[Curated for NRIs] Top 5 Investment Options in India

Living abroad doesn't mean your Indian investment dreams must take a backseat. NRIs can still build a robust portfolio back home. But, knowing your options and deploying them appropriately can be tricky. 

You must consider personal factors like your risk tolerance and financial goals in addition to factors like taxation and repatriation. It could all get a bit overwhelming so we decided to write about the top 5 investment options available in India for NRIs. 

Suggested Read : What Indian mutual fund investors in US need to know about PFIC

Mutual Funds

Mutual funds are pooled investment instruments that invest in a portfolio of securities, such as stocks, bonds, or other assets. 

The biggest advantage of mutual funds is that they are managed by professional fund managers and don’t require you to have extensive investing knowledge. 

Mutual funds can be classified into two broad categories: equity and debt.

Equity Mutual Funds

Equity funds invest in shares of companies listed on the stock exchanges. They aim to provide capital appreciation and growth over the long term.  

Who Should Invest in Equity Mutual Funds?

Equity mutual funds are highly volatile investments than traditional investment options like fixed deposits and government savings schemes. They are subject to market volatility and fluctuations, which can affect their performance in the short term.

• Investment Horizon: Long term 5+ years

• Returns: Have the potential to generate high returns in the long term (inflation-beating returns)

• Risk Tolerance Level: High risk 

• Lock-in period: No lock-in period, except for Equity Linked Savings Schemes (ELSS) have a 3 years lock in period. Closed-ended funds have fixed tenures.

• Investment Goals: Wealth creation, retirement planning, etc.

Why Invest in Equity Mutual Funds?

• High Returns: The Indian economy is one of the fastest-growing economies in the world. Thus, investing in equity mutual funds will help you generate high returns in the long term. 

• Diversification: Investing in Indian equity mutual funds is a good way to diversify your portfolio globally. 

Taxation of Equity Mutual Funds

The capital gains based on the investment holding period are subject to taxation. And, the dividends are subject to Dividend Distribution Tax (DDT).

• Short Term Capital Gains Tax (STCG): Investments held for less than a year are taxed at 20%.

• Long Term Capital Gains Tax (LTCG): Investments held for over a year are taxed 12.5%, this is only on capital gains exceeding ₹1,25,000.

• Dividend Distribution Tax (DDT): Dividends from equity mutual funds obtained through the Income Distribution Cum Withdrawal (IDCW) option are taxed at your marginal income tax rate. Tax Deducted at Source (TDS) is applicable on dividends exceeding ₹ 5,000 per AMC per financial year.

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Debt Mutual Funds

Debt funds invest in fixed-income securities, such as government bonds, corporate bonds, debentures, or money market instruments. They aim to provide regular income and stability over the short to medium term. 

Who Should Invest in Debt Mutual Funds?

Debt funds can offer steady returns, as they are less affected by market volatility and fluctuations. They have the potential to generate higher returns than traditional investments like fixed deposits. However, debt funds are subject to interest rate risk and credit risk, which can affect their performance in the long term. 

• Investment Horizon: Short to medium term, 1 to 5 years

• Returns: Have the potential to generate regular and stable income

• Risk Tolerance Level: Low to moderate risk 

• Lock-in period: No lock-in period.

• Investment Goals: Wealth creation, retirement planning, etc.

Why Invest in Debt Mutual Funds?

• Stable Returns: These funds are known for delivering steady and predictable returns over time.

• Low Risk: These funds minimise risk by predominantly investing in fixed-income securities such as bonds and treasury bills. Reputable institutions or large corporations issue these securities and offer a fixed rate of return, contributing to lower risk.

• Diversification: Debt Funds are good options for portfolio diversification that help mitigate overall risk.

Suggested Read - Top Large-cap Mutual Funds For NRIs In 2024

Taxation of Debt Mutual Funds

The capital gains based on the investment holding period are subject to taxation. And, the dividends are subject to Dividend Distribution Tax (DDT).

• Short Term Capital Gains Tax (STCG): Investments held for less than or equal to two years are taxed at your marginal income tax rate.

• Long Term Capital Gains Tax (LTCG): Investments held for more than two years attract long term capital gains tax of 12.5%.

• For investments made before 1st April, 2023: Capital gains are taxed at a 20% flat tax rate with the benefit of indexation.

• For investments made after 1st April, 2023: All debt funds lose LTCG and indexation benefits and will be taxed like STCG - at your marginal income tax rate.

• Dividend Distribution Tax (DDT): Dividends from debt mutual funds, obtained through the Income Distribution Cum Withdrawal (IDCW) option, are taxed at your marginal income tax rate. Tax Deducted at Source (TDS) is applicable on dividends exceeding ₹ 5,000 per AMC per financial year.

How to Invest in Indian Mutual Funds?

