All the NRIs are permitted by the government of India to make investments in India. It seems to be simple but for the NRI residing in USA its not so simple because of FATCA and US SEC regulations.

The financial service providers that are serving US-based customers have to fulfil FATCA requirements strictly. This makes investment or trading difficult for the NRIs and expensive for the company offering such services.

NRI Trading Rules and Regulations USA

The Indian Regulation by RBI and FEMA provides the permission to trade and invest by the NRIs that are based in the USA. The US has a certain set of regulations under FATCA as well as restrictions on the solicitation of the US citizens for investment in the Indian Stock Market.

1. Restriction or Solicitation- It means that the brokers or the asset management companies of India may not be registered with the SEC can not directly or indirectly contact the US residents for selling the products and services. It gives advice to the US resident to not do the business with the foreign brokers that are not registered with the SEC as it might lose the protection of investor as provided under the US law. Interpretation of SEC Rule:

   It is a restrictive that makes solicitation by the brokers unlawful and this works as an advisory for the investors. The NRI can open their trading and demat account with a stock broker in India at your discretion. The SEBI regulations works as a protection shield for all the investors i.e. both Indian Residents and Non-Residents of India. It allows trading from the various financial service providers to the NRIs.

2. FATCA- It is an act that is enacted by the US government in order to receive information from various foreign countries about the investment made by US citizens in their countries. The aim is to detect and prevent the offshore tax evasion by the US persons. In this act, it is compulsory for all the financial institutions such as banks, stock brokers, AMCs and various Insurance companies, etc. to share the investment details that involves US citizens that includes the NRIs based in US. The AMC or a stock broker that makes investment must comply with the FATCA regulations and reports about the investments as per the process outlined.

   The NRIs residing in US are allowed to make investments in stocks, mutual funds, and other securities that are expected in order to provide details such as the country of tax residence, tax identification number, country of birth and country of citizenship at the time of opening an account with the stock broker. As per the rules of FATCA, U.S. citizens that hold some foreign financial assets with an aggregate value of more than the threshold to report the details and information about it on form 8938. The form has to attached with the annual income tax return of the taxpayer. The reporting threshold varies that are based on the marital status and whether you file a joint on income tax return.

FATCA Tax Payer Status Note:

1. If the customer is married then they with their spouse needs to file a joint income tax return. The customer needs to file only one combined form 8938 for the taxation year. The asset value will be jointly owned with their spouse must be included only once to determine the total value of all the specified foreign financial assets owned by the NRI with their spouse.
2. If NRI customer is married and he/she along with their spouse files a separate income tax return, they need to consider one-half of the asset value that is jointly owned with their spouse to determine the total value of the specified foreign financial asset. It is only if the value owned by NRI when combined with other assets owned by NRI exceeds the thresholds then the NRI is liable to fill form 8938. In case, if the threshold exceeds the limits then he/she is obliged to fill the form 8938 and is required to report the complete value of the asset on the form.
3. A non-compliance with form 8938 can cause penalties of $10,000 for failure to fine penalty, there is an additional penalty up to $50,000 for the continuous failure to file after the IRS notification and a 40% penalty on any understatement of the tax attributable to the non-disclosed assets.

Interpretation of FATCA Rule 1. The NRI customer has to fill the form 8938 and attach it with their income tax returns if they cross the reporting thresholds and the financial institutions must report their transactions to the US authorities. The US-based NRIs can trade and make investment in the Indian Stock Markets along with various other countries. The Indian rules and regulations allow the NRIs to trade and invest in specific securities with some regulatory restrictions. Thus, US NRIs can trade and invest in the Indian Stock Markets. US NRI Investment Options in India NRIs are given permission to make investment in Bank Deposits, Real Estate, Bonds, Equities, NPS and Mutual Funds. NRI can make investment or trade in the following securities:

1. Equity Shares.
2. Equity Derivatives.
3. Convertible Debenture of Indian Companies.
4. Exchange-Traded Funds (ETFs).
5. Mutual Funds.
6. IPO.
7. Bonds issued by PSU in India.
8. Government Securities.
9. Government Treasury Bills.
10. Currency Derivatives.

Requirements for US NRI Trading in the Stock Market

The requirements for a US NRI Trade in the Indian Stock Market are the same as those for the other NRIs. An NRI needs some necessary accounts to trade in Indian Stock Exchanges which are:

1. NRI Bank Account.
2. PIS or PINS Permission.
3. NRI Trading Account.
4. NRI Demat Account.
5. NRI Custodial Account.

Note:

1. The US based NRIs needs to open two bank accounts i.e. NRE and NRO savings bank account.
2. The PIS permission is a compulsion to trade by using the NRE account.
3. NRI demat account is a compulsion for trading in India. An NRI needs to open two demat accounts and link them separately with NRE and NRO accounts.
4. NRI trading account provide the access to the Indian Stock Exchanges.
5. Custodial Account is an optional account that is used specially for derivative trading.

US NRI Trading Taxes

Capital Gains Taxation- The capital earned from the stocks, derivatives and mutual funds in order to attract capital gain taxes. An NRI needs to pay the Capital Gain Tax on the stock market investments in India. The tax also depends on the tenure or the period for which their investments are held by the investor.

The Capital Gain Tax is classified in two:

1. Long term capital gain- If the tenure for holding the securities is less than a year then the long-term capital gain applies to the earnings from the sale of stocks, mutual funds, debentures, property, FD interest, etc.
2. Short term capital gain- If the tenure for holding the securities is less than a year then the short-term capital gain applies to the earnings from the sale of stocks, mutual funds, debentures, property, etc.

DTAA (Double Taxation Avoidance Agreement)-

To make sure that US-based NRIs don’t end up by paying the taxes in the USA and India both the countries enter into the mutual fund agreement by the Double Taxation Avoidance Agreement (DTAA). This tax is applied to the individual with the taxable income in both the countries. As per DTAA on capital gains from the trading and investments. The taxes that are paid by the NRI in India re then deducted from their total income earned from both the countries and they need to pay the taxes only on the remaining amount.