If you are a Non-Resident Indian, residing in the USA or Canada, looking to invest in mutual funds in India, this article is for you. The reason being unlike NRIs from other countries, USA/Canada NRIs are faced with certain compliance considerations if they are looking to invest in India. However, there are many AMCs in India that allow US/Canada NRIs to invest in mutual funds in a hassle free way.  Let us know more about these AMCs and the rules governing USA/Canada NRI investments in India.

Who Are Considered As Non-Resident Indians (NRIs)?

Any Indian resident who is been residing outside India for a period of 182 days or more in a financial year is termed as Non-Resident Indian. As an NRI, you can hold on to your existing property that you bought earlier (when you were a resident) as well as can invest in new properties in the domestic boundaries. A major portion of NRIs investments includes real estate investments. However, NRIs can also opt for other investment avenues like mutual funds.

Rules For NRIs Mutual Fund Investment

NRIs mutual fund investments are governed by the Foreign Exchange Management Act 1999 (FEMA). As per the provisions of the act, the NRIs are allowed to make investments into the capital markets including direct stocks, exchange-traded funds (ETFs) and mutual funds. These investments are allowed only with the compliance of certain conditions like fresh filing of Know Your Customer (KYC) documents, the opening of a rupee-denominated Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account, etc.

Investment Procedure For NRIs In India

Mutual fund houses are not allowed to accept investments in foreign currencies. So, firstly it’s necessary to open a NRE account, NRO account or Foreign Currency Non-Resident (FCNR) account with an Indian bank. Now the NRI can proceed with any one of the below options:

  • Direct/Self-investment: All the basic transactions, debiting and crediting can be done by NRIs through usual banking channels. The investment application must be attached with the required KYC details. While the application itself it is required to mention whether the investment is capable of repatriation or not.
  • Via Power of Attorney: Asset Management Companies (AMCs) allow NRIs to invest through another person. NRIs can give their Power of Attorney (PoA) to someone who can then take the decisions regarding their investments. However, the signature of both the NRI investor and PoA holder should be present on the KYC documents at the time of investment application.

Issues related to USA and Canadian NRI Investors

Mutual fund investments are as simple for NRIs (not from USA and Canada) as it is for residents. This is only because of the cumbersome compliance requirements under the Foreign Account Tax Compliance Act (FATCA).

Under FATCA, it is compulsory for all financial institutions to share details of all transactions involving US citizens, including NRIs with the US government. FATCA ensures that there is no deliberate tax evasion on the income generated by US citizens overseas. India signed the Inter-Governmental Agreement (IGA) with the USA on July 9, 2015, for improving International Tax Compliance and implementing FATCA. Due to this reason, mutual fund houses stopped taking investments from USA and Canada.

After consultation between the fund houses and experts, many have again started the investments from the USA and Canada but with some conditions applied. For example, ICICI Prudential AMC, Birla Sun Life Mutual Fund and SBI Mutual Fund allow USA and Canada investments only through the offline transaction with an additional declaration signed by the client, where as L&T Mutual Fund doesn’t allow such investments in close-ended funds.

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

Taxation Laws For NRIs For Mutual Fund Investments

Taxation rules are basically the same for both residents and NRIs. For example, dividends are exempt from tax in the hands of residents or NRIs.

  • Short term capital gains (STCG) rules apply for equity mutual fund investments made for 1 year or less. The applicable tax rate is 15% of the gains.
  • Long term capital gains (LTCG) rules apply for equity mutual fund investments made for more than 1 year. The applicable tax rate is 10% of the incremental gains over Rs. 1lakh for a financial year.
  • Short term capital gains (STCG) rules apply for debt mutual fund investments made for 3 years or less. The applicable tax rate is 30% of the gains.
  • Long term capital gains (LTCG) rules apply for debt mutual fund investments made for more than 3 years. The applicable tax rate is 20% of the gains with indexation benefit in case of listed funds or 10% without indexation benefit in case of non listed funds.

Now, at the time of sale or redemption of units, the tax calculated as above will be deducted by the buyer and the remaining money will be transferred to the NRI. This is known as Tax Deducted at Source (TDS) and it is then paid to the government on behalf of the NRI. Thus, after that, no tax on the same is required to be paid by the NRI to the Indian Government.

Type of scheme Tax Rate
STCG LTCG
Equity Schemes 15% 10% on long term gains exceeding Rs. 1lakh
Non-Equity Schemes 30% 20% with indexation (listed fund)

10% without indexation (unlisted fund)

 

Type of scheme TDS Rate
STCG LTCG
Equity Schemes 15% 10% 
Non-Equity Schemes 30% 20% 

Further, NRIs can claim the benefit of TDS deducted and taxes paid in India against the tax payable in their country as per the Double Taxation Avoidance Agreement (DTAA). For example, if tax of Rs. 50,000 is deducted on short term capital gain in an equity fund in India, then NRI can claim the same on the tax required to be paid on the same gain by him/her in the resident country. The main objective of DTAA is to avoid double taxation of the same income.

Conclusion

NRIs can choose to invest in their home country (India) as it is one of the growing economies in the world. There might be some difficulties in the initial stage, but in the long run, it will be fruitful. NRIs will have a scope to earn returns from investments as well as more profits from rupee appreciation. With online investment option, it has become easy for NRIs to track their investment portfolio. Even the NRIs from USA and Canada can start to invest in mutual funds as now the count of fund houses accepting USA and Canada clients are increasing.

Disclaimer: The views expressed in this post are that of the author and not those of Groww