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6 Important Things NRIs Must Know Before Investing in India

28 March 2022

Can NRIs invest in mutual funds in India online? Here’s a direct answer to the question on your mind: Yes, you can invest in mutual funds in India if you’re an NRI. Mutual funds for NRIs is almost as accessible as it is for resident Indians.*

1. What kind of bank account do NRIs need to invest in Mutual Funds in India?

All transactions between you and the mutual funds will be in Indian National Rupees (INR). You will have to pay the mutual funds in INR and whatever return you get, they’ll pass on to you in INR as well.

You’ll need any one of the following types of bank account:

  • Non-resident External Rupee (NRE) Account
  • Non-resident Ordinary Rupee (NRO) Account
  • Foreign Currency Non-resident (FCNR) Account

Keep in mind, in the case of an NRO account, only the returns are repatriable. The principal amount is not.

If you are an NRI, you probably already have an NRE/NRO account. Great!

2. What Are the Requirements to Invest in India?

You’ll need to upload self-attested photocopies of:

  • A recent photograph of you
  • Your PAN card
  • Your passport (certified copy)
  • PIO/OCI card
  • A proof of your residence outside India and permanent address proof (could be of any foreign nation).
  • Bank statement (1 month’s) of the bank account you want to use for investing.

All of this is to make sure you are KYC compliant. An in-person verification would also have to be carried out.

4. Is the Income Taxable for NRIs?

Income earned will be subject to tax laws of India.

+Short-Term Gains

Equity Mutual Funds: You’ll have to pay 15% as tax if the investment is redeemed before one year.

Debt Mutual Funds: the rate of tax depends on your income tax slab if the investment is redeemed before three years.

+Long Term Gains

Equity Mutual Funds: No tax needs to be paid if investments are redeemed after a year from the investment.

Debt Mutual Funds: If redeemed after three years from the date of investment, a tax rate of 20% is applicable on the gains with indexation benefit.

tax mutual funds

Taxes you’ll have to pay in the country you reside in will depend on the individual country laws. India has Double Tax Avoidance Agreements with 88 countries (USA and Canada also a part of this) of the world. This agreement aims to reduce taxing the same income twice.

For example, if you (NRI) are based in the USA makes short-term capital gains, you will have to pay 15% tax in India. The rate of tax for the same gains is 30% in the USA. However, you will have to pay only the difference in the tax rate in the USA. Thus, you are not taxed doubly.

5. Why Should NRIs Invest in India?

IMF foresees India’s growth in 2018-2019 to be 7.7%. A report by the World Bank says something on similar lines. The Chinese official media indicated in an article that India could become the “factory of the world”.

India attracts highest FDI inflows since 2015, as opposed to its erstwhile rank of 15 just a few years back.

The world economy is not doing very well as a whole. The Indian economy in such cloudy times appears as a silver lining. Consistently rated as one of the world’s fastest-growing nations, India has attracted investments from all over the world. It is no surprise then that retail investors want a piece of the cake too.

In fact, you are probably reading this because an NRI friend of yours has shown interest or has already started investing in Indian mutual funds. No surprise then that more NRIs are investing in Indian mutual funds.

6. NRI from US/Canada

NRI from USA and Canada cannot invest in all mutual funds. Certain mutual funds need investors to be physically in India while making investments. This means that they cannot do a SIP.

Mutual Fund Houses like Reliance let NRI from US/Canada invest online also. Please, Whatsapp 9108800604 for more details.

Restrictions for NRI investors (Especially for Stock Market)

  • Certain sectors

Unlike resident investors, NRI stock market investors cannot invest in just about any sector that piques their interest and seems poised for an uptrend. NRIs are barred from investing in specific sectors as per the RBI mandate. And heavy penalties are attached to attempts to invest in these sectors. 

  • Certain instruments

It’s not only shares of specific sectors that NRIs need to avoid. Some stock market instruments are also not open for external investment. For example, currency derivatives and commodities are off-limits for NRI stock market investors. 

  • Intraday trading 

The kind of trading that involves buying shares and selling them on the same day is known as intraday trading or day trading. As an NRI investor, this type of trading is off-limits. However, if you have a short investment horizon, you can still buy shares, wait for their delivery and sell them in the short term. Provided the pricing bodes well for your investment goals. 

  • Ceilings and caps 

  1. An NRI is not permitted to hold investments that correlate to over 10% of the paid-up value of shares of a company listed on the Indian stock market. 
  2. An NRI can only invest 5% (on a repatriable and non-repatriable basis) of the paid-up value of shares of companies listed on the Indian stock market. 
  3. You can repatriate (or, in other words, transfer to your local bank account in the country where you might reside) a maximum of $1 million annually after paying the designated taxes on the amount being repatriated.
  • Other repatriation rules 

The dividend amount and interest you might earn on your stock market investments are repatriable. However, the principal investment (in this case, the value of the shares or the bond) is not repatriable. 

But when you invest in an IPO, you can repatriate the entire amount. You need not use your PIS for buying IPO shares. Keep in mind that the issuer of the shares can decide whether or not to permit NRI investors. For example, the LIC IPO did not welcome NRI investors. 

Takeaway

Investing in the Indian stock market or any other form of investment is not a more complex process for NRI investors than for resident investors. However, to ensure that you are not breaking any rules and to avoid the heavy penalties associated with breaking the rules, it might make sense for you to hire a financial advisor or consultant. 

The only challenge that might exist, for NRI investors, is avoiding banned sectors and staying within the limits of NRI investors. Note that, the stock market remains unpredictable. So do consider your risk appetite, investment horizon, goals and optimal entry and exit prices. 

*Franklin Templeton Mutual Fund does not accept investments from NRIs and PIOs.

*The options for NRI from US/Canada are fewer than Indian residents.

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