Why should an NRI invest into a Portfolio Management Service (PMS) and not into Mutual Funds (MF)?

A Portfolio Management Service (PMS) is a personalized investment solution for individuals with high net worth who want to invest in equity, debt, and other securities through a designated fund manager. The investment objectives of the investor are kept in mind while making any investment in PMS. Investors who desire personalized investment solutions and long-term wealth creation choose Portfolio Management Services (PMS). Portfolio Management Services (PMS) offer tailored investment portfolios in fixed income, cash, stocks, debt, structured products, and other individual securities. These services can be customized to meet specific investment objectives. Unlike Mutual Funds (MF), where investors can only earn the units of the fund, PMS allows investors to own individual securities. PMS is a flexible investment option that can be customized to address the investor’s personal preferences and financial goals.

What are the documentation requirements, before you can start Investing in INDIA as an NRI?

NRIs interested in investing in India need to have their basic KYC documents like Foreign residence proof, and PAN card, and so on, in place. NRI investors are required to submit immigration documents to verify the last time the investor had visited the Indian soil. In normal circumstances, this is a mandatory requirement for PMS and AIF investments, as these are private placement products and the documentation is expected to have happened in-person with the client. But, given the post-Covid era, this requirement has been relaxed somewhat. If the investor is outside India, he needs to send notarized or banker attested KYC documents with attestation of in-person verification done by the Notary officer or Banker. Apart from KYC documents, NRI investors need to also open a Portfolio Investment Scheme (PIS) account as required under the RBI guidelines. All the other do’s and don’ts are applicable to NRIs under the RBI’s PIS Scheme. These include limits on the investments made in single stocks or on the procedure for investments made under repatriation & non-repatriation basis as well as those applicable for short-selling of shares. Once the above documentation is completed and PMS is activated, funding can be done by sending money via RTGS or transferring existing shares to the PMS service provider.

What is a Portfolio Investment Scheme (PIS) account & how many PIS accounts can an NRI hold?

PIS account is a scheme of Reserve Bank of India ( RBI ) which enables NRIs ( Non – Resident Indians ) and OCBs( Overseas Citizens of India ) to purchase and sell shares and convertible debentures of Indian companies on a recognized Indian stock exchange by routing such purchase/sale transactions through their NRI Savings account with a designated bank branch. There can only be one PIS account that an NRI investor can open with any bank – In fact there is an undertaking that has to be given by NRI stating that the NRI has no other PIS account(s). All popular banks today have PIS options for their customers – like HDFC bank, ICICI bank HSBC, Standard Chartered, Kotak, SBI, etc. There are certain restrictions with PIS like on intraday trades, short selling of shares, etc are not allowed. PIS is used to purchase only listed shares and debentures.

What are implications of investing from NRE bank account vs NRO bank account?

As per the Foreign Exchange Management Act (FEMA) guidelines, it is illegal for NRIs to have domestic saving accounts in their name in India. It is mandatory that you convert all your savings to NRE or NRO account. Therefore, continuing to use the domestic savings account in the home country can attract hefty penalties. Opening an NRE or NRO account is, hence, a viable option for Non-Resident Indians. It can help NRIs in two ways. One, they can send the money they earn abroad to India at any point of time. Two, they can also retain their income from India (via any asset sale of rent etc) in the home country itself. Both NRE and NRO accounts are Indian rupee accounts. NRE account is used to transfer foreign earnings to India. Money from NRE accounts is freely repatriable i.e. both the principal amount and interest earned are freely and completely transferable. You should opt for NRE account if you want to hold or maintain your overseas earnings in Indian currency. Whereas, NRO is used to manage income earned in India. Funds from the NRO accounts can be repatriated post payment of applicable taxes with a limit of USD 1 million in a financial year. You should opt for NRO accounts if you want to save your earnings from India in Indian currency itself. These earnings could include rent, income, dividend, sale of property etc. Also under NRO accounts, interest earned on this account is taxed at the rate of 30% (plus surcharge) and other applicable taxes in India according to the ITA. In order to take the benefit of lower rates of tax as per double taxation avoidance agreement (DTAA) entered in by India, NRIs need to submit the Tax Residency Certificate issued by Tax Authorities of the country of his residence.

