When Indians living abroad seek investment opportunities in their home country, they often consider real estate, including vacation homes, residences, or office spaces. Additionally, they are drawn to Indian stocks and the securities market. For non-resident Indians (NRIs) or people of Indian origin looking to invest in Indian markets, the process is not overly complex. Similar to Indian residents, they need a demat account, type – non repatriable to hold and invest in financial securities. To participate in trading and investment activities, they can open either repatriable or non-repatriable Demat accounts.
This article focuses on the non-repatriable Demat account, delving into its meaning, providing an example, highlighting the differences between the repatriable Demat account, and presenting key facts about this specific type of Demat account.
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What Is Non Repatriable Demat Account
The term “non-repatriable” signifies the inability to transfer financial securities from one country to another, specifically from the host country to the country of residence. A Demat account is a crucial tool for holding shares, bonds, and other financial securities in electronic form.
A Non-Repatriable Demat account serves NRIs, but it comes with restrictions on transferring funds back to their country of residence. Investments made through a non-repatriable Demat account cannot be converted into foreign currency. This type of account is also known as the NRO Demat account and is typically linked to a Non-Resident Ordinary (NRO) savings bank account. The NRO account is designed to manage income earned by NRIs in India, including bonuses and dividends from investments.
With a non-repatriable Demat account, NRIs are limited in their ability to transfer proceeds from the sale of securities and profits from investments. They can only transfer the principal amount and the interest earned after Tax Deducted at Source (TDS) is deducted. The Reserve Bank of India (RBI) permits remittances of up to $1 million per financial year once applicable taxes are paid.
According to RBI regulations, NRIs cannot hold more than 5% of the paid-up capital in an Indian company. Additionally, NRIs can use a non-repatriable Demat account for transactions related to equity shares and mutual funds through the Portfolio Investment Scheme (PINS).
Explaining Non Repatriable Demat Account meaning with Example
Consider Aniket, an Indian resident who recently retired and relocated to the USA to be with his son. After settling there, his status changed to Non-Resident Indian. However, he still holds a non-repatriable Demat account in India with investments totaling Rs. 80 million. When he decided to sell his investments in India, he received net proceeds of Rs. 24 million. Now, he wishes to transfer this amount to his US account. Unfortunately, he cannot transfer the full Rs. 24 million; only the principal amount can be transferred after tax deduction. RBI guidelines dictate that an NRI must open separate Demat accounts for repatriable and non-repatriable investments.
Distinguishing Between Repatriable and Non-Repatriable Accounts
In contrast to non-repatriable Demat accounts, repatriable Demat accounts enable NRIs to transfer their funds abroad. A repatriable Demat account requires a linked Non-Resident External (NRE) savings account, which is designed for depositing foreign currency and allows funds to be repatriated as needed.
NRIs can use a Repatriable Demat account and bank account for investing in Initial Public Offers (IPOs) or other financial assets on a repatriable basis. Conversely, a non-repatriable Demat account and bank account are used for non-repatriable investments.
Any non-resident Indian wishing to invest in India must have either an NRE or NRO account.
Key Facts About NRO Demat Accounts (Non-Repatriable)
- A non-repatriable Demat account must be linked to an NRO savings account.
- Separate accounts are required for repatriable and non-repatriable investments.
- NRIs cannot transfer proceeds from the sale of securities and investment gains.
- NRIs can transfer the principal amount and interest earned from the NRO account.
- RBI permits remittances of up to $1 million per financial year once applicable taxes are paid.
Summarising
In summary, a non-repatriable Demat account allows NRIs to hold securities on a non-repatriable basis, enabling them to invest and trade in the Indian financial market. However, the transfer of funds is restricted, and strict RBI regulations apply. Despite the regulatory constraints, NRIs can still benefit from market diversification by investing in the Indian stock market, provided they adhere to the Foreign Exchange Management Act and other relevant regulations.