You can invest in Indian mutual funds through your Non-Resident External (NRE)/ Non-Resident Ordinary (NRO) bank account. You can invest through the direct route (via online platforms like iNRI) or a Portfolio Investment Scheme (PIS) account. 

You can invest in mutual funds through the lump sum or Systematic Investment Plan (SIP) route. SIPs allow you to invest a fixed amount at regular intervals. 

There are mutual funds for every type of investor, you can pick the right one that suits your investment goals, risk tolerance level, and investment horizon.

Open an NRI Mutual Fund Account on iNRI

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Stocks

Stocks are shares that give ownership in a company and trade on the stock exchanges. Stocks offer the potential for capital appreciation, growth, and dividends. 

Who Should Invest in Stocks?

Stocks are extremely high volatile investments out there. They are subject to market volatility, fluctuations, and company-specific risks, which can affect their performance in the short term. 

• Investment Horizon: Long term 5+ years (short term, opportunistic trades are possible but riskier)

• Returns: Potential to generate high returns in the long term (inflation beating returns).

• Lock-in period: No lock-in period.

• Risk Tolerance Level: Very high

• Investment Goals: Wealth creation

Why Invest in Stocks?

High Returns: The Indian markets present an outsized alpha opportunity compared to any other equity market globally. India is among the world’s top fastest growing economies and will continue to be for the foreseeable future. 

Taxation of Stocks

The tax implications of stocks for NRIs are similar to those of equity mutual funds. 

• Short Term Capital Gains Tax (STCG): Investments held for less than or equal to a year are taxed at 20%

• Long Term Capital Gains Tax (LTCG): Investments held for over a year are taxed 12.5%, this is only on capital gains exceeding ₹1,25,000.

• Dividend Distribution Tax (DDT): Dividends from equity mutual funds obtained through the Income Distribution Cum Withdrawal (IDCW) option are taxed at your marginal income tax rate. Tax Deducted at Source (TDS) is applicable on dividends exceeding ₹ 5,000 per AMC per financial year.

How to Invest in Indian Stocks?

You need a PIS and demat account to buy and sell shares of listed Indian companies on recognised stock exchanges. These transactions can be done through NRE or NRO accounts.

However, there are some limitations, and you cannot participate in short selling, intraday trading, and derivatives trading.

But investing and managing stocks takes work. You must manage these investments by yourself and actively track them (don’t forget the time difference). While this may not be everyone’s cup of tea. You need to understand the financial markets, track them regularly and have a very high-risk appetite to invest in stocks. 

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Fixed Deposits (FDs)

Fixed deposits (FDs) are term deposits that offer a fixed interest rate for a specified period. FDs offer the safety of principal and guaranteed returns, irrespective of market conditions. NRIs can open any of the following FDs:

• NRE Fixed Deposit: Through an NRE account, you can invest your foreign income in an NRE fixed deposit and withdraw INR (at prevailing exchange rates) to manage your expenses or other financial obligations in India. You can fully repatriate the principal and interest back to your country of residence without any restrictions.

• NRO Fixed Deposit: You can invest and manage your Indian income in an NRO FD. However, withdrawals can be made in INR only. You can transfer up to $1 million per year from an NRO account to your country of residence.

• Foreign Currency Non-Resident (FCNR) Fixed Deposit: You can invest your foreign currency in FCNR FDs. You can withdraw in foreign currency (without any conversion loss). The principal amount and interest earned are fully repatriable.

Who Should Invest in Fixed Deposits?

FDs are suitable for investors who have a low risk appetite and seek regular and guaranteed returns. 

• Investment Horizon: Short, medium and long term (6 months to 10 years)

• Lock-in period: Funds are locked during the fixed deposit tenure. 

• Risk Tolerance Level: Low 

• Investment Goals: Capital protection

Why Invest in FDs?

• Steady and Stable Returns: FDs offer regular income through interest payments. Since banks offer these, the returns are guaranteed. 

• Deposit Insurance: NRE, NRO and FCNR FDs up to Rs 5,00,000 are covered under Deposit Insurance and Credit Guarantee Corporation (DICGC).

Taxation of Fixed Deposits

• NRE FD: The interest on NRE FDs is not taxed in India. 

• NRO FD: The interest you earn on NRO FDs is taxed in India. TDS of 30% (plus a surcharge and cess) is levied for interest earned from NRO FD. The rate is applicable only when no PAN is furnished while opening the account. 

If the interest earned is more than Rs 10 lakhs, a 10% extra surcharge will be applied.

• FCNR FD: The interest you earn on FCNR deposits is tax-free in India as long as you hold the NRI status or RNOR (Resident and Not Ordinarily Resident) status.

How to Invest in FDs?

You can open an NRE, NRO or FCNR account with any leading bank in India and open the respective fixed deposit. Make sure you pick a reputed bank that offers competitive interest rates. 

