For decades, non-resident Indians (NRIs) have believed that investing in the Indian stock market was the natural way to participate in the country’s growth story and build long-term wealth. Reserve Bank of India (RBI) data shows that NRIs channelled nearly ₹1.4-1.5 lakh crore (around $16 billion) into India during FY25 through various investment avenues, including fixed deposits, real estate and equity markets.
The sad part, however, is that the very regulatory framework through which many NRIs invest in Indian stock markets may be working against them.
Here’s a look at why traditional NRI investing structures are becoming increasingly inefficient and how GIFT City changes the equation.
Why investing in India is a bad idea for NRIs
The reality is that many NRIs face a combination of hidden taxes, currency depreciation, compliance complexity, and double taxation that quietly chips away at real dollar returns, says Saurabh Mukherjea from Marcellus Investment Managers
Let’s take an example of a US-based investor to better understand this. The contrast is striking:
Over the past decade, the Nifty 50 delivered ~9.4% annual returns in dollar terms. In contrast, the S&P 500 delivered ~15.2% annual returns over the same period.
Since 1991, the Indian rupee has depreciated against the US dollar at an average annual rate of around 4%, or 40% of its value every decade. As a result, the rupee has depreciated by roughly 70% since the early 1990s.
A key reason for this trend is the inflation differential between India and the US. Since inflation in India has generally been higher, the rupee took a beating to maintain relative competitiveness between the two economies.
So, while an investment in Indian equities may appear to generate returns of 9.4% in rupee terms, the effective return for a dollar-based investor, after accounting for currency depreciation and conversion costs, is closer to 8%.
The situation becomes more complicated thereafter:
- PFIC taxation pushes effective capital gains tax rates dramatically higher: PFIC (Passive Foreign Investment Company) is a US tax classification for foreign companies that earn mostly passive income or hold primarily passive assets. Many foreign mutual funds fall under this category. If classified as a PFIC, gains may be subject to complex tax rules, pushing the effective tax burden to around 40% or higher.
- Multiple annual IRS filings create ongoing compliance headaches: For instance, US taxpayers holding mutual fund investments must file Form 8621 for each qualifying mutual fund. This can create a significant compliance burden, as investors often need professional assistance and may incur separate accounting costs.
- Indian capital gains taxes and TDS further reduce post-tax returns: For example, short-term capital gains are subject to a 20% TDS. In addition, investors may also have to bear the applicable surcharge and cess, increasing the overall tax outgo.
- PIS accounts and repeated KYC processes create significant friction: The Portfolio Investment Scheme (PIS) is regulated by the RBI under the Foreign Exchange Management Act (FEMA). One of the biggest challenges for NRIs is the compliance process, which often requires physical identity verification. Moreover, KYC and verification formalities may need to be repeated periodically, typically every two to three years.
Once currency depreciation, taxes, compliance costs and regulatory hurdles are factored in, the Nifty’s nominal return of around 9.4% can shrink to roughly 5% in effective terms, which is lower than the returns available on NRE fixed deposits.
So, should investors avoid investing in Indian stock markets?
Despite these challenges, India can still play a valuable role in an NRI’s portfolio, particularly for those primarily invested in US markets, says Mukherjea
Historically, Indian and US equities have not moved in perfect sync, providing diversification benefits. Barring major global shocks such as the 2008 financial crisis and the Covid-19 market crash, the two markets have often followed different trajectories. As a result, allocating a modest portion of a US-based portfolio to Indian equities can help improve diversification
This is where GIFT City becomes very interesting:
A dollar-denominated investment structure based out of GIFT City has the potential to solve several of these structural problems simultaneously:
- Since investors hold the underlying Indian stocks directly in their own name through a demat account, the investments are generally not treated as PFICs under US tax rules, avoiding the onerous PFIC reporting requirements.
- Further, investments are made and held in US dollars, eliminating concerns that rupee depreciation would erode returns.
- Investors also do not face Indian capital gains tax, with taxation typically applicable only in their country of residence, such as the US.
- In addition, the need for a PIS account and the associated compliance requirements is removed.
Investment through GIFT City allows NRIs to cut through all the regulatory complexities to build wealth in the same currency they earn in, save in, and often want to retire in, i.e. US dollars.