Mutual Fund for NRIs: Know About Eligibility, Investment Process, and Taxation
Divya Grover
Oct 30, 2024 / Reading Time: Approx. 10 mins
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As one of the fastest-growing economies in the world and with the steady rise of the Indian equity market, India has attracted the attention of many individuals who have settled abroad for career opportunities. Mutual funds are one of the most sought-after options for investments by NRIs.
However, the question arises here is whether NRIs can invest in mutual funds in India?
The answer is yes; NRIs are indeed allowed to invest in mutual funds.
According to a general permission by the Reserve Bank of India under Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, Non Resident Indians (NRIs) , Persons of India Origin (PIO) residing abroad, Foreign Institutional Investors (FIIs) have been granted permission for investing in / redeeming units of the mutual funds.
In simple words, NRIs can invest in mutual funds provided they adhere to the provisions of the Foreign Exchange Management Act (FEMA).
An individual is classified as an NRI if they fulfil the following criteria:
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He/she is an Indian citizen residing abroad.
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He/she was physically present in India for less than 120 days in a financial year (April - March). This 120-day rule will apply only if the individual's taxable income in India exceeds Rs 15 lakh in a financial year.
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If an individual's income in India is below Rs 15 lakh, then the physical stay in India can be extended to 181 days without affecting the NRI status for taxation purposes.
What is the process NRIs need to follow to invest in mutual funds in India?
Since mutual funds in India cannot accept investments in foreign currency, there are certain procedures that NRIs need to follow before they can begin their investment journey. Here is how it can be done:
1. Complete the KYC
Just like in the case of resident investors, completion of the KYC process is mandatory for NRI investors as well before starting investments in mutual funds. Investors are required to submit the necessary documents along with the KYC registration form to KYC Registration Agencies (KRAs) such as CAMS and KFintech.
Such applicants must furnish a certified copy of proof of their identity (their PAN), passport size photograph, cancelled cheque leaf of NRE/NRO account, and copy of passport (relevant pages as specified by the mutual fund house). They also need to submit a copy of their overseas/local address proof (as applicable) certified by a local authority/Indian embassy/consulate is required. If documents are not in the English language, they must be translated into English.
In the case of NRIs, the in-person verification can be completed through authorised officials of overseas branches of Scheduled Commercial Banks registered in India, Notary Public, Court Magistrate, Judge, or Indian Embassy / Consulate General in the country where the client resides.
Investors have to go through the KYC process only once, i.e. NRIs do not need to submit the KYC form for every investment once the KYC process is complete.
It is important to note that many mutual fund houses in India do not permit investments from NRIs residing in the USA and Canada due to the stringent compliance procedures laid down under the FATCA (Foreign Account Tax Compliance Act).
Very few mutual fund houses, such as the ones listed below, allow investors from the USA and Canada to invest in their schemes:
It is noteworthy that NRIs from the USA or Canada may be required to submit additional documents as well as declarations before they can begin their investment journey. Accordingly, it is important to refer to the scheme-related documents.
2. Open an NRO/NRE account
NRIs looking to invest in mutual funds in India cannot do so through a regular savings bank account. For this purpose, they need to open an NRO (Non Resident Ordinary) or NRE (Non Resident External) account.
An NRE account enables NRIs to park their foreign earnings, whereas an NRO account enables them to manage income earned in India.
The NRE Account is suitable for those who want to deposit/invest their overseas earnings in India. The earnings from Indian investments, such as mutual funds, can also be repatriated to a bank account abroad.
On the other hand, the NRO account is suitable for managing earnings/savings derived from India. NRO is a Rupee-based account and money cannot be repatriated to a foreign currency easily.
Do keep in mind that once an individual starts investing in a mutual fund scheme via an NRE/NRO account, they need to stick to the same account type for that investment in that scheme (folio).
[Read: 3 Types of Bank Accounts an NRI Can Open in India]
3. Select the mode of investment
Once the NRE/NRO account is activated, an NRI can invest in mutual funds either directly or through an authorised person.
