The Investment Mistakes NRIs Make in India — and How to Dodge Them

Mistake 1 — Investing through the wrong bank account

Every rupee an NRI invests in India carries a trail that determines whether the returns can ever leave India freely. Money invested from an NRE account is fully repatriable — principal and gains can go back abroad without hitting the USD 1 million per financial year cap. Money invested from an NRO account is subject to that cap and requires Form 15CA/CB to repatriate. If you invest through the wrong account — or mix sources — you may find that gains you expected to send home are trapped behind repatriation limits you did not budget for.

Mistake 2 — Buying mutual funds without sorting FATCA first

NRIs can invest in Indian mutual funds — but US and Canadian residents face a specific complication. Most Indian fund houses stopped accepting investments from US and Canada-based NRIs after FATCA (the Foreign Account Tax Compliance Act) imposed reporting obligations that many AMCs found operationally unworkable. A handful of fund houses — including SBI Mutual Fund, UTI, and a few others — do accept US/Canada NRI investments, but they require a completed FATCA self-declaration before the first unit is allotted.

The mistake NRIs make is assuming that having an NRE or NRO account is sufficient. It is not. The KYC process for mutual funds is separate, and the FATCA declaration is a distinct form. Invest without it and the investment can be rejected or frozen — and the redemption proceeds may be withheld until compliance is established.

Mistake 3 — Ignoring TDS on investment income

NRI investment income is subject to TDS at source, at rates higher than what resident Indians pay, and many NRIs are caught off guard by how much disappears before they see the return. The most common surprises:

• Interest on NRO fixed deposits: ~30% TDS (resident Indians pay 10%).
• Rental income: 30% TDS applies on gross rent, not the net amount after expenses.
• Short-term capital gains on equity: 20% TDS.
• Long-term capital gains on property: 12.5% TDS on the full sale price, not the gain, unless Form 128 (formerly Form 13) is obtained.
• Dividends from Indian companies: 20% TDS.

The fix is not to avoid these investments — it is to model the post-TDS return before committing, and to check whether a Double Tax Avoidance Agreement (DTAA) between India and your country of residence reduces the rate. India has DTAAs with over 90 countries. An NRI in the UAE or UK can often claim a lower withholding rate on interest or dividends by filing a Tax Residency Certificate (TRC) with the bank or fund house.

Mistake 4 — Chasing real estate returns without the FEMA checks

Property is the investment category where NRI mistakes cost the most. The purchase might be entirely legal, the price might be reasonable, and the rental yield might look attractive — and yet an oversight in how the transaction was structured can make the proceeds impossible to repatriate later.

• Paying for the purchase in cash (not through banking channels) — FEMA prohibits this, and it breaks the repatriation trail.
• Buying agricultural land, plantation land, or farmhouses — NRIs and OCIs cannot buy these categories under FEMA, regardless of how the deal is structured.
• Buying property jointly with a resident Indian who is not a close relative — this creates complications around repatriation of the NRI's share.
• Not retaining proof of the original inward remittance — when you sell, the bank asks for evidence that the purchase was funded from overseas or an NRE/NRO account. Without it, repatriation is blocked.

Mistake 5 — No nominee on investment accounts

Mutual fund folios, demat accounts, fixed deposits, and property — none of these automatically transfer to a legal heir on death. Without a nominee, the legal heir must produce succession certificates or letters of administration from an Indian court before any of these assets can be accessed. This process takes two to three years and absorbs a meaningful fraction of the estate in legal fees.

A nominee is not a substitute for a will — a will governs who ultimately receives the asset, while a nominee is the person who can access and hold it in the interim. Both are needed. But adding nominees costs nothing and typically takes ten minutes per account through a digital portal. Skipping it is the most avoidable estate-planning mistake in an NRI's investment portfolio.

Mistake 6 — Not updating residential status across all investment accounts

When you become an NRI, your residential status must be updated across every investment account — mutual funds, demat accounts, insurance policies, bank FDs — not just the bank account you redesignate to NRO. FEMA's obligation is not limited to bank accounts. A mutual fund folio that still shows 'Resident Indian' after you moved abroad can attract penalties on redemption, and TDS may be deducted at the wrong rate (or not at all, creating a tax demand later).

The practical sequence: update the bank first (redesignate to NRO/NRE), then use that updated KYC to cascade the status change to your demat account, mutual fund folios, and insurance policies. Most depositories and AMCs accept a KYC change form with a copy of your passport and visa — it does not require you to liquidate and re-invest.

Mistake 7 — Investing in sovereign gold bonds without checking repatriation

Sovereign Gold Bonds (SGBs) are attractive on paper — government-backed, gold-linked returns, tax-free interest exemption on maturity redemption. NRIs can hold SGBs acquired while they were resident Indians. However, NRIs cannot purchase new SGBs under RBI rules. Many NRIs are unaware of this restriction and invest through an NRO account, only to find on redemption that the proceeds face the NRO repatriation cap and do not enjoy the tax treatment they expected.

Mistake 8 — Skipping tax planning before a large exit

Capital gains from selling Indian investments — property, mutual funds, shares — are taxable in India for NRIs, with TDS deducted at source. The mistake is not the tax itself; it is failing to plan before the exit. Two provisions in particular can significantly reduce the tax burden, but both require action before the sale proceeds are received, not after:

• Section 54 / 54F exemption: capital gains from selling a residential property can be reinvested in another residential property or certain bonds to claim an exemption. The reinvestment must happen within a specific window — typically two years forward or one year backward from the sale date.
• Form 128 (formerly Form 13): for property sales, this certificate from the Assessing Officer reduces TDS to the tax on your actual gain, rather than the full sale price. It must be obtained before the sale deed is registered — applying after is too late for that transaction.
• DTAA benefit: if your country of residence has a tax treaty with India, you may be able to reduce or eliminate Indian tax on certain types of capital gains. A Tax Residency Certificate filed with the relevant party before the sale is required to claim treaty relief.

Frequently asked questions