📌 Quick Answer: How can NRIs invest in India and what are the FEMA and tax rules?
Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) can invest in India through multiple channels: Foreign Direct Investment under the Automatic or Government Route governed by the FEMA Non-Debt Instrument (NDI) Rules 2019, Portfolio Investment through the SEBI-regulated Foreign Portfolio Investor (FPI) route or the NRI Portfolio Investment Scheme (PIS), immovable property under Section 6(3)(i) of FEMA 1999, and deposits in NRE/NRO/FCNR accounts under FEMA Deposit Regulations. Taxation is governed by the Income-tax Act 1961 — specifically Section 115C (special provisions for NRI investment income), Section 195 (TDS on payments to non-residents), and the applicable Double Taxation Avoidance Agreement (DTAA). Repatriation of capital and returns depends on the nature of the investment, the account used, and compliance with FEMA reporting requirements.
Non-Resident Indian (NRI): Under FEMA, an NRI is defined as a person resident outside India who is a citizen of India. Under the Income-tax Act 1961, the residential status is determined by the number of days of physical presence in India during a financial year — broadly, an individual who is in India for less than 182 days (or 120 days in certain cases for Indian citizens with Indian income exceeding Rs. 15 lakh) is a non-resident. The FEMA and Income-tax definitions operate independently, and it is possible for a person to be non-resident under one law but resident under the other.
Repatriable Investment: An investment made by an NRI in India where both the principal amount and the returns (dividends, interest, capital gains) can be converted into foreign currency and remitted outside India through an Authorised Dealer bank. The repatriability depends on the type of account (NRE is fully repatriable; NRO has annual limits), the nature of the investment, and compliance with applicable tax obligations including obtaining a Tax Clearance Certificate or a Certificate from a Chartered Accountant under the Income-tax Act.
The regulatory framework governing NRI investments in India operates through a multi-layered statutory structure under the Foreign Exchange Management Act, 1999 (FEMA). Unlike the previous regime under FERA 1973, which treated foreign exchange transactions with suspicion and required permission by default, FEMA operates on the principle of permission unless specifically prohibited. This fundamental shift, combined with progressive liberalisation over two decades, has created a relatively open regime for NRI investment in India.
The key regulations governing NRI investment are:
The regulatory treatment of NRI investment depends on the precise classification of the investor. Under the current FEMA framework:
For the purpose of this guide, references to “NRI” include OCI Cardholders unless specifically stated otherwise, as the FEMA treatment is substantially identical for most investment categories.
NRI investment in Indian companies by way of subscription to shares, convertible debentures, or other eligible instruments is governed by the NDI Rules, 2019 and the FDI Policy issued by the Department for Promotion of Industry and Internal Trade (DPIIT). Investment under the Automatic Route does not require prior government approval — the investment can be made directly through an AD bank, subject to compliance with sectoral caps, pricing guidelines, and reporting requirements. Investment under the Government Route requires prior approval from the concerned Administrative Ministry through the Foreign Investment Facilitation Portal.
The sectoral caps and entry routes applicable to NRI investment are the same as those applicable to any foreign investor, with one important distinction: for sectors where FDI is permitted under the Automatic Route, NRI investment on a repatriation basis is also under the Automatic Route. Additionally, NRIs have a special dispensation under Schedule 4 of the NDI Rules for investment on a non-repatriation basis, where the investment is treated on par with domestic investment and is not counted towards the sectoral cap.
NRI investment on a repatriation basis follows the general FDI rules under Schedule 1 of the NDI Rules. The key parameters are:
Schedule 4 of the NDI Rules provides a special regime for NRI and OCI investment on a non-repatriation basis. This is a significant advantage for NRIs because:
The trade-off, of course, is that the principal amount becomes non-repatriable. Only the returns — dividends, interest, or sale proceeds — can be repatriated, subject to the NRO repatriation limits and applicable tax deductions. This makes non-repatriable investment most suitable for NRIs who have accumulated funds in India (in NRO accounts) and wish to deploy them productively within India rather than repatriate them.
The pricing of shares issued to NRIs on a repatriation basis is governed by Rule 21 of the NDI Rules (for unlisted companies) and SEBI regulations (for listed companies). For unlisted companies, the valuation must be done by a SEBI-registered Category I Merchant Banker or a practising Chartered Accountant using an internationally accepted pricing methodology on an arm’s length basis. The most commonly used methodologies include:
For a comprehensive analysis of valuation approaches for FDI transactions, our guide on FEMA valuation for FDI share pricing provides detailed methodology discussions and regulatory requirements. For startups specifically, our article on FDI in Indian startups with FEMA compliance checklist addresses the unique challenges of valuing early-stage companies.
