Most NRIs look at investing in India from two perspectives. Firstly, they are looking to create a nest egg in India so that they can come back to their home country post retirement. Secondly, many NRIs find returns on Indian investments relatively attractive compared to similar investments in other Western nations.
Bank FDs and company FDs
For a very long time, the fixed deposits of Indian banks have been preferred by NRIs for their safety and the higher rate of interest offered. In India, NRIs have the choice of structuring FDs through their NRE accounts, NRO accounts or FCNR accounts. While NRO is a non-repatriable rupee account, the NRE is a non-repatriable rupee account. The FCNR account, on the other hand, is a foreign currency designated account which protects the NRIs from currency risk. FCNR FDs are quite popular among NRIs as they are free of currency risk.
FD returns are taxable for NRIs and that needs to be factored into calculations. NRIs are also permitted to invest in company FDs but most NRIs still prefer the bank deposits due to their safety and relatively liquidity.
PPF and other tax saving bonds
NRIs are liable to pay tax on the income that arises in India. Hence, NRIs with tax payable in India prefer to use PPF as a route to claim tax benefit under Section 80C. PPF is attractive to NRIs in multiple ways. It pays attractive returns of around 8% and if the Section 80C benefit is factored, the effective yield is much higher. In addition, the interest received on PPF is fully tax-free in the hands of the NRI. Effective yields, therefore, are very attractive on PPF. The lock-in period is 15 years but one can withdraw or borrow after 7 years.
Another option for NRIs to invest in is the tax-free bonds issued by designated infrastructure institutions in India. Here, there is no tax benefit on the investment but the interest received is tax-free without any upper limit. NRIs with a larger investible surplus prefer these bonds for the tax-free interest. Such bonds are also guaranteed by the government and are virtually default risk-free.
NPS for post retirement annuity
The National Pension Scheme (NPS) is also becoming quite popular with the NRIs looking at post retirement saving options. NPS comes with tax benefits. In fact, the Section 80C limit can be enhanced from Rs1.5 lakhs to Rs2 lakhs by investing in NPS. The amount accumulated at the time of maturity is completely tax-exempt and becomes an important nest egg for the NRIs looking to settle in India. The asset mix can be selected based on tenure and with proper selection, the yields can be as high as 13-14% CAGR over longer time frames. This is a government scheme and hence there is no risk of default in NPS.
Equity and Mutual Fund investments
Under the new regulations, NRI investments in the equity of Indian companies will also come under FPI regulation and limits. Indian government has been trying to woo NRIs to invest in Indian equities but their interest levels have been quite low and they have preferred the safety of banks. NRIs can invest in the Indian stock market directly under the Portfolio Investment Scheme (PINS) of RBI. NRIs can designated either their NRE or NRO account for equity investing and a special NRI demat account is required.
The PINS facility can also be used to invest in mutual funds. However, this facility has been limited since most Indian funds cannot sell to NRIs in the US and Canada.
Realty, REITS and INVITS
NRI investments in real estate have doubled from $5 billion to $10 billion between 2014 and 2019. While NRIs do look to purchase property in the form of flats and apartments in major cities as an investment, NRIs also have the option of investing in REITS and INVITS. These are pass-through-certificates backed by a portfolio of commercial real estate assets or infrastructure assets. They offer security type investments in real estate and can be a lot more flexible.