NRIs can choose to manage their mutual fund investments on their own. In such a case, they can start investing in mutual funds directly (on their own) through normal banking channels.
They may also choose to designate someone to transact and manage the investment on their behalf. In other words, investors can issue a Power of Attorney (PoA). Both the investor and the registered PoA holder must be KYC-compliant. Investors can authorise a resident Indian to be the PoA holder.
The PoA holder has the authority to invest on behalf of the NRI investor and sign documents for initial and additional purchases and redemption transactions.
How NRIs can redeem their mutual fund units
In order to redeem the mutual fund units, the NRI investors need to submit the redemption request form at the nearest Investor Service Centres of AMCs/RTAs (such as CAMS/KFintech). Redemption requests can also be processed online through the respective websites of the AMCs/RTAs. The redemption request forms should contain the investor's folio number and the amount/units to be redeemed, and should be duly signed by the investors or the PoA holders.
Redemption proceeds are made in favour of the first investor. Moreover, the redemption proceeds and/or dividend or income earned (if any) will be payable in Indian Rupees only. Mutual Funds are not liable for any loss on account of fluctuations in exchange rate while converting the Rupee into the US dollar or any other currency.
The AMC will credit the redemption proceeds (investment + gains) to the registered NRE/NRO bank account of the investor after deducting applicable taxes.
What are the tax implications of mutual fund investments for NRIs?
The tax aspect remains an important consideration for NRIs making investments in India. For NRIs too, the taxation will depend on the type of fund, equity or debt mutual fund, as well as the holding period.
In the case of equity-oriented mutual funds, capital gains arising on redemption/transfer of units held for more than 12 months are considered as long-term capital gains. As per the proposals of the Union Budget 2024, LTCG exceeding Rs 1.25 lakh on or after July 23, 2024 will be taxed at the rate of 12.5% as against 10% earlier, subject to STT.
Meanwhile, short term capital gains on redemption of units of equity-oriented mutual funds on or after July 23, 2024 will be taxable @20%.
In the case of gains on debt mutual funds there has been no change in tax rates. As per the amendments of the Finance Bill in 2023, the government had removed the indexation benefit for debt mutual funds which was applicable on long-term holdings (more than 3 years) to make it on par with Bank FDs. Accordingly, with effect from April 01, 2023, capital gains arising from the sale of debt mutual funds are now taxable as per the marginal rate (i.e. as per the income tax slab rate applicable to the investor's income), regardless of the holding period.
Click here to read more about the taxation of debt mutual funds.
Capital gains tax treatment for NRIs investing in mutual funds
(Source: AMFI)
On redemption of mutual fund units, the tax will be deducted at the source (TDS) on the capital gains made on the investment. The specific TDS rate to be deducted is determined by the type of scheme (equity or non-equity) as well as the holding period of the investment.
TDS will be also be deducted on income distributed under the dividend option of mutual fund if the distributed income exceeds Rs 5,000 in a financial year.
TDS applicable on NRI investment in mutual funds
(Source: AMFI)
Do note that income earned in India may also attract taxation in their resident country. To prevent the instance of investors having to pay double taxes on incomes arising in one country to a tax resident of another nation, India has signed the Double Taxation Avoidance Treaty (DTAA) with around 90 countries.
Thus, under the DTAA, NRIs can claim tax credits in India on the earnings from their mutual fund units, provided India has signed such an agreement with the resident country of the investor.
The Bottom Line
NRIs can easily invest in mutual funds in India, provided they comply with the necessary KYC and other regulations. Through mutual fund investments, they can potentially build a respectable corpus for their future financial goals or meet the requirements for their dependents in India.
However, they should ensure that they select the right schemes for their financial needs based on their investment objective, risk profile, and investment horizon.
Watch this video to learn about the changes in mutual fund taxation announced in the Union Budget 2024:
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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.