How Does NRIs Invest in the Indian Stock Markets

As per the Foreign Exchange Management Act (FEMA), NRIs are allowed to invest in the Indian stock market through the Portfolio Investment Scheme (PIS). India has quite an encouraging attitude towards NRI investments, and India's central bank’s decision to double the investment cap contributes to potentially attracting greater foreign capital. To participate in the Indian stock market as an NRI, you must establish a Portfolio Investment Scheme (PIS) account associated with a demat account, after which you can invest in stocks.

In the article, we will talk about:

What is required for investing in the stock market (NRI bank account, PIS, Demat account, trading account)
How to fulfill the requirements (Info on the required accounts)
Taxation on the invested amount
Restrictions on investing in the stock market (any limits, who can invest on your behalf, and more)

Who is an NRI?

While both FEMA and the IT Act define who an NRI is, do remember that NRI Investments are governed by the definition under the former:

How FEMA Defines the NRI Status

According to the 1999 FEMA Act, one is considered an NRI if:

He has gone out of India with the intention of staying outside India for an indefinite period. This applies to anyone leaving for employment, business, vacation, and so on.
He stays in India temporarily, but he is only visiting and has not returned to take up employment or settle down.

Step-by-Step Guide on How NRIs Can Invest in the Indian Stock Market

From opening a bank account to understanding PIS and non-PIS options, there are multiple steps in this process:

Open an NRI Bank Account

As an NRI, you can choose from two types of NRI banking accounts to start your investment journey in the Indian stock market.

Non-Resident Ordinary Account (NRO): For incomes earned within India, such as rent, pension and business profits. This account holds income earned in India, denominated in Indian Rupees. However, this income isn’t fully repatriable, meaning only a portion of this can be used for foreign investment.
Non-Resident External Account (NRE): For individuals who want to manage their investments and expenses in India using their foreign-earned income. Interest earned in an NRE account is tax-free in India.

Portfolio Investment Scheme (PIS)

NRIs can invest in the Indian market through two major routes:

Portfolio Investment Scheme (PIS): To begin secondary market investments, NRIs need a PIS Account. This ensures all transactions go through the NRI PIS account, which can be opened through any authorized bank. Kotak’s NRI investment plans are a hassle-free choice for PIS investments.
Non-PIS: For NRIs looking to invest in mutual funds or IPOs.

Open a Demat and Trading Account

NRIs can open a trading account that will allow them to enjoy easy trading options such as buying and selling stocks or investing in mutual funds. Along with this, NRIs need a Demat account to hold their assets electronically. The NRE or NRO account will have to be linked to the Demat account to start trading in the stock market.

Start Investing

Once all accounts are set up, NRIs can buy and sell stocks as per their preference. They can enjoy investment options such as direct equity, mutual funds, Initial Public Offerings (IPOs), exchange-traded funds, and bonds. If you’re interested in learning more about mutual fund investments as an NRI, you can go through Kotak Bank’s blog.

Understanding NRI Investment in Futures and Options

NRIs can invest in futures and options; remember, NRIs:

Can only trade through an NRO bank account using the Rupee funds. The individual needs a custodian account and a custodian participant (CP) code
Can opt for either equity or index-related derivatives.
Can only engage in delivery-based trades or hold positions till the expiry date of the derivative contract.
Can do intraday trading if they appoint a custodian and get a Custodian Participant (CP) code.
Cannot trade in currency and commodity derivative contracts.

Taxation Rules For NRIs

Tax Type	Applicable Rate for NRIs	Conditions
Capital Gains Tax	Short-term: 20%	Holding period < 1 year for equity investments
	Long-term: 12.5%	Holding period > 1 year; applicable on gains exceeding ₹1.25 lakh
Dividend Tax	As per the NRI’s applicable income tax slab rate	Taxed at the individual’s slab rate
Tax Deducted at Source (TDS)	Applicable on capital gains and dividends	NRIs may be eligible for a tax refund if their total tax liability is lower than the TDS deducted, but they must file an income tax return in India to claim it.

Things to Keep in Mind: NRI Trading Restrictions

Here are some key points to keep in mind while trading:

NRIs are banned from investing in certain sectors such as gambling, lottery firms, betting, etc.
They are not allowed to short-sell
Public sector services such as railways, military, and atomic energy are off-limits for NRI investments
An NRI's investment in any Indian company's stock cannot exceed 10% of its paid-up capital
The aggregate ceiling of 10% can be raised to 24% if a special resolution to that effect is passed by the General Body of the Indian company

Conclusion

The Indian economy is on the rise, and people from all around the world are interested in the Indian Stock Market. If you’re an NRI and looking to invest your money here, you can follow proper guidelines and legal procedures to do so. Whether you want to invest in an up-and-coming firm or are looking for a wise mutual fund investment, Kotak can help you with everything. In just a few steps, open your Kotak demat account and begin your trading journey today!

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FAQs

Can NRIs use their resident demat account to trade in the Indian Stock Market?

No, you have to create an NRI demat account for Indian investments. You can choose to convert your existing account into an NRI demat account and link it to your NRO account.