How to Fund Your Business in India as an NRI

India's position as one of the fastest-growing economies in the world. The country is an attractive destination for NRIs looking to invest back home. Funding a business in India offers an effective combination of familiar markets, lower operational costs, and favorable currency appreciation. It also offers access to one of the largest consumer markets in the world.

However, every financial transaction between an NRI and an Indian entity is governed by the Foreign Exchange Management Act (FEMA), 1999. It provides the rules regarding which bank accounts to use, how to transfer funds, and how to repatriate profits. It also reflects the permitted sectors for foreign investments, and getting them wrong can attract serious legal and financial consequences.

In this blog, we will break down the two key funding routes available to NRIs: business loans and equity investments (FDI route). We will also discuss the compliance requirements, tax implications, and the process to fund using each route.

Why are NRIs Funding Businesses in India?

With a GDP growth rate among the highest globally, India has recognized itself as one of the fastest-growing economies in the world. Funding a business in India is a financially beneficial move for the NRIs living across the USA, UAE, UK, Canada, and Singapore. NRIs enjoy numerous structural benefits, such as:

• Favorable currency appreciation
• Being familiar with Indian markets
• Access to India's large domestic consumer market base
• Lower operational costs as compared to their resident country

However, it's important to choose the correct funding route, which is either a loan or an equity investment. It is because it has a significant impact on control, taxation, repatriation, and compliance.

What are the FEMA, RBI, and FDI Rules for Funding Business?

The Foreign Exchange Management Act (FEMA), 1999, governs all NRI financial transactions with India. The Reserve Bank of India (RBI) serves as the managing authority that issues circulars and provides core principles to execute FEMA in practice.

Factors Governed by FEMA for NRIs

• Repatriation of capital and profits.
• Restricted sectors for investment.
• Rules for inward and outward remittances.
• Loans given to or received from Indian entities.
• Making investments in Indian companies via the FDI/FPI routes.
• Types of bank accounts that NRIs can hold. It includes NRE, NRO, and FCNR.

Key RBI/ FEMA Rules to Keep in Mind

• Most sectors permit 100% FDI under the automatic route, without the need for prior approval.
• A single NRI cannot hold more than 5% under PIS (Portfolio Investment Scheme) for listed companies
• The total investment an NRI can make in a company is capped at 10-24% of paid-up capital.
• Repatriation from the NRO account is capped at 1 million USD per financial year.
• Loans lent to Indian companies must adhere to the Foreign Exchange Management (Borrowing & Lending) Regulations, 2018.
• Investments made by NRIs in Indian companies are classified as Foreign Direct Investment (FDI)

Which NRI Bank Accounts Must be Used to Fund Business?

Ensure you route your funds through the correct NRI bank account when funding a business in India. The type of account will determine repatriation flexibility, tax treatment, and the funding instrument you are allowed to use. The table below lists the types of bank accounts available for NRI business investment in India:

Funding Your Business via a Loan

An NRI has the option to fund an Indian business via a loan in three different ways:

1. Taking a loan from an Indian bank against their NRI deposits.
2. Lending money directly to the Indian company.
3. Lending to a resident individual (relative)

Both these routes are strictly routed under FEMA. Let's understand each in detail:

Option 1: Loan Against NRI Bank Deposits (NRE/FCNR)

If taking a loan against NRE/FCNR deposits:

Option 2: Lending a Loan Directly to an Indian Company

Under FEMA, an NRI can also lend money directly to an Indian company. However, strict rules may apply under the Foreign Exchange Management (Borrowing and Lending) regulations, 2018. Here are some rules to adhere to while lending a loan to Indian companies in FY 2025-26:

Option 3: Lending to a Resident Individual (Relative)

Apart from the above two options, an NRI can also lend INR to a close resident relative in India to fund their business. However, these are subject to the following rules:

Funding Your Business via Equity Investment

Equity investment is the preferred route to fund a business for NRIs who want ownership, control, and long-term growth in an Indian business. Under FEMA, NRI investments in Indian companies are classified as Foreign Direct Investment (FDI). It offers investors a regulated yet flexible framework. Let's understand the permitted FDI investment route for NRIs:

Repatriable Basis

• Funds invested from NRE or FCNR accounts are fully repatriable.
• Both the original investments and profits (dividends, capital gains) can be repatriated fully outside India.
• It is ideal for NRIs who may intend to exit and bring funds back.

Non-Repatriable Basis

• Funds invested from the NRO account are capped. Hence, capital and earnings cannot be remitted abroad freely.
• Remittance of only up to 1 million USD per year is allowed.
• It is preferable for NRIs who plan to stay in India for a long time and have no near-term exit plans.

