The Non-Resident Indian (NRI) status is hugely important from a taxation perspective. Because taxation is an evolving body of rules and regulations the definition of NRI is also prone to changes. Find out whether you qualify as an NRI or not, here.
Indians across the world are avid investors. And our love story with shares, bonds, mutual funds, and (of course) gold continues.
If you are looking to ride the Indian investment juggernaut, the first and most important step that you need to take is to open a Demat account.
What is a Demat account?
Demat stands for dematerialization. A Demat account facilitates the holding of the following securities in electronic format:
- Shares
- Mutual funds
- Government securities
- ETFs (Exchange Traded Funds)
- IPOs (Initial Public Offerings)
- Non-convertible debentures
- E-gold
- Bonds in electronic format
Indian markets began with the process of dematerialization way back in 1996. The dematerialization process has eliminated tedious and cumbersome paperwork. Today, there are no physical share certificates issued.
A Demat account works like a bank account. Every time you buy or sell securities, your Demat account is “credited” or “debited” with shares in the electronic format.
Under the markets regulator of India, the SEBI (Securities and Exchange Board of India), it is mandatory for a person to possess a Demat account if they wish to invest in Indian stock markets. However, it is not mandatory to hold a Demat account if you wish to invest in mutual funds.
Types of Demat Accounts
There are three types of Demat accounts in India:
- Regular Demat Account: This type of account is used by traders or investors who reside in India and are Indian citizens.
- Repatriable Demat Account: This type of Demat account caters to NRIs (Non-Resident Indians). This account allows fund transfers abroad. It requires an associated NRE (Non-Resident External) bank account.
- Non-Repatriable Demat Account: This type of account is also for the Non-Resident Indians. However, such an account doesn’t facilitate the transfer of funds abroad. This account requires an NRO bank account to be associated with it.
Demat accounts in India are opened with a central depository such as the National Securities Depository Limited (NSDL) or the Central Depository Services Limited (CDSL). Both the NSDL and CDSL enlist the DPs (Depository Participant) registered with them.
Can NRIs Hold Shares in Demat Form?
According to SEBI, both residents and NRIs (non-resident Indians) can possess a Demat account.
NRIs cannot use a regular Demat account. They may opt for either a repatriable Demat account or a non-repatriable Demat account.
NRI Demat Account—Important Things to Keep in Mind
One of the most important considerations regarding NRI Demat accounts is to follow the rules of the FEMA (Foreign Exchange Management Act).
NRIs need to consider the following definition of NRI, according to FEMA rules.
- NRI (Non-Resident Indian): is a “person resident outside India”, who is a citizen of India or is a PIO (Person of Indian Origin).
- Person residing outside India: Under the FEMA (Foreign Exchange Management Act, 1999), a person who is NOT a resident in India, as defined under Section 2 (v) of the Act, is considered as a person resident outside India. It is an important change in definition since the FERA (Foreign Exchange Regulations Act, 1973). According to the new definition, citizenship of a person no longer has a bearing in determining the residential status.
- PIO (Person of Indian Origin): is a citizen of any country other than Bangladesh or Pakistan, if:
- he at any time held an Indian passport; or
- he or either of his parents or any of his grandparents was a citizen of India under the Constitution of India or the Citizenship Act, 1955; or
- the person is a spouse of an Indian citizen or a person referred to in either of the two categories above.
Some other important things that NRI investors need to remember for opening a Demat account are:
- NRI investors are mandated to appoint another person as power of attorney to conduct transactions on their behalf.
- NRIs are required to close their existing regular Demat account used as a resident Indian to open an NRI Demat account.
- NRIs do not require permission from the RBI (Reserve Bank of India) to open a Demat account. However, there is a limit to the number of shares that can be sold by NRIs. There exists a restriction or repatriation up to a maximum of $1 million USD during a calendar year (January–December).
- Both NRIs and PIOs are treated similarly under Indian Securities. They enjoy similar exemptions and need the same approvals.
- An NRI/PIO may open a Demat account with any DP (Depository Participant) enlisted with either the NSDL or CDSL. The NRI/PIO needs to mention the type of account (repatriable or non-repatriable) in the account-opening form.
- NRI/PIO investors may hold more than one Demat account, but not with the same DP.
- NRI/PIO investors will also need a trading account with the DP to buy or sell shares in the Indian stock market.
Simple Steps to Open a Demat Account
Select an Appropriate DP
NRIs should carefully consider the benefits, costs, charges, and services offered before selecting a DP enlisted with either the CSDL or NSDL. A DP may be a bank, a full-service broker, or a discount stockbroker.
Fill Out the Demat Application Form
You will need to fill out a Demat Application Form provided by the DP. Along with the application form, you will need to submit a copy of the following KYC (Know Your Client) documents:
- Passport-sized photograph
- Copy of passport
- Copy of Visa
- Copy of PAN card
- Overseas address proof, like rental or lease agreement, driving license, bank statement, or utility bills
- FEMA declaration (ask your bank or Demat account service provider for assistance)
- Cancelled cheque leaf page of the associated NRE/NRO account
All the documents submitted need to be attested by the Indian Embassy or Consulate in the country in which the NRI resides.
Verification of Documents
The DP shall now conduct an in-person verification process to ascertain the authenticity of the documents you submitted.
Payment of Fees
You shall need to pay the requisite fees to the DP to activate your Demat account. These fees include Account Opening Fees, Maintenance Fees, and Annual or Monthly Fees.
Final Approval
On completion of all the above steps, you shall receive the final approval of your Demat account. It includes the following documents:
- DP identification code: It is an 8-digit code allotted by the CDSL/NSDL to all DPs
- Demat account number: It is a 16-digit code which is a unique combination of your DP ID and client ID
- Client Master Report Copy: This report contains the details of your Demat account and should be carefully checked and verified that accurate details have been submitted to your DP.
- Login ID & password: You shall receive a unique login ID and password at the time of opening an account. These login details facilitate online access to your Demat account.
- Power of Attorney document: This document allows your designated broker to operate your Demat account. The purpose of this document is to authorize your broker to conduct transactions on your behalf. A broker cannot conduct trading on your behalf without the Power of Attorney document.
Almost 32 million NRIs and PIOs reside in foreign lands. Their dreams of investing in India are coming true, thanks to a simple Demat account.
