Tax-Saving Investment Options for NRIs

Tax-Saving Investment Options for NRIs

NRIs are taxed in India in the same manner as any other ordinary citizen. Any NRI with an annual income of more than ₹2.5 lakh in India is subject to income tax and must prepare an income tax return.

The case is similar with investments. Just like resident Indians, you as an NRI are free to invest in almost every financial institution like mutual funds, direct equity, real estate, government bonds, fixed deposits, and so on.

The only restriction on your investments is with regard to schemes by the post offices in India. Thus, you cannot invest in schemes such as:

  • National Savings Certificate
  • Public Provident Fund
  • Monthly Income Schemes

Resident Indians are bound to pay taxes on all their income from such investments made by then. However, there are certain provisions in India that allow NRIs to earn money from investments without any tax levied on them.

  1. Fixed Deposits in Banks

  2. Fixed deposits are definitely the most popular and risk-free investments there are. NRIs may invest in fixed deposits in any Indian bank. Most of these banks have really attractive interest rates, usually ranging from 7–9%.

    It is important to note that the type of bank account you hold is relevant here. The interest and principal amount on NRE and FCNR accounts are not taxable in India. However, if the fixed deposit is made from an NRO account, then a 30% tax is levied on the interest income.

  1. Real Estate

  2. Real estate is the most popular investment among NRIs. As long as your property is in the right location, the steady growth of property rates guarantees profits to you.

    NRIs can invest in all types of land in India. The only restriction is agricultural land. For you to be able to purchase agricultural land, you will have to acquire permission from the RBI, which is next to impossible.

    If you rent out your property for over 300 days a year, you will be exempt from wealth tax on that property. However, if you do not rent it out, you can be exempt from wealth tax by leaving it vacant and declaring it “self-occupied”.

    Capital gains tax of 20% is applicable on a property you sell after two years of purchase.

    Capital gains tax of 30% is applicable on a property you sell within two years of purchase.
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  1. Mutual Funds

  2. A mutual fund is a large pool of money belonging to multiple investors, used to purchase a share or security. Investing in mutual funds is a tad riskier than fixed deposits. However, they also reap a much larger sum than fixed deposits.

    With regard to mutual funds, an NRE, NRO, or an FCNR account may be used.

    There are two main categories of mutual funds. Both of these categories are taxed differently:
    • Equity funds: More than 65% of the fund is invested in equity stocks. The investment becomes tax-free after ownership of one year. However, if you sell the investment within the first year, you will incur a 15% tax.
    • Debt funds: Less than 65% of the fund is invested in debt stocks. If you sell the stock after three years of ownership, you will incur only a 20% capital gains tax. However, if you sell it before the three years are complete, you will incur a 30% capital gains tax.

  1. Bonds and Non-Convertible Debentures (NCDs)

  2. Bonds and Non-Convertible Debentures tend to be very profitable investments. However, they have certain risks involved.

    There are three categories of bonds:
    • Non-Convertible Debentures: With regard to NCDs, the company secures the debt. Predictably, the interest rate offered to you will be lower, as the risk is reduced when a debt is secured. However, even after being lowered, the interest rate remains comparable and profitable.

    • Public Sector Undertakings Bonds (PSU Bonds): Public Sector Undertakings refer to undertakings that are owned and managed by the government. When you loan your money to such an institution, it becomes a Public Sector Undertaking Bond.

    • If you sell the PSU bond after owning it for over three years, the capital gains tax taken out is only 20%. The rate for resident Indians, however, can go up to 30%.

    • Perpetual Bonds: These bonds are governed by market conditions. There is no specific date for when you will be paid. However, the holder continues to receive a set amount of annual payments.

  1. Direct Equity

  2. Direct Equity is concerned with long-term growth. If you purchase stock under direct equity, you become a part-owner in that company. You then share the profits as well as the losses of that company.

    You may invest money into the National Stock Exchange of India Ltd. To be able to do that, you have to become a part of the Portfolio Investment Scheme (PIS) of the Reserve Bank of India (RBI).
    If the investment is sold within one year of purchase, the capital gains tax levied on NRI accounts is 15%. However, if the investment is sold after one year, the tax levied on NRI accounts is only 10%.

    You will need:

    • An NRE/NRO savings account dedicated solely to the purpose of PINS.
    • A Security and Exchange Board of India (SEBI) account with a registered broker.
    • A dematerialized account that holds financial securities electronically.
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