The NRI Portfolio Investment Scheme, governed by the FEMA (Non-Debt Instrument) Rules 2019 and the RBI Master Direction on Foreign Investment in India, permits NRIs to purchase and sell shares and convertible debentures of Indian companies on a recognised stock exchange in India. The key features of PIS are:
NRIs who wish to invest more substantially in Indian capital markets may consider the FPI route, governed by the SEBI (Foreign Portfolio Investors) Regulations, 2019. While individual NRIs cannot directly register as FPIs, an NRI can invest through a foreign fund or investment vehicle that is registered as an FPI with SEBI. The FPI route offers higher limits (up to 10% of the paid-up equity capital of a company per FPI, with no aggregate NRI limit), access to debt instruments, and the ability to invest in derivatives and other complex instruments.
However, the FPI route comes with its own regulatory burden — the foreign fund must be registered with SEBI through a Designated Depository Participant, must comply with KYC requirements, and must submit periodic reports. For most individual NRIs, the PIS route remains more practical and cost-effective.
NRIs can invest in Indian mutual fund schemes without any SEBI or RBI approval, subject to the mutual fund’s own policies. Most Indian mutual fund houses accept NRI investments, though some restrict investment from NRIs resident in the United States or Canada due to FATCA compliance complexities. The investment can be on a repatriation basis (through NRE account) or a non-repatriation basis (through NRO account). There is no monetary ceiling on NRI investment in mutual funds.
Under Section 6(3)(i) of FEMA 1999 and Rule 24 of the FEMA (Non-Debt Instrument) Rules, NRIs and OCIs can acquire immovable property in India, subject to the following conditions:
The purchase consideration for immovable property must be paid through inward remittance from outside India through normal banking channels, or through debit to the NRE or NRO or FCNR(B) account maintained by the NRI with an AD bank in India. Payment by cash, traveller’s cheque, or foreign currency notes is not permitted. This requirement is strictly enforced, and any property transaction where the payment is not through banking channels creates both a FEMA contravention and a potential black money issue under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
An NRI who has acquired property in India can sell it to any person resident in India, or to another NRI/OCI. Sale to a person resident outside India who is not an NRI or OCI requires prior RBI approval. The sale proceeds can be credited to the NRE or NRO account, subject to the following conditions:
The NRE account is a rupee-denominated account funded through inward remittance from outside India or transfer from another NRE or FCNR(B) account. Key features:
The NRO account is a rupee-denominated account that can be funded through local sources (rental income, dividend, pension, sale proceeds of assets in India) as well as inward remittance. Key features:
The FCNR(B) account is a foreign currency-denominated term deposit account available in designated currencies (USD, GBP, EUR, JPY, CAD, AUD). Key features:
When an Indian resident becomes an NRI, their existing savings and fixed deposit accounts must be converted to NRO accounts. They can then open NRE and FCNR(B) accounts. Conversely, when an NRI returns to India and becomes a resident, the NRE and FCNR(B) accounts must be redesignated as resident accounts (or RFC accounts if the NRI has been abroad for a continuous period exceeding one year). The redesignation must be done within a reasonable period — the RBI expects this to be completed promptly upon change of status.
The tax liability of an NRI on income from investments in India depends on the residential status under the Income-tax Act, 1961 (which, as noted earlier, is different from the FEMA definition). Under Section 6 of the Income-tax Act, an individual is a resident if they are in India for 182 days or more during the previous year, or if they are in India for 60 days or more during the previous year and 365 days or more during the four preceding years. For Indian citizens who are NRIs (and not having Indian income exceeding Rs. 15 lakh), the 60-day threshold is relaxed to 182 days.
