All NRIs including US-based NRIs are permitted by the Government of India to invest and trade in India. However, if you are an NRI
residing in the USA, there are certain regulations and guidelines one needs to bear in mind because of FATCA
and US SEC regulations.
Financial services providers serving US-based NRIs have to comply with strict FATCA reporting requirements which makes investment/trading difficult for NRIs and expensive for the company offering these services.
This article gives a brief synopsis of the various FATCA regulations, SEC and RBI guidelines, for US based NRI investors in listed Indian equities.
Indian regulations by RBI and FEMA permit trading and investment by US based NRIs in listed Indian equities. However, the United States has certain regulations under FATCA as well as restrictions on the solicitation of US citizens for investment in the Indian securities market.
As per the U.S. Securities and Exchange Commission (SEC) website, it is generally against the law for a foreign or domestic broker, to contact a U.S. investor and solicit an investment unless the broker is registered with the SEC. If U.S. investors directly contact and work with a foreign broker not registered with the SEC, they may not have the same protections as they would if the broker were registered with the SEC and subject to the laws of the United States.”
For US-based NRIs, it means that stock brokers or asset management companies (AMCs) of India not registered with the SEC cannot directly or indirectly contact US residents for selling their products and services. The law also advises US residents including NRIs to not to do business with foreign brokers not registered with the SEC as they might lose the investor’s protection as provided under US law.
The restrictive act, which makes solicitation by brokers unlawful, is a mere advisory for investors. One can open a trading and demat account with a stock broker in India, at their discretion. SEBI, the regulator for the securities market in India, regulations protect the interest of all investors, both residents and non-residents, who trade with SEBI registered financial service providers.
FATCA (Foreign Account Tax Compliance Act) is an Act enacted by the United States government to get information from foreign countries about the investment made by US citizens in their countries, the objective being is to detect and prevent offshore tax evasion by U.S. persons.
Under the Act, it is mandatory for all financial institutions like banks, stock brokers, AMCs and Insurance companies, etc., to share the investment details involving US citizens, including NRIs based in the US. The onus is on the stock broker or AMC to comply with FATCA regulations and report these investments as per the process outlined.
US-based NRIs investing in stocks, mutual funds, and other securities are expected to provide details such as their country of tax residence, tax identification number, country of birth and country of citizenship at the time of account opening to the stock broker.
The Reserve Bank of India (RBI) permits NRIs to invest in or trade in India.
· IPOs/Mutual fund investments can be done through NON-PIS using NRE/NRO savings bank account.
· Futures & Options trading can be done through the NON-PIS savings bank account.
· NRIs are not permitted to do intraday trading in either equity or derivatives. They can trade only in delivery-based equity transactions.
· NRI cannot invest more than 5% of the paid-up capital of a company.
· NRIs are only allowed to trade in certain scrips. The list of scrips is available on the RBI website.
· NRIs are not allowed to trade using margin or exposure funding. The total trade value has to be paid at the time of buying.
· Short selling is not allowed for NRIs. They need to hold 100% of the securities in their demat account while selling.
· NRIs can trade in bonds issued by PSUs, Government Treasury Bills and Securities
To trade in Indian Stock Exchanges, BSE & NSE, a US-based NRI needs
· PIS Account
Incidental Charges: NRI Trading charges are higher than those for residents because of additional compliance costs associated with NRI accounts. NRIs have to pay various charges & fees for holding such bank, demat and custodial accounts.
Income Taxes: The income of the investors would attract taxes under Income from Other Sources and Capital Gains
Capital gains from stocks, derivatives and mutual funds attract capital gain taxes. An NRI has to pay the Capital Gain Tax on the stock market investments in India. This tax depends on the tenure or the period for which these investments are held by an investor.
Long-term capital gain (LTCG): If the period of holding of the securities is more than a year. For debt oriented mutual funds the definition of long term is more than 3 years. The long-term capital gain applies to earnings from the sale of stocks, mutual funds, debentures, property, FD interest, etc. The rate of taxation varies from 10-20%
Short-term capital gain (STCG): If the period of holding of the securities is less than a year. For debt oriented mutual funds the definition of short term is less than 3 years. The short-term capital gain applies to earnings from the sale of stocks, mutual funds, debentures, property, FD interest, etc. The rate of taxation varies from 15-30%.
DTAA (Double Taxation Avoidance Agreement): To ensure that US-based NRIs do not end up paying taxes in the USA and India, both countries entered into a mutual agreement through The Double Taxation Avoidance Agreement (DTAA).
The DTAA applies to any individual with taxable income in both countries. As per DTAA, on capital gains from trading & investments, the taxes that you pay in India are then deducted from your total income from earned both the countries and you need to pay taxes only on the remaining amount.
De Emerald Partners specializes in providing Investing in listed Indian Equities to NRIs especially to US Based NRI investors.