Seven FEMA and Investment Rules NRIs Should Know Before Buying Indian Stock

Can an NRI invest in the Indian stock market? Yes — and the question searched almost as often is the one that actually causes problems: through what route, held in what account, and on what terms can the money come back out. Indian exchange-control law permits a person resident outside India to invest in listed Indian equity, but it channels that investment through defined routes with their own reporting, limits and account requirements. Getting the route right at the outset determines whether repatriation later is a form-filling exercise or a reconstruction project.

This is written for both sides of a typical arrangement: the India-side reader who needs the regulatory framework and the operational steps, and the US-based NRI who needs to know what to open, what to sign and how funds move.

Rule 1: Portfolio Investment Runs Through a Designated Route

Secondary-market purchases of listed Indian shares by a non-resident individual are made under the portfolio investment framework administered through banks authorised for the purpose. In practice the investor designates one bank branch to route the transactions, and that branch monitors and reports the investment.

The structure has consequences. Only one designated bank may be used for portfolio investment at a time. Transactions must be routed through the designated account rather than through any account the investor happens to hold. Delivery-based purchase is the norm; the framework does not contemplate a non-resident individual engaging in intraday or short-selling activity in the same way a resident may. And the bank, not the broker, is the entity reporting the investment for exchange-control purposes.

Rule 2: Repatriable and Non-Repatriable Are Separate Buckets

An NRI may invest on a repatriable basis or on a non-repatriable basis, and the distinction is set at the point of investment by the account the funds come from.

Investment funded from a non-resident external account or by inward remittance is on a repatriable basis: the sale proceeds and income may, subject to tax and documentation, be sent abroad. Investment funded from a non-resident ordinary account is on a non-repatriable basis for that purpose, and while the proceeds may still be remitted within the general annual limit applicable to specified categories of receipt, they are not freely repatriable in the same way.

This is not a distinction that can be corrected afterwards. The bucket is fixed by the funding source at purchase. An investor who funds from the wrong account and later wants free repatriation is left arguing about the source of funds years after the event, which is why the account question should be settled before the first trade. The framework is set out under FEMA, FDI and cross-border practice.

Rule 3: Account Structure Does Most of the Work

Three account categories matter and they are frequently conflated.

The practical rule is to keep repatriable and non-repatriable money apart from the beginning. Mixing them produces a balance whose character is uncertain and a bank that will not certify it, and the cost of that is felt at the moment the investor most wants the money — a purchase abroad, a tuition payment, a business need.

Rule 4: Sectoral Limits and Prohibitions Still Apply

Portfolio investment operates within ceilings. There is an aggregate ceiling on the total holding of non-resident individuals in an Indian company, capable of being raised by the company by resolution up to the sectoral limit, and an individual ceiling on any one investor's holding. Where an aggregate ceiling is reached, further purchases in that stock are stopped for the class of investors concerned.

Separately, some sectors are closed to foreign investment altogether or open only up to a limit or subject to approval. An investor buying a diversified basket rarely encounters this; an investor concentrating in a regulated sector should check before building a position.

Rule 5: Tax and Withholding Operate Independently of FEMA

Exchange control determines whether money may move; tax determines how much of it remains. The two frameworks are separate and compliance with one is not compliance with the other.

For a non-resident, gains on listed equity are subject to withholding at source in India at rates depending on whether the gain is short-term or long-term, and the resulting figure is increased by surcharge and cess. Dividends paid to a non-resident are subject to withholding. Where India has a treaty with the country of residence, the treaty may reduce the rate, but claiming a treaty rate requires the prescribed documentation, including a residence certificate and the prescribed declaration, filed in time. An Indian return may still be required, and credit for Indian tax in the country of residence follows that country's own rules. This is where an investor's accountant abroad and the Indian chartered accountant need to be talking to each other, and it is one of the areas where IndusGuard's NRI legal services team is asked to coordinate between the two.

Rule 6: Repatriation Is Documented, Not Discretionary

Remittance of funds from India is permitted rather than exceptional, but it is documented. From a non-resident external account, remittance is straightforward because the balance is already repatriable. From a non-resident ordinary account, remittance of Indian-source income and of the proceeds of Indian assets is permitted within an annual limit applicable to specified categories of receipt, on production of the prescribed forms and a certification from a chartered accountant on the tax position.

The recurring failure is documentary rather than legal: an investor who cannot show how funds entered India, or whose account holds mixed money, cannot get the certification the bank requires. Keeping contract notes, remittance advices, dividend statements and tax deduction certificates from the beginning turns repatriation into an afternoon's paperwork. Reconstructing them a decade later does not.

Where the funds derive from the sale of Indian property rather than from securities, the same framework applies with additional documents on the property side, coordinated with property and real estate work.

Rule 7: Investing in a Company Is a Different Route Entirely

Buying listed shares on an exchange and putting money into an Indian company are governed by different parts of the framework. Subscription to shares of an Indian company, whether a startup or a private company being set up, is foreign direct investment, and it carries its own requirements: the sector must permit the investment under the applicable route, the price must comply with the applicable pricing rules, the funds must come through banking channels, and the receipt and allotment must be reported within the prescribed timelines. Late reporting attracts a compounding process that is administratively tiresome and entirely avoidable.

Consider a hypothetical illustration. Suppose Vikram, an invented NRI in Seattle, wants to put money behind a cousin's Bengaluru software company and also to build a portfolio of listed Indian shares. These are two separate exercises. The listed portfolio runs through the designated bank branch under the portfolio route, with the repatriable or non-repatriable character fixed by the funding account. The company investment runs through the direct-investment route, requires a valuation-compliant price, and must be reported by the company within the prescribed period after the funds arrive and again on allotment. Structuring the company side is corporate advisory and startup and investment advisory work, and where the investment later leads to a sale of the business or a share transfer to another non-resident, the pricing, reporting and tax treatment of that exit fall within mergers and acquisitions practice.

Putting the Rules in Order

For an NRI starting from nothing, the sequence that avoids the common problems is:

1. Decide whether the investment is intended to return abroad; that decides the funding account.
2. Open the appropriate account category, and keep repatriable and non-repatriable funds separate.
3. Designate a bank branch for portfolio investment and open the trading and depository accounts under the correct non-resident category rather than a resident one.
4. Obtain the Indian tax registration number and, where a treaty rate is to be claimed, the residence certificate and prescribed declarations.
5. Retain every contract note, remittance advice, dividend statement and deduction certificate from the first transaction.
6. Where a company investment is also contemplated, treat it as a separate exercise with its own pricing and reporting discipline.
7. Review the position when residence status changes, because a change in residence changes the account categories permitted and the reporting that applies.

The last point deserves emphasis because it is the one most often missed. Accounts and demat holdings opened as a resident before moving abroad, or retained as non-resident after returning to India, are a common source of irregularity that surfaces years later during a sale or a remittance.

IndusGuard's panel includes chartered accountants, company secretaries and advocates who work across the exchange-control, tax and corporate aspects of these arrangements, and can review a specific holding structure where the general position described here does not fit the facts.