Why many NRIs are missing out on India’s market rally

Take the case of Tani Tayal, a 31-year-old NRI based in the US. She first thought of investing in the Indian stock market four years ago but dropped the idea midway after being asked to produce a number of documents to open an NRI demat account.

To be sure, an NRI demat account is mandatory for transacting in equities— for Indians who reside outside the country and meet eligibility conditions that classify them as NRIs. They can, however, invest in funds that have an exposure to the Indian markets.

“I am already exposed to the US market through the stock options we get but I still feel connected to my roots and want to participate in India’s growth story,” said Tayal , a senior HR business partner, Amazon Devices. “Opening a demat account requires me to be physically present in India. And that has not been possible.”

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Graphic: Paras Jain

Most NRIs visit India on short holidays and would rather spend that time with friends and family than running around to open a demat account.

Abhinav Mitaal, a Dubai-based NRI, said a broker asked him to fetch notarized documents for opening the demat account. “How can I get my documents notarized when I’m in Dubai,” said Mitaal. “It is a lengthy process and I don’t want to go to the embassy just for this,” he added

Another UAE-based NRI, Malay Zota, 33, a finance and tax manager with automobile group Mena, managed to open a demat account but that came with a rider barring transfer of funds outside India. The process of opening these so-called non-repatriable demat accounts are slightly less cumbersome and the charges lower than opening an account with repatriation facility. The latter allows money to be transferred from India to a foreign country. Both Tayal and Mitaal wanted to open a repatriable demat account.

Two ways to invest

Before initiating the process of opening an NRI demat account, applicants need to change their regular savings account to a non-resident external (NRE) or a non-resident ordinary (NRO) status. In adherence to the guidelines outlined by the Foreign Exchange Management Act (FEMA), it is not permissible for an NRI to maintain a savings account in India.

People opt for an NRE account when they want to have the flexibility to repatriate their funds to a foreign country where they are staying. The NRO account is less flexible when it comes to repatriation. In an NRE account, both the principal and interest earned can be repatriated abroad. The NRO account allows only the interest amount to be repatriated. To be sure, up to $1 million can be repatriated in a financial year from the NRO account under the liberalised remittance scheme but this requires permission from the banking regulator, the Reserve Bank of India (RBI).

No tax is levied on the interest earned in the NRE account but that accrued in the NRO account incurs a 30% tax rate. For NRE accounts, deposits are allowed only in foreign currency and withdrawal in Indian rupee. In the NRO account, deposits can be in foreign as well as Indian currency whereas withdrawals have to be in Indian rupee.

After opening an NRE or an NRO account, an NRI has to decide whether to open a demat account using the portfolio investment scheme (PIS) or the non-portfolio investment scheme (non-PIS). The decision to go with a PIS or a non-PIS account will have implications on how they can invest and dabble in Indian stocks.

The PIS status allows repatriation of money to the foreign country but the privilege comes with caveats. Firstly, only a handful of big banks have the licence to issue the PIS status and the applicant needs to get permission from RBI to open a PIS account. This involves a cumbersome documentation process.

Graphic: Paras Jain

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Graphic: Paras Jain

On the other hand, opening a non-PIS account is a relatively straightforward process. RBI approval is not required and all regulated banks offer non-PIS status. However, the downside of a non-PIS account is that the funds cannot be repatriated to the foreign country.

There are other limitations too. In PIS, future and options (F&O) trade is not permitted. Some brokers like Zerodha do not yet support MF investments in PIS accounts. F&O trading is allowed in the non-PIS route. Note that both PIS and non-PIS demat accounts don’t allow intraday trades, trading in currency and commodity segments, and buying sovereign gold bonds. Also, there are restrictions put in place by RBI that specify how much amount can be invested in each stock or sector. If this limit is breached, PIS account holders cannot invest further in those stocks. No such restrictions exist in the non-PIS route.

