significant capital appreciation as well as dividend income. If lack of time or knowledge is a constraint, investment through the mutual fund route is a viable option.
Traditional investment choice still holds good
However, when it comes to investing back home, NRIs have traditionally preferred real estate as an investment avenue. In 2018, NRI investment in real estate touched the $10 billion mark. In the current financial year NRI investments are expected to rise by 15%. NRI interest in the sector has improved given the culmination of two large factors.
Firstly, a depreciating rupee (that has increased their purchasing power) and secondly improved transparency in the sector, thanks to the introduction of landmark regulations such as and Real Estate Regulation and Development Act (RERA) 2016 and Goods and Services Tax (GST).
NRI interest is rising in the commercial real estate space with its potential to offer stable rental yields at 6-8%. With the Government focus on building smart cities, special economic zones (SEZ), special investment regions (SIRs), IT parks and co-working spaces are witnessing rapid development in cities such as Bengaluru, Hyderabad, Chennai, NCR and Pune offering lucrative opportunities for NRIs. Further, with new opportunities rising in real-estate financial products such as Real Estate Investment Trusts (REITs), the first of which was a major success in India, real estate continues to be a favourite investment theme.
One of the most asked question by an NRI is how to repatriate money made on Indian investments. Repatriation rules depend on the sources of funds. The source of fund can be identified through the bank account you choose to hold as an NRI. These are:
- Non Residential External Rupee Account- NRE
- Non Resident Ordinary Rupee Account -NRO
- Foreign Currency Non-Repatriable Currency Deposit-FCNR
If you invest through an FCNR or NRE account it can repatriated freely. However if you hold an NRO account proceeds only to the extent of $1 million USD is repatriable annually. Further, if the source of funds used for investments is foreign currency it is repatriable. If the source is Indian rupee, it is non-repatriable. Any income earned on the Indian investments, are repatriable after paying the applicable taxes. Thus short-term capital gains rate for an NRI is 15% on profits, and there is no tax on long-term capital gains for up to Rs. 1 lakh profit within a year.
Taxation norms for NRIs
Another pertinent question that NRIs ask is with regards to double taxation. NRIs who earn an income on investments in India need to pay taxes as explained above. This income also needs to be declared in the country of residence leading to double taxation. In order to avoid double taxation, countries enter into a Double Taxation Avoidance Agreement (DTAA) to provide relief from being taxed on the same income twice.
Let us understand this with an example. An NRI, say A who resides in a foreign country earns an interest income of Rs 10,000. Now the tax rate on interest income as per the laws of his country of residence is 20%, whereas as per tax treaty under DTAA with India it is 15%.
Thus, here is how taxation will pan out for A:
- Interest income-Rs. 10,000
- Tax paid in India- Rs. 1500
- Tax paid in country of residence- Rs. 2000
Net payable tax in country of residence- Rs. 500 (2000-1500) credit for the tax paid in India.
As an NRI, you can thus avail benefits of DTAA by submitting tax residency certificate to your concerned bank or broker to avoid being taxed at a higher rate.
In conclusion it is fair to say that with an increasing number of working professionals abroad and the reducing prospect of permanent citizenship in most countries such as U.K , Singapore and Australia due to protectionist measures, the inflow of NRIs investments is set to see a meteoric rise. This, coupled with the high growth path that India is likely to maintain and the promise of higher yields will mean the astute NRI investor will be chasing lucrative investments options in India.
Make sure you don’t get left behind.