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Bonds (Corporate and Government)

Bonds are debt securities issued by corporations or governments to raise funds from investors. They pay a fixed or variable interest rate, known as the coupon, and return a fixed amount, known as the face value, at maturity. 

NRIs are not eligible to invest in all Indian bonds. Thus, before investing, check the bond’s eligibility.

For example - Government bonds only under the FAR (Fully Accessible Route) are available for NRIs.

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Who Should Invest in Bonds?

Bonds offer regular income, stability and capital protection if held till maturity. Bonds are suitable for investors who have a low to moderate risk appetite and a medium to long-term investment horizon. However, bonds are exposed to interest rate risk and borrower default risk. 

• Investment Horizon: Short, medium and long term (1 year to 10 years)

• Lock-in period: No lock-in period. Most bonds trade on the stock exchange. 

• Risk Tolerance Level: Low 

• Investment Goals: Capital protection

Why Invest in Bonds?

• Steady and Stable Returns: Bonds offer regular income through interest payments. Bonds with high credit ratings rarely default on interest payments. Low rated bonds may be more risky. 

Taxation of Bonds

Interest and capital gains from bond investments are taxable. The capital gains based on the investment holding period are subject to taxation. However, interest on tax-free bonds is not taxable.

• Short Term Capital Gains Tax (STCG) on Listed Bonds: Investments held for less than or equal to 2 years taxed at your marginal income tax rate.

• Long Term Capital Gains Tax (LTCG) on Listed Bonds: Investments held for more than 2 years attract TDS of 12.5% applicable.

How to Invest in Bonds?

You can invest in corporate and government bonds in India through the PIS account. You can invest in government bonds directly through the RBI Retail Direct portal. 

Alternatively, you can invest in bonds through mutual funds, offering more flexibility and diversification.

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Real Estate

Real estate has been popular in Indian households, including NRIs. You can purchase either commercial or residential real estate in India. FEMA doesn’t permit you to buy agricultural property, farmhouses and plantation homes in India.

Real estate is a physical asset that consists of land and buildings. Real estate offers the potential for capital appreciation, rental income, tax benefits, and diversification. 

Who Should Invest in Real Estate?

Physical real estate investments are high-ticket purchases suitable for investors wishing to earn regular income. 

• Investment Horizon: Long term

• Lock-in period: No lock-in period. However, liquidity can be low.

• Risk Tolerance Level: Low to high

• Investment Goals: Own a physical asset and regular income

Why Invest in Real Estate?

• Regular Income: Rental properties earn regular income through rents. 

• Capital Appreciation: Indian real estate is booming, and the potential for property value appreciation is quite high in developing regions.

Taxation of Real Estate

The tax implications of real estate for NRIs are similar to those of resident Indians. 

• Rental Income: Subject to TDS at 30% + 4% on the TDS

Capital Gains

• ‍Short Term Capital Gains: Investments held for less than two years are taxed at your marginal income tax rate. TDS is deducted at 30%.

• Long Term Capital Gains: Investments held for more than two years are taxed at 12.5%. TDS is deducted at 12.5%.‍

‍Tax Exemption: You can claim tax exemptions under Sections 54, 54EC, and 54F of the Income Tax Act if you reinvest the capital gains in Capital Gain Bonds within the stipulated time.

How to Invest in Real Estate?

First, identify a high growth potential region/area/project. You may have to get the help of a real estate broker for this if you are not well-versed with the market.

Next, decide whether you want to invest in a residential or commercial property and begin your hunt. Again, you may need the help of a real estate broker for this.

If you don’t want the ownership and hassle of managing the entire property, you can invest in fractional real estate or through exchange-listed Real Estate Investment Trusts (REITs).

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At a Glance

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Conclusion

Each investment option has its pros and cons. Picking the right investment will depend on your investment goals, tenure and risk tolerance level. You will have to shortlist, invest, track and manage your investments by yourself when investing in stocks, bonds, real estate and FDs. 

Investing in stocks and bonds will require you to have knowledge and time to track the Indian markets and economy regularly. This can be the biggest challenge while investing in these assets, owing to the different time zones. 

Real estate investments are capital intensive, and managing them while staying abroad can be challenging. And, real estate investments are known for being illiquid (you may need more time to sell them). 

Fixed deposits may be among the safest investment options but fail to generate inflation-beating returns. 

Among these investment options, mutual funds are a clear winner. They are professionally managed; you need not worry about tracking the markets. Mutual funds are suitable for all types of investor profiles - from high risk to low risk, there are funds for everyone. Historically, equity mutual funds have generated high returns - 15% to 18%. 

The best part is you can start investing in mutual funds from the comfort of your home without requiring a demat or PIS account. With iNRI, you can set up your mutual fund investments within a few days.

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Sign up on iNRI and invest in the top mutual funds (specially curated for NRIs). Don’t worry, we’ll help you at every step - investing, managing, taxation and repatriation.