Gift City Investments For NRIs

GIFT City or Gujarat International Finance Tec-City is Gujarat’s pioneering greenfield smart city and international financial hub. It has made significant strides since its inception. Promoted by the Gujarat Government, this burgeoning central business district in Gandhinagar ranks among the top global financial centers, especially noted for its rapid ascent in emerging financial sectors.

As of mid-2023, it boasts a vibrant ecosystem of 23 multinational banks like HSBC and Barclays, 35 fintech companies, two international exchanges with a daily trade volume of more than $30.6 billion, and the first international bullion exchange in India.

GIFT City stands as India’s premier International Financial Services Centre (IFSC), strategically located to bridge the time zones between financial capitals across the globe. It aims to foster a vibrant ecosystem for financial services, akin to leading global financial hubs, offering unparalleled infrastructure, connectivity, and regulatory frameworks.

An International Financial Services Centre (IFSC) in India is defined as a zone that facilitates financial services for non-residents and institutions in currencies other than the Indian Rupee.

It is established to perform financial services transactions that are normally conducted outside India by foreign financial institutions and the international branches/subsidiaries of Indian financial institutions. It serves customers beyond the domestic economy’s scope, dealing with the international movement of finance, as well as offering financial products and services across borders.

The Indian government officially recognizes and governs IFSCs under the Special Economic Zones Act of 2005.

VISION

GIFT City aims to become a world-class center for finance and technology. Its development is seen as a step toward reforming and nurturing a robust financial ecosystem that’s crucial for growing and supporting businesses.

GIFT City strives to match or surpass the business environments of top international financial centers. It’s recognized as a project of national significance, playing a key role in India’s journey toward becoming a developed country.

GIFT City attracts international and local companies, especially in banking, financial services, IT, and service industries, by offering lower operational costs, a business-friendly environment, beneficial tax conditions, and a readily available skilled workforce with low turnover rates, thus positioning itself as an ideal hub for establishing their operations.

GIFT City addresses four key areas for businesses:

1) Taxes and Start-up Funding: It’s becoming a choice for Indian asset managers previously based in places like Dubai or Singapore, due to its tax benefits, such as a zero tax policy for the first ten years for registered companies.

2) Legal Framework and Banking: GIFT City offers a single-window approval system for ease of doing business and allows Indian banks to operate international banking units (IBUs), providing services like overseas loans in foreign currency without needing a branch abroad.

3) International Exchange: It permits Foreign investors to trade in Indian stocks and vice versa, fostering a more interconnected global trading environment.

4) Fund Management Benefits: Funds managed in GIFT City are overseen by IFSCA, with portfolio managers eligible for a 100% tax deduction on their income for ten years, enhancing GIFT City’s appeal as an investment hub.

FAQs: Taxation for Investments in GIFT City

Are management and performance fees charged in GIFT City subject to GST?

No, management and performance fees are not subject to the standard 18% GST applicable in other parts of India.

How are IFSC funds taxed?

Taxes for IFSC funds vary by investment type:

Long-Term Capital Gains: For equity shares held over 12 months, taxes are around 12%, including applicable surcharges and cess.

Short-Term Capital Gains: For equity shares held under 12 months, the tax rate is around 17% with applicable surcharges and cess.
Interest Income: Income from temporary investments is taxed at 10%.
Dividend Income: This is taxed at 10%.
Derivative Gains: Certain gains from derivatives like covered calls may be tax-exempt.
Additionally, these AIFs are exempt from tax on bond trading and incur a 10% tax on interest income. This framework makes GIFT City AIFs particularly appealing to Non-Resident Indians (NRIs), who are subject to a tax deduction of 10-15% on equity-focused AIF investments.

How do these taxes affect India tax filings?

The trust managing the IFSC fund is responsible for paying all applicable Indian taxes by March 31st of the tax-filing year.

How is an IFSC fund different from a domestic AIF when it comes to taxation and structure?