Convertible Instruments

• NRIs can invest either via compulsorily convertible preference shares (CCPS) or compulsorily convertible debentures (CCDs).
• These are hybrid instruments that are used by startups and companies to raise funds that eventually convert into equity.
• Keep in mind that SAFE notes are not recognized legally in India.

Convertible Notes (Startups)

• These are short-term debt instruments that convert to equity at a future date.
• It is available only for DPIIT-recognized startups.
• It provides flexibility in early-stage rounds without the need for immediate valuation.

Investment Vehicles Available to NRIs

The table below lists some equity investment vehicles that NRIs can use to fund their business in India:

Tax Implications for NRIs Funding Indian Businesses

The tax treatment for NRIs while funding an Indian business may vary. It depends on the income type, funding route, and the applicable Double Taxation Avoidance Agreement (DTAA). Also, it depends on whether TDS has been deducted at source in India.

Tax on Investment Income

The table below lists how your investment income will be taxed:

Tax on Loan/Interest Income

The table below lists how NRIs are taxed on their loan/Interest income:

What is the Process to Fund Your Indian Business?

Let's understand the process to fund your Indian business both via equity investment (FDI route) and via the business loan route:

Steps to Fund via Equity Investment (FDI Route)

Follow the steps below to fund your business via the Foreign Direct Investment Route:

• Confirm Eligibility: Check whether your target sector permits 100% FDI under the automatic route via the DPIIT FDI policy. Many sectors may require government approval. It includes sectors like retail (single brand), defense, and media.
• Open/ Activate NRE or FCNR Account: Route your investments through either an NRE or FCNR account. This will help ensure full reparability of returns. Use the NRO account if already in India, although it has repatriation limits.
• Get Fair Valuation Done: Determine the fair value of the company's shares using the DCF method. You can seek help from a SEBI-registered Merchant Banker or Chartered Accountant. This process is mandatory for every investment in unlisted companies.
• Sign the Shareholder Agreement and Allot Shares: Finalize the investment terms, shareholder agreement, and articles of association. After that, the Indian company will allot shares to you as a foreign investor.
• File Form FC-GPR with the RBI: The Indian company must file FC-GPR (Foreign Currency- Gross Provisional Return) with the RBI. It must be filed through an authorized dealer bank within 30 days of allotment of shares. It is a mandatory FDI reporting requirement.
• Obtain PAN and Complete KYC: Ensure you have a valid PAN card, as it is mandatory for conducting financial transactions in India. Complete your KYC with your bank and investment entity. NRIs without a PAN will face a higher rate of TDS deductions of 20%.
• Annual Compliance & FEMA Filings: The Indian company is required to file Form FC-TRS (Foreign Currency- Transfer of Shares). It must be filed on the transfer of shares and annual returns with the RBI. Ensure to maintain documents for all transactions as an NRI investor for your annual ITR filings. It applies if your Indian income exceeds the specified exemption limit.

Steps to Fund via the Business Loan Route

Follow the steps below to fund your business via the business loan route:

• Select the Structure for Lending: Choose the correct lending structure:
  • A loan against NRE/FCNR deposits (easiest)
  • Personal loan to a resident relative (interest-free, maximum tenure of 3 years).
  • NCD-based (Non-convertible debentures) lending to a company. It requires compliance with the public offer.
• Draft a FEMA-Compliant Loan Agreement: Engage a CA or lawyer to draft a loan agreement that specifies the amount. It must also specify the tenure (minimum 3 years for company loans), interest rate (within the 3% and the SBI rate cap), and the repayment method.
• Route Funds via Authorized Banking Channel: Transfer the funds via inward remittance through SWIFT or from your NRE/NRO/FCNR account. Informal and cash transfers are strictly not allowed and are considered violations under FEMA.
• Report to RBI Through Authorized Dealer Bank: Report cross-border loans to the RBI through your authorized dealer (AD) bank. Submit KYC documents, loan agreements, compliance certificates, and other relevant documents as required.
• Manage TDS and DTAA Compliance: The Indian borrower must deduct TDS on interest payments. To claim benefits of the DTAA treaty, submit Form 10F and a tax residency certificate. Also, if interest income exceeds the specified threshold, file your Indian ITR.

To Conclude

India's regulatory framework for NRIs has become significantly progressive. Most business sectors allow 100% foreign investment under the automatic route. The key to funding a business successfully is selecting the right bank account, regardless of whether you choose debt or equity. It also includes following FEMA's documentation and reporting requirements carefully, and using DTAA treaties to minimize tax outflows.

If you are still confused, consult an expert at Savetaxs before transferring the funds. At Savetaxs, we are a team of experts who can offer tailored guidance to NRIs seeking assistance with funding their business. Our team can help you choose the right route, correct bank account, proper documentation, and much more related to funding an Indian business as an NRI. Connect with us right away and fund your business in India as an NRI with confidence and precision.