A non-resident is liable to tax in India only on income that accrues or arises in India (Section 5(2)) or is deemed to accrue or arise in India (Section 9). This covers:
Chapter XII-A of the Income-tax Act (Sections 115C to 115I) provides special provisions for the taxation of investment income and long-term capital gains of NRIs. These provisions offer a simplified and in some cases preferential tax regime:
Section 195 of the Income-tax Act imposes a TDS obligation on any person making a payment to a non-resident that is chargeable to tax in India. This is one of the most broadly drafted TDS provisions and has significant implications for NRI investments:
Capital gains tax is often the most significant tax implication for NRIs investing in India. The tax treatment depends on the type of asset and the holding period:
Following the abolition of Dividend Distribution Tax from April 2020, dividends from Indian companies are taxable in the hands of the NRI shareholder at the applicable rate. Under the domestic law, the rate is 20% (plus surcharge and cess). However, this is subject to DTAA relief — most of India’s DTAAs provide a reduced withholding rate on dividends, typically between 10% and 15%.
TDS is required to be deducted by the Indian company under Section 195 (or Section 196D for FPI dividends) before payment. The NRI can claim credit for the TDS in their country of residence under the applicable DTAA provisions to avoid double taxation.
India has DTAAs with over 90 countries, and these agreements provide significant tax benefits to NRIs. The key benefits include:
India-United States DTAA: The India-US DTAA is one of the most commonly used treaties by NRIs. Dividend withholding is limited to 15% for portfolio dividends (25% for dividends from US companies to Indian residents in certain cases). Interest withholding is capped at 15%. Capital gains on shares are taxable in both countries, with the US providing credit for Indian taxes. The US also taxes its citizens and residents on worldwide income, so NRIs in the US must report Indian investment income on their US tax returns and claim Foreign Tax Credit on Form 1116.
India-United Kingdom DTAA: Dividend withholding is limited to 10% for portfolio dividends. Interest withholding is capped at 15%. Capital gains on shares are generally taxable only in the country of residence, providing a significant benefit for NRIs in the UK selling Indian shares — though this is subject to the condition that the seller did not have a permanent establishment in India.
India-Singapore DTAA: Following the 2017 protocol, capital gains on shares acquired after 1 April 2017 are taxable in the source country (India) at a rate not exceeding 50% of the domestic rate (for a transitional period that has now expired). For shares acquired from 1 April 2017, the full domestic rate applies. Dividend withholding is limited to 10%. This treaty is particularly relevant for NRIs in Singapore and for investment structures routed through Singapore.
India-UAE DTAA: Interest income is taxed at 12.5% under the treaty. Dividend withholding is at 10%. Capital gains on shares are taxable in the source country. The India-UAE DTAA is particularly relevant for the large Indian diaspora in the UAE, and the tax-free status of individual income in the UAE makes the treaty analysis critical for determining the net tax burden.
To claim DTAA benefits, the NRI must obtain a Tax Residency Certificate from the tax authority of their country of residence. This was introduced by Section 90(4) of the Income-tax Act from Assessment Year 2013-14. The TRC must be provided to the Indian payer (or the Indian company deducting TDS) along with Form 10F, which provides details such as the NRI’s tax identification number in the country of residence, residential status, and the period for which the TRC is valid.
Without a valid TRC, the domestic law rates apply, and the NRI cannot claim reduced withholding under the DTAA. This is a compliance step that is frequently overlooked, leading to excess TDS deduction and the need to file an Indian tax return to claim a refund.
Funds in NRE and FCNR(B) accounts are fully repatriable without any monetary ceiling and without RBI permission. The AD bank processes the remittance on the basis of the NRI’s instruction, subject only to the standard FEMA declarations (Form A2). No 15CA/15CB is required for remittance from NRE/FCNR(B) accounts because the interest income on these accounts is tax-exempt in India, and the principal represents foreign exchange that was brought into India.
Repatriation from NRO accounts is permitted up to USD 1 million per financial year. This covers all types of income and sale proceeds credited to the NRO account — rental income, dividend, sale proceeds of shares, sale proceeds of immovable property, and any other income earned in India. The remittance requires:
The repatriation of sale proceeds of immovable property has additional conditions beyond the general NRO repatriation rules:
NRIs who inherit assets in India — whether immovable property, bank balances, shares, or other financial assets — can repatriate the inherited amounts through the NRO route, subject to the USD 1 million annual limit. The inherited asset must first be converted to cash (if it is not already in cash form), the conversion must comply with applicable FEMA and tax provisions, and the sale proceeds or balances must be credited to the NRO account. Tax on capital gains (if the inherited asset is sold) or tax on income (if the inherited asset generates income) must be paid before repatriation.
