Can NRIs Invest in Mutual Funds in India?

6 mins read
If you are an NRI or planning to become but are interested in investing in Indian mutual funds then this article is a must read for you. Happy investing!

NRI investments are good news!

NRI investment in mutual funds in India is good news for India as funds gathered from sources abroad can then be channelised into the Indian markets, thereby increasing liquidity for Indian companies and the financial system overall – domestic investors, asset managers, companies etc. all stand to gain.

Let us see under what circumstances can NRIs invest in mutual funds in India and what are the procedures involved.

Who is an NRI

First, let us make sure who exactly an NRI is. 

  1. As per Regulation 2 of Notification No. 13 of  May 3, 2000 under the Foreign Exchange Management Act (FEMA), 2000, a citizen of India who is resident outside India is an NRI.
  2. As per the Income Tax Act, 1961 –
    1. A person living inIndia for 120 days or more during a financial year or 365 days or more in the preceding 4 financial years and at least 60 days in that year is a resident. In other words an NRI is an Indian who visited India for less than 120 days in the financial year. This rule is applicable for those NRIs whose income accrued from Indian sources is less than Rs 15 lakh in that financial year. 
    2. If the total Indian income is more than Rs 15 lakh in that financial year, then the citizen will be counted as an NRI only if their stay does not exceed 181 days.

Can NRI invest in mutual funds in India

Non-resident Indians and Foreign Institutional Investors (FIIs) are given permission under the RBI Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 for investing in or redeeming mutual funds units. Therefore NRI investment in mutual funds is allowed provided certain conditions are met.

Types of mutual funds for NRIs

Mutual funds investment by NRIs can be done on the following basis – 

1. Repatriable basis –

Investment on a repatriable basis means an investment whose sale or maturity proceeds, net of taxes, are eligible to be moved outside India.

In order to invest in a mutual fund on a repatriable basis the following conditions must be met by an NRI –

a. The NRI must have an NRE or FCNR bank account in India

b. The investment amount should be received by debit to the NRE/FCNR account or by inward remittance through normal banking channels.

c. The returns based on dividends/interest/maturity amount must be credited to the NRE/FCNR account or emitted via normal banking channels.

d. The investor must pay the applicable taxes

e. The mutual funds must comply with the SEBI rules and regulations.

2. Non-repatriable basis –

In this case, the principal and the gains must be retained within the country. Mutual funds are allowed by the RBI to offer mutual fund schemes to NRIs on non-repatriable basis as long as the funds payable to the investor are credited to the NRI’s NRO account.

Overseas Corporate Bodies (OCBs) and FIIs, and not NRIs, require permission from the RBI for investing in Indian mutual funds.

Non-resident external rupee (NRE) accounts are accounts opened by NRIs to park their foreign earnings in India.

Non-resident ordinary rupee (NRO) accounts are accounts opened by NRIs usually to keep their earnings from India.

Foreign currency non-resident (FCNR) accounts are quite like NRE accounts, but the funds are held in foreign currency.

Mutual funds investment procedure for NRIs

The following steps must be taken by NRIs in order to invest in mutual funds in India –

Step 1. Open the applicable NRE/NRO account

NRIs are not allowed by the FEMA to park their money in ordinary savings accounts in India. Moreover, Mutual fund asset management companies in India cannot accept investments in foreign currencies.

Step 2. Make the Investment in either of the two following methods

  1. The NRIs can directly invest by themselves. For this they will be required to give their KYC details including recent photograph, certified copies of PAN card, passport, residence proof of outside India and a bank statement. The bank may ask for an in-person verification which can be done in the Indian embassy of the residence country.
  2. The NRIs, through Power of Attorney, can allow a third party to make investments on their behalf. But signatures of both the NRI and the PoA must be present on the KYC documents.

Step 3. Get the KYC done

Many mutual fund houses may choose to not accept investments from the USA or Canada because of the complex requirements under the Foreign Accounts Tax Compliance Act (FATCA). Some other companies do allow such investors with additional requirements of documents.

List of funds that allow investors from USA and Canada:

  1. Aditya Birla Sun Life Mutual Fund
  2. L&T Mutual Fund
  3. SBI Mutual Fund
  4. UTI Mutual Fund
  5. ICICI Prudential Mutual Fund
  6. DHFL Pramerica Mutual Fund
  7. Sundaram Mutual Fund
  8. PPFAS Mutual Fund

Step 4. Redeeming the Mutual Fund

The AMC will credit the principal and gains to the NRE/NRO account or issue a cheque. Overall, different fund houses have different procedures for the redemption of funds.

Taxation for NRI mutual fund investments

Taxes for NRI mutual fund investments are based on the holding periods and asset classes of the mutual fund investments.

Type of fund Short term holding Long term holding
Equity mutual funds <12 months 12 months or more
Balanced mutual funds <12 months 12 months or more
Debt mutual funds <36 months 36 months or more

 

Type of fund Short term capital gains tax Long term capital gains tax
Equity mutual funds 15% 10% without indexation
Balanced mutual funds 15% 10% without indexation
Debt mutual funds As per tax slab 20% after indexation

Note: If India has signed a Double Tax Avoidance Agreement with a country, then residents of those countries do not have to pay tax twice to India and the country of residence.

Important points for NRIs investing in mutual funds in India

  • If details of only foreign bank accounts are given then the NRI’s application will be rejected
  • Tax is deducted at source on capital gains on mutual funds redemption
  • Right of repatriation of principal and gains is there for you only as long as you are an NRI.
  • Check if your country of residence is a part of the Common Reporting Standard (CRS) related to combating tax evasion.

Final words

NRI investors gain a lot when rupee appreciates against the currency of their country of residence and vice versa. This is because, if the rupee appreciates, then for the same amount of investment in rupees, the investor will get more returns in terms of the currency of the country of residence. Along with NRIs, Overseas citizens of India (OCIs) too can invest in Indian mutual funds.

If you are interested in investing in mutual funds or the equity or commodity markets, try to open demat account and learn about investing today!