NRI Mutual Funds Investment in India – A Complete Guide

NRIs guide to Mutual Fund investments in India

NRI Mutual Funds Investments are one of the ideal investment options for NRIs, owing to better returns and lesser personal involvement.

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The Indian economy, being one of the fastest growing economies in the world, attracts investors from all over the world. NRIs are not far behind in investing in India, as it gives them the satisfaction of investing in their homeland.

Mutual funds are one of the best investment vehicles for NRIs to start investing in India. With mutual funds offering a variety of schemes investing across different asset classes such as equity, debt, commodities, etc., it is simpler for NRIs to invest in the right mix of asset classes with lesser personal involvement and smoother processing. Mutual funds offer a diversified portfolio with equity, debt, and hybrid (combination of equity and debt securities) options and hence, the investment portfolio need not be actively managed by the NRI investors. Also, the expenses are less as compared to PMS charges.

All said and done about MFs, how do NRIs go about investing in MFs? Are they allowed to invest in all types of MF schemes? What about the taxes?

Procedure for NRIs to invest in MFs

NRIs have the option to invest directly in MFs or invest through another person by giving them Power of Attorney (PoA). The PoA holder can invest on your behalf and take decisions about your investments.

Let us understand the investing procedure step by step.

1. AMCs are not supposed to accept investments in foreign currency, and hence, the first step is to have either an NRE or NRO account to start investing in MFs in India.

Investments done through NRE accounts are repatriable and from NRO are non-repatriable. AMCs do not accept overseas bank account details for any MF transaction.

2. KYC (Know Your Customer) is mandatory for all investors. If you are planning to carry out the investment transactions yourself, you have to get KYC verified by submitting copies of your PAN, passport, residence proof outside India, and bank statement. Your bank may even insist on an In-Person Verification (IPV) which can be done by visiting the Indian embassy in your country of residence.

If you are investing through another person through Power of attorney (PoA), the KYC documents should contain yours as well the PoA holder’s signature on the KYC documents.

With an Indian Rupee account and KYC done, you are all set to start investing in MFs. But are you allowed to invest in all schemes that a Resident Indian can invest?

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Can NRIs invest in all MF schemes available for Indian Residents?

Well, NO!

Not all AMC allow NRIs to invest in their schemes. By accepting NRI investments in Mutual Funds, AMCs have to follow stringent reporting standards and report all the holdings of the NRI investors to their home country.

The compliance requirements are even more stringent if the investors are from US or Canada. In fact, the FATCA declaration for the investors was introduced for the purpose of sharing the details of all financial transactions done by US citizens in India.

With the additional compliance requirements, many AMCs do not accept NRI investments and even the AMC which receives NRI investments , allow them to invest only in selected schemes.

US/Canada based NRIs Beware:

It is not advisable for US and Canada based NRIs to invest in Indian Mutual Funds or for that matter any offshore Mutual Funds, though the fund houses accept such investments.

What modes are available for NRIs to invest in MFs?

NRIs can pay online for investments through NRE/NRO accounts.

If you plan to make payment through cheque or demand draft, you must attach a Foreign Inward Remittance Certificate (FIRC) or a letter from the bank to which remittance was done. This is required to confirm the source of funds.

Also read:Non-Resident Indian(NRI) Investment options in India

Can NRI Mutual Funds investment in India be repatriated?

If you have made investments in MFs from your NRE/FCNR account, it can be repatriated. The dividends/redemptions arising from your investments will be credited to your NRE/FCNR account only. The funds for investment in MFs should compulsorily come from inward remittance.

If you have made investments from your NRO account, the dividends/redemptions arising from your investments will be credited to your NRO accounts. The funds in your NRO account can come from either from your income arising in India or by debit from NRE account.

If you had made MF investments before your tax status changed to NRI, the redemption proceeds cannot be repatriated.

However, it is important to note that the dividends received can be repatriated even if the investments are non-repatriable.

How are NRI Mutual Funds investment taxed?

Even though the capital gains tax rate applicable for NRIs and Indian Residents are the same, it works in a slightly different manner for NRIs and residents.

Indexation benefit is available for NRIs for listed, non-equity schemes only.

Long-Term Capital Gains (LTCG):

For equity schemes, both NRIs and Residents have to pay 10% tax on the gains.

In case of non-equity schemes, NRIs are taxed at 10% of the gains without indexation benefit or 20% of the gains after indexation in case of listed schemes.  In case of unlisted schemes, a 10% tax rate is applicable as indexation benefit is not available.

Usually, only close-ended mutual fund schemes are listed on stock exchanges and hence, NRIs investing in open-ended, non-equity schemes such as income funds, credit risk funds etc., do not benefit from indexation.

Short Term Capital Gains (STCG):

Short term gains from both equity and non-equity schemes are taxed in the same manner for both NRIs and Residents.

TDS (Tax Deducted at Source)

To ensure better compliance and collection of tax, AMCs mandatorily deduct tax at source in case of redemption, and the value net of tax is disbursed. The TDS is equal to the applicable rates of tax for LTCG and STCG.

  STCG LTCG
Equity Oriented Schemes 15% 10%
Non-Equity Oriented Schemes 30% 20% for listed and 10% for unlisted

You are supposed to file your tax returns to claim any refunds, if applicable.

Also, NRIs can take advantage of DTAA (Double Taxation Avoidance Agreement) treaty, if it exists between India and their country of residence to avoid taxation on the same income in India and their country of residence.

Also read: RNOR Tax Status – A boon for returning NRIs

Nominees

A resident is allowed make an NRI as a nominee. However, the nominee can receive it as a non-repatriable investment only.

An NRI can make a resident as a nominee. However, the MF holdings may be subject to inheritance laws of the country in which the NRI resided.

Final Words

Investing in Mutual funds is very convenient for NRIs as they can get professional management of their funds at a lesser cost, and also get to invest across a wide variety of asset classes. The prerequisite such as opening a Rupee account, i.e. NRE/NRO account and KYC verification is a one-time process. In the long run, investing in Mutual Funds is the best in terms of returns, ease of operations as well as from tax perspective.

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