The government of India is very precise about its policies for trade and exchange in the country. Just like tax exemption for senior citizens, the government has made separate laws for NRI’s in terms of banking and trading. When trading in stock market NRIs have to adhere to certain guideline laid by bodies like SEBI and RBI. Which brings us to the question, can NRIs trade in ETFs?
Before we get to the answer forthe previously mentioned question, let us first understand what ETFs are.
What are ETFs?
Exchange-traded Funds or commonly known as ETFs are marketable security which tracks stock market elements like index, commodity, index funds and bonds. An ETF stock can be traded like a common stock on a stock exchange. Due to the high frequency of trade, the price of ETFs keeps constantly changing throughout the day. Owing to lower fees and better liquidity ETFs are popular day trading stock picks among investors. ETFs do not possess a Net Asset Value (NAV) like mutual funds, as they are traded like stocks.
Can NRIs invest in it?
According to the trading policies of India, NRIs are allowed to invest in the securities and futures & options segment of the exchange out of Rupee funds on non-repatriation basis, but there is a procedure which has to be followed.
How do I invest?
If an NRI wishes to invest in the Indian stock market, he or she has to approach any authorized bank approved by RBI to administer a Portfolio Investment Scheme (PIS) and open a NRE(Non-Resident External) or a NRO (Non-Resident Ordinary) account.
Amateur investors often get confused while choosing between NRE and NRO. Even though both bank accounts serve almost the same purpose, there are notable differences between them. In an NRE account,you can repatriate funds including interest from your account with no limits. For NRO account holders, the RBI has set a limit of USD 1 million in a financial year. However, to withdraw your funds from any of these accounts, you might need a chartered accountant for documentation.
Both accounts have different taxation policies, where NRE is exempted from taxes like income tax, wealth tax and gift tax, an NRO account holder has to pay each of the taxes levied. Moreover, in an NRO account,the interest earned is taxable too, but you can avoid paying taxes by availing tax benefit under Double Taxation Avoidance Agreement (DTAA).
There are many things an NRI needs to keep in mind while investing in the Indian stock market. Regulations like barrier of extraction of the intraday transaction in cash segment, barrier of trade in Currency derivative segment of the Exchange should be observed while trading.