Demat Account For NRIs - Application Process, Benefits & More

A demat account for NRIs is an electronic account that lets you hold shares, bonds, and other securities. This account serves as a digital repository for your investments, keeping them in electronic form, eliminating the need for physical certificates.

This shift to the digital stage not only streamlines the entire trading process but also enhances convenience, efficiency, and transparency. 

In this blog, we will discuss the key aspects of NRI demat accounts, including the application process, benefits, eligibility criteria, documents required, and more. 

What is an NRI Demat Account?

An NRI demat account is an electronic account for investors' shares. In India, CDSL (Central Depository Services Limited) and NSDL (National Securities Depository Limited) are the depository institutions that manage investors' Demat accounts. Shares traded in the BSE are generally managed and stored by CDSL. Whereas the shares traded on the NSE are stored and managed by NSDL.

However, CSDL and NSDL are the depositories in India, and the broker chooses which depository your demat account is created under. 

An NRI demat account is a 16-digit unique number that provides you with access to a variety of financial products. However, it is your trading account that is debited or credited on the purchase or sale of shares. 

Please note that debiting or crediting of the share takes approximately two business days. 

Why Does an NRI Need A Demat Account?

NRIs need a demat account for various reasons, such as:

Security: The physical share certificates, which were prone to damage, theft, and loss, are no longer in use, as a demat account has replaced them. Now, with the help of a demat account, securities are kept safe because they are electronically held in it. 

Effective and Efficient: With a demat account, the process of purchasing and selling shares is more efficient, as the likelihood of errors is reduced and transactions now occur quickly. 

Transparency: NRIs now have access to their real-time financial portfolios through a demat account. They can view their portfolio, analyse the stock performance, and make an informed decision. 

What Are The Types Of NRI Demat Accounts

Every non-resident Indian can open two types of demat accounts. They are:

1: Non-Resident External (Demat) Account: This type of demat account allows NRIs to invest in the indian market using the funds remitted from abroad. Additionally, this type of NRI demat account is linked to an NRE bank account; hence, the funds here are repatriable, meaning they can be taken abroad. 

2: Non-Resident Ordinary (Demat) Account: This type of demat account is for investments made from income generated or earned in India. Additionally, this type of demat account is linked to an NRO account, which means the funds here are not fully repatriable, i.e., there is a limit on repatriation. 

The NRI demat accounts are regulated by SEBI, RBI (Reserve Bank of India), and FEMA. 

Who Is Eligible To Open An NRI Demat Account?

The following are the eligibility criteria for opening an NRI Demat Account. 

Non-Resident Indian (NRI)

You are eligible if you are an Indian citizen living outside India for:

• Employment
• Business or profession.
• Uncertain duration of staying abroad. 
• Education. 
• Long-term residents, such as green card holders, work permit holders, and permanent residents abroad. 

2: Person of Indian Origin (PIO)

A PIO can open an NRI Demat Account under the following circumstances. 

• If they have an Indian passport at any time, or
• Parents/grandparents of the PIO holder were Indian citizens. 

3: Overseas Citizen Of India (OCI)

OCI cardholders are also eligible to open both:

• NRE Demat Account (PIS)
• NRO Demat Account (Non-PIS)

4: NRIs Investing Through PIS (Portfolio Investment Scheme)

As an NRI, you are eligible to open a PIS-linked Demat account if:

• You want ot invest in the listed Indian stocks on either a repatriation or a non-repatriation basis. 
• You have an NRE or NRO bank account as required by the RBI. 

5: NRIs Investing Without PIS (For Non-repatriation)

You can open a non-PIS NRO Demat account to invest in:

• IPOs
• Mutual Funds
• Bonds
• ETFs (exchange-traded funds)
• PMS
• Indian unlisted shares

6: Minors (NRI/PIO/OCI Minors)

A minor NRI can also open a demat account, provided the following guidelines are met. 

• A guardian, whether the minor's parent or a legal guardian, will operate the account. 
• KYC for both the minor and the guardian is complete. 

Documents Required For NRI Demat Accounts 

To open an NRI demat account, NRIs must provide documents such as their passport, PAN card, and a copy of their valid visa as part of the KYC (Know Your Customer) Process. 

Additionally, you will need a completed NRI demat account opening form, the proof os address, a canceled check or the latest statement of your NRE/NRO savings account, and an investment form from the Reserve Bank of India (RBI). 

Please note that this is not the final checklist for the documents, as additional documents may be required per the depositary participant requirements or regulatory authorities. 

Step-by-step Process To Open An NRI Demat Account

To open an online demat account for an NRI. Follow the steps mentioned here. 

Get yourself a broker: This can make or break your investment game, as having a reliable broker that provides NRIs with a demat account is essential. A good broker offers NRIs with the necessary infrastructure, manages the account opening, and more.

However, to avoid last-minute hassles, it is better to conduct thorough research on the broker's background before finalizing. 

Fill out the account-opening form: Download and complete it online. Please ensure that the information you mention in the form is accurate and up to date. 

Documents: Now attach all he relevant documents. However, please note that the Indian embassy or another authorized body must self-attest and notarize the documents. 

Demat Account Number: Upon submitting all relevant details, you will be allotted a Demat account number at the time of opening your account. This demat account will be linked to both your savings account and your NRI trading account. 

Trade: Once your demat account is set up, you can buy, sell, and transfer your assets in the Indian stock market. 

