“Synopsis”
India’s booming startup ecosystem has attracted massive global attention, including from Non-Resident Indians (NRIs). As an NRI, you may want to participate in the early-stage success of Indian startups—but you must comply with FEMA, Companies Act, and RBI regulations. This blog outlines the approved routes for NRIs to invest in startups or unlisted companies in India in 2025, such as angel investing, venture capital funds, and convertible notes, along with their compliance requirements and taxation aspects.
Why Startups Are an Attractive Option for NRIs
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High growth potential and early exit opportunities
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Exposure to India’s tech and innovation sector
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Portfolio diversification beyond traditional assets
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Direct support to Indian entrepreneurship
1. FEMA-Compliant Routes for NRIs to Invest in Startups
As per RBI and FEMA guidelines, NRIs can invest in unlisted Indian companies under specific automatic or government routes depending on the sector.
a. Automatic Route (Most Sectors)
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NRIs can invest without prior approval in most sectors.
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Sectors like agriculture, defense, and real estate require government approval.
b. Investment Instruments Allowed Under FEMA:
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Equity shares
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Compulsorily Convertible Preference Shares (CCPS)
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Compulsorily Convertible Debentures (CCDs)
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Convertible Notes (for startups)
2. Angel Investing in Indian Startups
Angel investing involves providing early capital to startups, usually in exchange for equity.
Key Points:
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NRIs can act as angel investors if they are investing in FEMA-permitted sectors.
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Investments should be made on a non-repatriation basis unless routed through proper NRE/FCNR accounts.
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Must comply with Startup India norms and ensure due diligence is documented.
3. Investing Through Venture Capital Funds (VCFs)
VCFs and Alternate Investment Funds (AIFs – Category I & II) are regulated by SEBI and are allowed to accept investments from NRIs.
Advantages:
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Professional fund management
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Portfolio diversification
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Lower entry barrier compared to direct equity
Things to Know:
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Funds should be SEBI-registered AIFs
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KYC and FEMA compliance is mandatory
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Income is taxed per fund structure (pass-through or taxed at fund level)
4. Convertible Notes for Startups
Convertible notes are debt instruments that convert into equity at a later stage. This is a common mode of early funding.
Eligibility & Rules:
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Startups can issue convertible notes to NRIs with a minimum investment of ₹25 lakhs in a single tranche.
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The investment must comply with FEMA Notification No. 20.
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Repayment or conversion must happen within 5 years.
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Must be through banking channels and reported to RBI.
5. Using NRE/NRO/FCNR Accounts for Investment
NRIs must route investments through these accounts:
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NRE/FCNR Account: For repatriable investments
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NRO Account: For non-repatriable investments
6. Companies Act Compliance
The startup must:
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Be registered under the Companies Act, 2013
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Issue shares or instruments in line with valuation guidelines
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File necessary ROC filings and Form FC-GPR with RBI
7. Tax Implications for NRIs on Startup Investments
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Capital Gains Tax: Short-term (within 24 months) is taxed at 15-30%, long-term at 10-20%.
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Dividend Tax: Taxed in the NRI’s hands at 20% TDS (DTAA benefit available).
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Exit Taxation: Repatriation of sale proceeds is allowed after taxes are paid.
8. Due Diligence and Risk Management
NRIs should:
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Verify startup registration and valuation reports
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Check fund utilization plans
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Conduct legal & financial due diligence
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Have exit clauses in place
Conclusion
Investing in Indian startups is not only a high-reward opportunity for NRIs but also a chance to contribute to India’s entrepreneurial landscape. Whether through direct equity, convertible notes, or venture capital funds, NRIs must follow FEMA rules, Companies Act, and tax laws diligently. With the right strategy, startup investing can become a powerful addition to your global investment portfolio.