A common question we encounter in our practice is whether the USD 1 million limit is per NRI or per NRO account. The answer is per NRI per financial year — if the NRI has multiple NRO accounts, the aggregate repatriation from all accounts cannot exceed USD 1 million.
NRI investment in Indian startups follows the general FDI framework under the NDI Rules. Since most startups operate in sectors where 100% FDI is permitted under the Automatic Route (information technology, software development, e-commerce marketplace, fintech, healthtech, edtech), NRI investment is typically straightforward from a FEMA perspective. The key compliance steps are:
NRIs frequently invest in startups through convertible instruments — Compulsorily Convertible Preference Shares (CCPS), Compulsorily Convertible Debentures (CCDs), or under the terms of a Simple Agreement for Future Equity (SAFE). Under the NDI Rules, only compulsorily convertible instruments are treated as equity and are eligible for FDI. Optionally convertible instruments are treated as debt and fall under the ECB framework, which has different pricing and reporting requirements.
The conversion price of the convertible instrument must be determined upfront or through a formula that is clearly specified at the time of issue. If the conversion price is below the fair market value at the time of actual conversion, it may raise pricing guideline issues under the NDI Rules. We recommend that the conversion formula be linked to a future valuation event (such as a priced round) with a floor price equal to the fair market value at the time of issue of the convertible instrument.
For a complete walkthrough of FDI compliance for startup investments, refer to our comprehensive FEMA compliance checklist for FDI in Indian startups.
NRI exit from a startup investment can occur through several routes: secondary sale to another investor, buyback by the company, sale in an IPO, or merger/acquisition. Each route has distinct FEMA and tax implications:
NRIs who wish to establish a business presence in India often set up an Indian subsidiary — a private limited company incorporated under the Companies Act, 2013 with the NRI as a shareholder. This is treated as FDI under the NDI Rules, and the company must comply with all FDI reporting requirements including filing Form FC-GPR, Annual Return on Foreign Liabilities and Assets (FLA), and maintaining compliance with sectoral conditions.
Our Indian subsidiary setup services cover the complete incorporation process, FEMA compliance, and ongoing regulatory requirements for NRI-owned Indian companies.
Where the NRI holds more than 26% of the voting power or share capital of the Indian company, the NRI and the company are “associated enterprises” under Section 92A of the Income-tax Act. Any transaction between the NRI and the Indian company — management fees, service charges, royalty, loan, or guarantee — must be at arm’s length price as determined under the transfer pricing regulations (Sections 92 to 92F). The Indian company must maintain transfer pricing documentation (including a master file and a local file for companies meeting the threshold) and file Form 3CEB along with the tax return.
Non-compliance with FEMA provisions governing NRI investment can attract penalties under Section 13 of FEMA — up to three times the amount involved or up to Rs. 2 lakh where the amount is not quantifiable. Common contraventions include:
These contraventions can be compounded under Section 15 of FEMA through an application to the RBI. Our guide on FEMA compounding and penalties provides comprehensive analysis of the compounding process and typical penalty amounts.
Non-compliance with tax obligations can attract penalties under the Income-tax Act:
🔍 Practitioner Insight — CA V. Viswanathan
In our practice at Virtual Auditor (IBBI/RV/03/2019/12333), the most common compliance failure we see among NRI investors is the disconnect between FEMA compliance and tax compliance. An NRI will invest in an Indian company through the correct FEMA route — proper valuation, proper pricing, proper reporting — but then fail to consider the Section 195 TDS obligation when the company pays dividends, or fail to file 15CA/15CB when repatriating NRO funds. These are not trivial oversights: a missed 15CA/15CB can result in a Rs. 1 lakh penalty, and non-deduction of TDS under Section 195 can result in the Indian company being held liable for the full tax amount plus interest. The second most common issue is NRIs investing from NRO accounts assuming the investment is repatriable — it is not. Investment from NRO is treated as non-repatriable, and the principal cannot be remitted abroad through the NRE route. I always advise NRI clients to map the entire lifecycle of their investment at the outset: entry (FEMA route, pricing, reporting), holding (tax on income, annual compliance), and exit (capital gains, TDS, repatriation mechanism). Planning for exit at the time of entry is not pessimism — it is prudent structuring.
