Tax breaks, reforms, and returns: Why NRIs are banking big on India

The Indian market offers diverse avenues for portfolio diversification, including alternative investments such as portfolio management services (PMS) and alternate investment funds (AIFs). 

Equity investments, for instance, have delivered an impressive average annual return of 15% over the past five years, outperforming most major economies. Mutual funds also remain a popular choice, providing professional management, diversification, and flexibility.

Through the portfolio investment scheme (PIS), NRIs can seamlessly trade in Indian equities via NRE or NRO accounts on recognised stock exchanges.

Also read: NRI investing in Indian stocks? Know about TDS on capital gains

The real estate sector further strengthens India’s investment appeal, offering stability and steady returns. Reforms like the Real Estate Regulation Act (RERA) and the Foreign Exchange Management Act (FEMA) have enhanced transparency and accessibility. 

For many NRIs, factors such as India’s economic growth, USD-INR exchange rate movements, and an emotional connection to their homeland continue to drive interest in this asset class.

Understanding taxation 

The Union Budget 2024 introduced targeted tax reforms to streamline compliance and enhance the experience for NRI investors. These reforms address income earned both within and outside India, aiming to simplify tax processes and reduce cash flow challenges for taxpayers.

Among the key changes, the budget proposed applying tax credits for all tax deducted or collected when computing salary income, reducing reliance on refunds during tax filings. Additionally, residency status under FEMA has been recommended as the benchmark for determining the applicability of tax collected at source (TCS) on foreign remittances, adding much-needed clarity to cross-border financial transactions.

For capital gains, short-term rates on listed equity shares and equity-oriented mutual funds were raised from 15% to 20%, while tax rates for non-financial assets remained unchanged. Long-term capital gains tax rates were raised from 10% to 12.5%, though the exemption threshold has been increased from ₹1 lakh to ₹1.25 lakh annually, offering partial relief to investors.

NRIs can also benefit from the Double Taxation Avoidance Agreement (DTAA) India has with several countries, ensuring they aren’t taxed twice on the same income, especially regarding interest, dividends, and capital gains.

These measures reflect a balanced government approach, aiming to enhance revenue generation while safeguarding investor interests. By refining tax rules, increasing transparency, and aligning with global trends, the reforms position India as an attractive and efficient investment destination for NRIs.

GIFTing NRIs returns

GIFT City, India’s first smart city and International Financial Services Centre (IFSC), is emerging as a tax-efficient haven for NRI investors. Situated between Ahmedabad and Gandhinagar, it operates under a unified regulatory framework governed by the International Financial Services Centre Authority (IFSCA). This framework simplifies approvals, minimises bureaucratic hurdles, and enhances investment convenience.

Also read: How NRIs can use UPI for instant, no-fee transactions abroad

NRIs enjoy significant tax advantages on financial products, including capital gains tax exemptions for derivatives, alongside the ease of investing without constant currency conversions. Leading banks like SBI and HDFC in GIFT City offer foreign currency savings accounts in USD, EUR, and GBP. These accounts provide benefits such as higher interest rates (up to 4-5%), tax-free earnings, and protection against currency depreciation, coupled with seamless global transfers via the SWIFT network.

Conclusion

India presents an attractive opportunity for NRI investments, supported by progressive policies, technological advancements, and reforms. 

Also read: The NRI’s guide to choosing the right kind of account to invest in Indian stocks

To strengthen its position as a top destination for NRI investments, GIFT City could be a viable option for a streamlined investment process with tax advantages, making it an attractive destination for efficient and simplified cross-border financial investments.

(Krishna Makhariya is a CFA, and executive director and head of research, iVentures Capital)