Structurally, both IFSC funds and domestic AIFs in India operate as irrevocable trusts with investors as beneficiaries. The trust itself handles all applicable taxes for investment activities, freeing investors from direct tax payments in India.

Key Taxation and Regulatory Differences for IFSC Funds:

IFSC funds target offshore and NRI investors seeking to invest in Indian & foreign equities, with or without an Indian tax ID (PAN).
Investment manager fees for IFSC funds are exempt from the standard 18% GST, unlike those for domestic AIFs.
Gains from derivatives in IFSC funds are not taxed, while domestic AIFs outside of this zone must treat such profits as business income and are subject to taxation that can reach up to 42.7%.
IFSC funds offer lower tax rates on interest and dividend income compared to domestic AIFs, which can face rates between 35-42%.

Can I invest funds from my NRE bank account in India?

Yes, since an NRE bank account in India is also considered equivalent to an offshore bank account.

I am a Non-Resident individual who has some funds in India in a local bank account. Can I invest that in an IFSC fund?

While the criteria to invest in the IFSC fund is to be a non-resident, it is also important to note that the funds to be invested in the IFSC fund has to flow from offshore bank accounts. Therefore, even if the investor is a non-resident, the investment funds cannot be invested from Indian local bank accounts to the IFSC fund.

Investment funds / corpus can be invested by the investor from their offshore bank account or bank account in GIFT IFSC, or NRE bank account in India.

Thus, if the NR wants to invest their local funds in the IFSC fund, they will have to repatriate the funds to their offshore account and then invest the same in the IFSC fund.

Investment to be made in which currency?

USD Only.

What is the minimum investment amount?

USD 1,50,000

Will the fund issue K-1 forms to its US investors? Will the Indian taxes paid by the fund be transferred to investors for them to take foreign tax credit?

Yes, the fund will obtain an EIN from the IRS soon, and thereafter, the fund shall also file Form 8832 with the IRS for the fund’s election as a pass through entity as per the US laws.

The purpose of this exercise is to enable the US investors to take credit for the taxes paid by the IFSC fund in India. As per our limited understanding, there are potentially two methods to take the tax credit in your US returns – 1) Claim credit against taxes due in the US; or 2) Reduce the income base.

You may want to check with your tax advisor on the right method for your filing.

LIQUIDITY

In terms of liquidity, AIFs based in GIFT City trade on the NSE and BSE, ensuring they have access to the same market liquidity as other participants in India. However, they are subject to the same transaction costs, like Securities Transaction Tax (STT) and Stamp Duty, as mutual funds, and onshore AIFs.

Foreign investors and NRIs can invest in GIFT City in foreign currencies and are free to repatriate their funds without restrictions. One specific fund aims to outperform the Nifty index by 6% per annum over a 2–3-year period. Additionally, there is no current plan to hedge against the rupee’s expected annual depreciation, as the cost of hedging is deemed to offset potential depreciation benefits.

Furthermore, the entry of foreign portfolio investments through GIFT IFSC is now a reality, with a focus on attracting new investors and providing them with a comprehensive range of investment services. This effort is supported by prominent financial institutions, which have been instrumental in the licensing processes for various AIFs in GIFT City and act as custodians and depository participants for these funds.

SOME OF THE GIFT CITY DOMICILED PRODUCTS

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Choosing the right PMS and/or AIF is not just about returns; it’s about selecting an investment path that suits your journey. With the right information and expert guidance, investors can make choices that not only align with their financial goals but also bring peace of mind in their investment endeavors.

PMS AIF WORLD brings forth a plethora of advantages for investors opting for PMSs & AIFs. We deliver a comprehensive approach to portfolio management, coupled with transparency and control over your investments.

Over 5+ years, we have been managing 500+ UHNI & NRI families, across 750 Cr+ assets. We are very selective in our approach, and our services are marked by customization, which allows your portfolios to be designed to meet specific investment goals.

Disclaimer: Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements

Do Not Simply Invest, Make Informed Decisions

WISH TO MAKE INFORMED INVESTMENTS FOR LONG TERM WEALTH CREATION

BOOK A CALL