📋 Key Takeaways
No. Under Rule 24 of the FEMA (Non-Debt Instrument) Rules 2019 and Section 6(3)(i) of FEMA 1999, NRIs and OCIs are prohibited from acquiring agricultural land, plantation property, or farmhouse in India through purchase. The only exception is acquisition by inheritance — if an NRI inherits agricultural land from a person who was resident in India, the NRI can hold the inherited land. However, the NRI cannot acquire additional agricultural land through purchase, even if the purchase price is paid through proper banking channels. If an NRI wishes to engage in agriculture, the recommended route is to invest in the equity of an Indian company that owns agricultural land, subject to the FDI sectoral conditions for the agriculture sector.
Yes, interest on NRO fixed deposits is fully taxable in India. TDS is deducted at 30% (plus applicable surcharge and health and education cess of 4%) on the interest credited to the NRO account. However, if the NRI’s country of residence has a DTAA with India, the withholding rate may be reduced — for example, the India-US DTAA limits interest withholding to 15%. To claim the DTAA rate, the NRI must provide a Tax Residency Certificate and Form 10F to the bank before the interest payment date. The interest (net of TDS) that is credited to the NRO account can be repatriated within the overall USD 1 million annual limit, subject to 15CA/15CB compliance.
An NRI whose TDS deduction exceeds the actual tax liability must file an income tax return in India (Form ITR-2 or ITR-3, as applicable) for the relevant assessment year, declaring the Indian income and claiming credit for TDS deducted. The excess TDS is refunded by the Income Tax Department after processing the return. The refund is credited to the NRI’s bank account in India (NRE or NRO). To expedite the refund, the NRI should ensure that the return is filed electronically and verified (through Aadhaar OTP, digital signature, or physical ITR-V sent to CPC Bengaluru). Refund processing timelines vary but are typically 4 to 12 months from the date of e-verification.
Yes, but with restrictions. Under the NDI Rules, FDI in LLPs is permitted only in sectors where 100% FDI is allowed under the Automatic Route and there are no FDI-linked performance conditions. This means NRIs can invest in LLPs operating in sectors like IT services, consulting, or professional services, but not in sectors where the Government Route applies or where sectoral caps below 100% exist. The investment must comply with FEMA pricing guidelines, and the LLP must file Form FC-LLP(I) with the RBI within 30 days of receiving the investment. Prior approval from the RBI may be required for certain downstream investments by the LLP.
When an NRI sells shares of an unlisted Indian company, the capital gains are taxable in India. If the shares were held for more than 24 months, the gain is long-term and taxed at 12.5% (post-July 2024 rates). If held for 24 months or less, the gain is short-term and taxed at the applicable slab rate (up to 30% for the highest bracket). The buyer is required to deduct TDS under Section 195 at the time of payment. The TDS rate for long-term capital gains on unlisted shares is 12.5%, and for short-term gains, it is 30% (or the applicable DTAA rate, whichever is lower). Additionally, the transfer must comply with FEMA pricing guidelines — the transfer price must not exceed the fair market value for sale to a resident, and must not be less than fair market value for sale to a non-resident. FEMA Form FC-TRS must be filed within 60 days of the transfer.
Yes, an NRI can gift shares of an Indian company to a person resident in India, subject to the condition that the gift is made without consideration (i.e., it is a genuine gift and not a disguised sale). The gift must comply with the FEMA pricing guidelines applicable to the sector. For tax purposes, the gift of shares is not a taxable transfer for the NRI donor (no capital gains arise on a gift). However, under Section 56(2)(x) of the Income-tax Act, the resident Indian donee is taxable on the fair market value of the shares received as a gift if the aggregate value exceeds Rs. 50,000 in a financial year (unless the donee is a relative of the donor as defined under the Act). The gift must be reported by filing Form FC-TRS within 60 days.
It depends on the nature and amount of income. Under Section 115G of the Income-tax Act, an NRI whose total income consists only of investment income from foreign exchange assets (as defined in Section 115C) and whose TDS has been deducted at the prescribed rates is not required to file a return. However, this exemption is narrow — it applies only to investment income from assets acquired with convertible foreign exchange. If the NRI has any other Indian income (rental income, capital gains, business income), or if TDS has been deducted at a rate lower than the applicable rate (for instance, at DTAA rates where the actual liability is higher), or if the NRI wishes to claim a refund of excess TDS, a return must be filed. As a practical matter, we recommend that NRIs with significant Indian investments file returns annually to maintain a clean compliance record and to avoid issues during repatriation or property transactions.
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