Transaction charges are also higher in the PIS route. This is mainly because, unlike in the normal demat account where the funds can be transferred directly to your brokerage account to buy stocks, the PIS account funds cannot be transferred to the brokerage account. The funds need to be transferred first from the savings account to the PIS account and when this happens, the banks intimidate the brokers about this information. After the broker gets this information, the account holders can buy stocks, the value of which cannot exceed the amount thus transferred. Thereafter, the broker executes the trade and sends a copy of it to the banks for trade settlement. All this back and forth incurs an extra cost which the PIS account holder has to bear.

“In certain cases, we make an exception by permitting individuals to submit evidence of the fund transfer to the PIS account. We promptly facilitate margin provision through this manual process. But this process is manual and we cannot extend this facility all to all if we get too many requests,” said Kazi Rehman, head of NRI investments at Zerodha.

To be sure, if NRIs want to invest only in mutual funds, they can do so without having to open a demat account. They can open an account directly with any asset management company (AMC) or a fintech firm that doesn’t use the services of a stock broker and buy mutual fund units in demat format.

The US and Canada have certain restrictions on advertisements of foreign mutual funds, hence only a handful of AMCs are available to serve US and Canadian NRIs. The seven AMCs that are allowed to take investments from these countries are Sundaram Mutual Fund, L&T Mutual Fund, UTI Mutual Fund, Aditya Birla Sun Life MF, Navi MF, ICICI Pru MF, and SBI MF.

Graphic: Paras Jain

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Graphic: Paras Jain


Unlike resident Indians who can easily open a brokerage account without physical paperwork, opening an NRI demat account is mostly a semi-online process. The NRI has to be physically present either at a bank branch or at a broker’s office or will need to courier the signed documents to the broker’s office after which the verification of documents is done.

“We first check if all documents are in order online and then tell them to courier us the physical copies,” says Rahman. “If this process is shifted online totally, we might just see a spurt in NRI demat openings. Today’s biggest roadblock is the KYC process for NRI clients, where clients must send their documents via courier. To help clients optimize the onboarding time, we have built a semi-automated process where clients can fill up the form, print only once the form is verified by us, and then courier it to us. This ensures no lapse in the details provided when the application is received,” said Rahman.

“An Aadhaar-led KYC would help the industry attract the NRI crowd. We see immense potential and interest from clients asking if they can digitally onboard. We believe this would be the next big step for our industry to attract investments and help our Indian economy and the markets to grow,” he added.

As of now, a number of documents are required to open an NRI demat account, be it PIS or non-PIS. Zerodha’s website lists out the documents needed and these include the Foreign Account Tax Compliance Act (FATCA) declaration and Foreign Exchange Management Act (FEMA) declaration, notarized copies of supporting documents such as passport and PAN card, besides proof of income and address—both Indian and overseas addresses— and a copy of the immigration document if the client is in India and visiting the branch. To start a PIS account, NRIs also need to submit a PIS approval letter from the bank. A webcam or in-person verification is also mandatory.

In a PIS account, the bank deducts and pays the applicable capital gains tax when stocks are sold in the form of tax deducted at source (TDS) whereas in the non-PIS account, the individual needs to take care of the tax filings. Zerodha takes care of the TDS deduction for its non-PIS clients. Short-term capital gains attract a 15% tax rate and long-term capital gains attract a 10% tax above Rs.1 lakh of gains. This also includes cess.


For NRIs, the option of choosing a non-PIS or PIS account depends on what they want in terms of repatriability of funds. Zerodha recommends the non-PIS route due to the low charges and relatively straightforward way of opening the account. Rehman told Mint that only 35% of NRI investors open an account through the PIS route.

Separately, some startups like US-based iNRI have started a mutual fund platform exclusively catering to NRIs. “No one caters to the needs of the NRIs. They use the mutual fund distributor route to sell MFs and the account opening process is less cumbersome than a demat account,” said iNRI founder Hemant Gangolia.

Tayal is now considering opening an account with iNRI instead of going the demat route.

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