Tax Implications On NRI Demat Account

There is no doubt that a demat account has made investing easier than ever for NRIs. However, most investors do not realize how their demat account affects their taxes. 

Depending on the type of income and your current place of residence, the applicable taxes on the dividends and capital gains are different. 

Tax on Capital Gains

Profits earned from the sale of EFTs, stocks, securities, or mutual funds are known as capital gains. These gains are categorized into two groups based on their holding periods. 

Here is how the capital gains tax on a demat account works. 

Short Term Capital Gain (STCG)

• This type of capital gains tax applies when equity shares or equity-oriented mutual funds are sold within 12 months of purchase. 
• Under section 111A of the IT Act, short-term capital gains are taxed at the flat rate of 15%. 
• There is no exemption threshold for NRIs, as short-term capital gains are taxable even if your annual income is below the tax exemption limit. 

Long-term capital gains (LTCG)

• This type of capital gain is applicable when you sell equity shares or mutual funds after owning them for 12 months. 
• LTCG above the threshold of Rs 1 lakh in a financial year is taxed without indexation at the flat rate of 10%. 
• Under section 112A, the first 1 lakh is exempted from taxes. 

However, please note that for unlisted shares, different holding periods and tax rates will apply. 

Tax On The Dividend Income

In earlier times, no tax applied to investors, as the company used to pay Dividend Distribution Tax (DDT). But since the financial year 2020-21, income from shares taxation has been calculated this way. 

• Dividend income will be taxable to the investor. 
• It is taxed at the individual's slab rate. 
• Companies are required to deduct the 10% TDS on the dividend income exceeding Rs 5,00 per year per company. Please ensure that if a PAN Card is not provided, TDS is 20% and not 10%. 

Please ensure to declare all dividend income, irrespective of whether TDS is deducted or not. 

Other Charges And Taxes On Demat Account

Apart from income tax on a Demat account, there are other charges related to the account and trading activities. 

STT (Securities Transaction Tax): This tax applies to the buying and selling of shares on stock exchanges. However, this is not deductible, but it does affect your cost calculations. 

Stamp Duty: Levied on securities transfer and is paid while purchasing.

Brokerage and GST: These are the charges levied by brokers, which may include 18% GST. 

However, these charges are not directly taxed; they are essential for computing capital gains. 

Income Tax For NRIs on a Demat Account

For NRIs holding NRE or NRO Demat Accounts, this is how the income tax works:

• STCG on listed equity shares is taxed at 15%. 
• LTCG: Taxed at the rate of 10% if the capital gains exceed the threshold of Rs 1 Lakh. 
• Dividend Income: As per Section 195, it is subject to TDS. 

However, to claim refunds, NRIs must file ITR in India if their total taxable income exceeds Rs 2.5 lakh.

Additionally, NRIs must be aware of the Double Taxation Avoidance Agreement (DTAA), which might provide relief or even lower tax rates on dividends and capital gains. 

The Rule Of Repatriation On NRI Demat Investments

The NRI demat account is categorised into two segments: repatriable and non-repatriable. 

Repatriable Demat Account

A repatriable demat account allows NRIs to transfer (repatriate) their investment income and principal amount without restriction to their country of residence. 

The repatriable account is linked to an NRE bank account. Ensure that funds must come from foreign earnings or NRE account deposits, and that every remittance transaction is governed by RBI and FEMA guidelines. 

A repatriable account is best for NRIs who want complete flexibility to move their investments between India and their country of residence. 

Let us understand with an example. 

Assume Mr. Malhotra is working in the United States and invests Rs 5 lakh in Indian stocks via his NRE-linked demat account. Now, he can transfer the profits or the principal amount back to his US bank account without any limits or special approvals. 

Non-repatriable Demat Account

This type of account is used when an NRI investor wants to invest funds that remain in India. As the name suggests, the principal and earnings in the non-repatriable account cannot be transferred abroad freely. 

The key features of this account include:

• Linked to a Non-resident ordinary bank account. 
• The limit for repatriation is up to USD 1 million per financial year. However, you need prior RBI approval for this. 
• This account is best if you want to manage your indian income sources. 

This type of account is best for NRIs who want to invest their Indian earnings in India and do not wish to transfer the funds abroad. 

Let us understand with an example.

Mr Jain owns a flat in India and earns rent through it; now he can invest that income via an NRO-linked demat account in a mutual fund or bonds. The profits generated through this will generally stay in India. 

The Bottom Line

For NRIs to participate in the Indian stock market, they need a demat account. This account streamlines the entire process, making it paperless and enabling you to hold and transfer assets or securities effectively.

Before opening an NRI demat account, please ensure that your broker is reliable and trustworthy, and that you are well aware of the terms and conditions they are setting.

Additionally, since the demat account for NRIs might not be taxable, but the income generated through it is. Hence, capital gains tax on demat accounts, dividend taxation, and other related matters are crucial for you to remain compliant. 

In a growing economy like India, there is no doubt that the Indian stock market is a game-changing investment product, but only if you are well-informed, your transactions are in order, and you have professional guidance throughout. 

For professional guidance to NRIs in the Indian stock market, the investment expert at Savetaxs is here at your service. Our experts bring 30 years of combined experience in cross-border investments and in analysing the Indian markets to flag the best investment opportunities. 

Connect with us today as we serve our clients 24/7 across all time zones.