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Mutual funds are one of the sought after options for investments for most NRIs and yes they can invest in it but to know about the specifics, one must refer to the scheme information document (SID) of the mutual fund scheme he/she is interested in. In this article, we have covered the process of investing in mutual funds for NRI and other important details.

Can NRIs Invest in Mutual Funds in India?

The very first question is that, are NRIs even allowed to invest in the Indian mutual fund industry? Of course, an NRI can invest in mutual funds in India as long as he/she adheres to the Foreign Exchange Management Act (FEMA).

  • In terms of Regulation 2 of FEMA Notification No.13 dated May 3, 2000, Non-Resident Indian (NRI) means a person resident outside India who is a citizen of India.
  • According to Income-tax Act 1961, a resident is a person who has been in India for 120 days or more during a financial year or365 days or more during the preceding 4 financial years and at least 60 days in that year. Therefore, NRIs include those individuals who visited India for less than 120 days in a financial year.
  • This amendment was brought in the current financial year. Earlier the 120-day threshold was 182 days. However, there is a catch here. If the total Indian income, that is income accruing in India, during the financial year is more than Rs 15 lakh, only then the 120 days rule will apply. Visiting NRIs whose total taxable income in India is up to Rs 15 lakh during the financial year, will continue to remain NRIs only if their stay does not exceed 181 days, as was the case earlier.
  • The definition of NRI in FEMA decides where an NRI can invest and the definition of an NRI in the income tax act defines how these investments will be taxed.

What Is the Procedure?

Step 1: Set Up an Account

Mutual fund Asset Management Companies in India cannot accept investment in foreign currency.

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According to Indian laws, specifically, Foreign Exchange Management Act (Fema), does not allow you to park your money in regular resident savings account in India once you have achieved the NRI status. This law makes it compulsory for an NRI to have the knowledge and know the NRE and NRO account difference and know which suits you more.

NRE: NRE Account is well suited for those who want to send the money they have earned overseas to India.

NRO: Money kept in NRO accounts also has to be in Indian rupee and money cannot be repatriated to a foreign currency easily. NRO Accounts can be used by NRIs to deposit their earnings in India. This is an important difference between NRE and NRO account.

Read more on GrowwDifference between NRE and NRO Account

Once the account is activated, an NRI can invest by any of the below methods.

A. Self or Direct

  • An NRI can carry out transactions, debiting or crediting through normal banking channels.
  • Their application with the required KYC details must indicate that the investment is on a repatriable or non-repatriable basis.
  • KYC documents consist of a recent photograph, certified copies of PAN card, passport copy, residence proof of outside India, and a bank statement. The bank may require an in-person verification which an NRI can comply with, by visiting the Indian Embassy in their resident country.

B. Through the Power of Attorney (PoA)

Another common method is to have someone else invest on behalf of an NRI.

In India, Mutual fund companies allow holders to invest on their behalf and take other decisions pertaining to their investments. However, signatures of both the NRI investor and PoA should be present on the KYC documents to make such types of investment.

Step 2: Get Your KYC done

An NRI must complete the KYC process before starting investment in Indian mutual funds.

For that, they need to submit a copy of your passport (only relevant pages with name), date of birth, photo and address. The current residential proof too is a must, whether temporary or permanent resident in that country. Some fund houses may also insist on an in-person verification too.

Many mutual fund houses in India don’t allow NRIs from the USA and Canada to invest in their schemes because of the cumbersome compliance requirements under the Foreign Account Tax Compliance Act (FATCA). On the other hand, there are some fund houses that have certain conditions on which they allow investors based in the USA and Canada to put money in their schemes.

So if you an NRI from the USA or Canada, then look into the additional document requirement also.

For Example, ICICI Prudential AMC, Birla Sun Life Mutual Fund and SBI Mutual Fund allow investments only through an offline transaction with an additional declaration signed by the client

List of fund houses that accept investments from NRIs based in the US and Canada:

Step 3: How to Redeem?

For NRIs, mutual fund investments can be redeemed by following the redemption procedure mentioned by the fund houses. Different fund houses in India follow different procedures for redemption by NRIs.

The AMC will credit the corpus (investment + gains) you get after fund redemption to your account after deducting taxes and shall be credited to the respective NRE or NRO bank account of the investor. They can also write a cheque for the same.

What About Taxation for NRIs?

Many NRI investors often fear that they will have to pay double tax when they invest in India, especially in mutual fund schemes. But certainly, that’s not the case if India has signed the Double Taxation Avoidance Treaty (DTAA) with the respective country.

For Example,

India has signed a DTAA treaty with the US. Hence, an NRI can claim tax relief in the US, if he/she has already paid taxes in India. The gains from equity-oriented mutual funds are taxable based on the holding period.

These are the holding periods defined for different types of mutual funds:

Type Short-term holding Long-term holding
Equity mutual funds Less than 12 months 12 months and more
Balanced mutual funds Less than 12 months 12 months and more
Debt mutual funds Less than 36 months 36 months and more

The below table summarizes the tax on the capital gain from mutual funds:

Capital Gain taxation on different types of mutual funds
Type Short-term capital gains (STCG) tax Long-term capital gains (LTCG) tax
Equity-oriented mutual funds 15% 10% without Indexation
Balanced mutual funds 15% 10% without indexation
Debt-oriented mutual funds As per tax slab 20% after Indexation

Important Points to be Noted for NRIs

  • If details of a foreign bank account are provided, the application of the NRI will be rejected.
  • On redemption of mutual fund units, the tax will be deducted at the source on the capital gains made on the investment.
  • Your investment into mutual fund schemes carry the right of repatriation of the amount invested and amount earned, only until you remain an NRI.
  • The compliance requirement in the USA and Canada are more stringent as compared to other nations. According to FATCA guidelines, all financial institutions must share the details of financial transactions involving a person from the USA working with the US Government.
  • You must check if you are a resident of any of the 90 countries that have signed the Common Reporting Standard (CRS)? CRS is a global reporting system to combat tax evasion around the globe.

The Bottom Line

NRIs can easily choose to invest in the Indian mutual fund industry although the process may have some initial hassles. However, in the longer term, the return on investment would be worth it and there is certainly no reason for you to be left out of investing in one of the fastest-growing economies of the world.

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