Indians staying abroad can invest in the Indian securities market. This can be done by opening a Demat account – similar to investors staying in India. For investing and trading in financial securities, Non-Resident Indians (NRIs) can create repatriable or non-repatriable Demat accounts. Furthermore, the Foreign Exchange Management Act, 1999 (FEMA) is the legal and regulatory framework for repatriable and non-repatriable investments, while RBI establishes rules pertaining to these investments.
What is a non-repatriable Demat account?
First, let us understand the meaning of ‘non-repatriable’. This implies that financial securities cannot be moved from India to a different country (current residence). Thus, a non-repatriable Demat account can hold securities but does not permit NRIs to freely move funds out of India. Furthermore, investments through these accounts are not permitted to be converted into foreign currency.
Non-repatriable Demat accounts, also known as NRO Demat accounts, must be linked to a Non-Resident Ordinary (NRO) savings bank account, which is used to manage the income earned from India. These accounts are utilised for holding bonds, shares, and other dematerialised financial assets. The dividends and bonuses earned from the investments are deposited in these accounts. After leaving India, those holding regular Demat accounts can move to non-repatriable Demat accounts without losing their shares.
With NRO Demat accounts, you cannot transfer any proceeds obtained from investments or selling financial assets like securities. The only transfer allowed is of the principal amount and the interest after TDS has been duly deducted. As per RBI regulations, NRIs can remit up to a million US dollars in one financial year after paying all taxes. Moreover, NRIs cannot hold over 5% equity when it comes to holdings in Indian businesses. NRO Demat accounts allow mutual fund and equity share transactions through PINS, the Portfolio Investment Scheme.
Example
An example may help clarify the concept of NRO Demat accounts.
Let us take the example of an individual, Ajay. Ajay is a retired Indian resident. His daughter is working and living in the US, so he also decides to move to America. This move has him change his status to a non-resident Indian. Now, his investments in India will be handled through a non-repatriable Demat account, which has investments worth Rs. 1 crore. Upon selling the investment, he received proceeds worth Rs. 50 lakh, which he then wanted to transfer to his US account. However, owing to repatriation rules, he cannot transfer the money. Even the principal amount will only be transferable after taxes have been deducted from it.
NRIs need to hold two different Demat accounts for non-repatriable and repatriable funds, according to RBI guidelines.
Now that you know the meaning of a non-repatriable Demat account, let us look at repatriable Demat accounts.
What is a Repatriable Demat Account?
Unlike non-repatriable Demat accounts, repatriable Demat accounts allow NRIs to freely transfer funds. Additionally, NRIs that open a repatriable Demat account have to follow FEMA’s rules and must link their Demat account with their NRE (Non-Resident External) account. The repatriation of funds depends on the legal frameworks of both countries and the absence of intent by the respective governments to hinder fund transfers for the particular individual.
How are Repatriable and Non-Repatriable Accounts Different?
While both repatriable and non-repatriable Demat accounts are specifically designed for non-resident Indians, they are different in how they operate. Let us take a look at these differences illustrated in the table below:
Feature |
Non-Repatriable Demat Accounts |
Repatriable Demat Accounts |
Fund transfer |
Does not allow free transfer of funds abroad |
Allows free transfer of funds abroad |
Linked savings account |
Must be linked with NRO savings account |
Must be linked with NRE savings account |
Purpose of savings account |
NRO account used to manage income earned in India |
NRE account permits repatriations and is used to deposit foreign currency |
Basis of investment |
Used for investing in securities where proceeds cannot be repatriated |
Used for investing in IPOs and other financial assets where proceeds can be repatriated |
Fund repatriation |
RBI-prescribed limit on NRO accounts allows transfers up to $ 1 million in a financial year. Even for this remittance, a CA certificate is required. |
Funds in an NRE account are freely repatriable |
NRO Demat account (non-repatriable) - Key facts
Here are some key characteristics of NRO Demat accounts:
- The account should be mandatorily linked with an Indian bank’s NRO savings account.
- Separate accounts have to be opened and held to manage repatriable and non-repatriable investments.
- In NRO Demat accounts, the gains from investments and proceeds from security sales cannot be transferred.
- Only transfers allowed are of the principal and the investment interest.
In a financial year, RBI guidelines allow for a maximum total remittance of $1 million after all taxes are deducted.
Conclusion
The meaning of NRI non-repatriation, as discussed above, is the restriction on the transfer of funds from an NRO account to a bank account overseas. A non-repatriable Demat account is used to hold the securities of non-resident Indians. Using this account, NRIs can trade in the Indian financial market. However, they cannot freely transfer funds from their NRO account to their bank account outside India. RBI permits NRIs to remit a maximum of USD 1 million per year from their NRO account. Additionally, interest earned on NRO deposits in India is taxable.
