Can NRI Invest in Mutual Funds in India?
Navigate the comprehensive process for Non-Resident Indians investing in mutual funds in India, covering regulations, setup, and financial implications.
Navigate the comprehensive process for Non-Resident Indians investing in mutual funds in India, covering regulations, setup, and financial implications.
Investing in Indian mutual funds offers Non-Resident Indians (NRIs) a pathway to participate in India’s economic growth and diversify their investment portfolios. This guide outlines the process, regulatory requirements, and tax implications involved in such investments, which are important for NRIs to understand.
The eligibility of an individual as a Non-Resident Indian (NRI) for investment purposes is primarily defined under the Foreign Exchange Management Act (FEMA). According to FEMA, an NRI is a person residing outside India who is a citizen of India. This definition is distinct from the income tax definition, which focuses on the number of days spent outside India. Overseas Citizens of India (OCIs), who are foreign nationals of Indian origin, are also eligible to invest.
The investment landscape for NRIs in India is governed by key regulatory bodies, primarily the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). The RBI, through FEMA, regulates foreign exchange transactions and capital flows, including the types of accounts NRIs can hold for investments. SEBI oversees the securities market, including mutual funds, and mandates compliance requirements like Know Your Customer (KYC) norms for all investors.
The Prevention of Money Laundering Act (PMLA) requires financial institutions to verify the identity and address of prospective customers through KYC procedures. This helps prevent illicit financial activities like money laundering and ensures transparency in financial transactions. Adherence to these regulations is a prerequisite for NRIs to invest in Indian mutual funds.
Before initiating mutual fund investments in India, NRIs must establish specific bank accounts and gather essential documentation. The primary bank accounts required are the Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account. An NRE account is suitable for repatriating both the principal investment and the income earned, as funds in this account are fully and freely repatriable. The interest earned on NRE accounts is also exempt from Indian income tax.
An NRO account is used for income earned in India that is not easily repatriable, such as rental income or dividends. While funds in an NRO account are not fully repatriable, up to USD 1 million per financial year can be repatriated, subject to tax clearance. Investments from an NRE account are repatriable, while those from an NRO account can be repatriable or non-repatriable, depending on the fund house.
For KYC compliance, NRIs must provide several documents. These include an Indian Passport, a Permanent Account Number (PAN) card, and proof of overseas address. Other documents may include an Overseas Citizen of India (OCI) card, foreign address proof, and Indian bank account details. Some institutions may also request an Indian address proof or a valid visa/work/residence permit to confirm NRI status.
The KYC process involves completing a Central KYC (CKYC) form, which centralizes investor information and reduces repetitive paperwork. Once established, investors receive a 14-digit CKYC number for subsequent investments. Documents need to be self-attested and may require attestation by an Indian Embassy, Consulate General, Notary Public, or authorized officials of overseas branches of scheduled commercial banks registered in India. Many asset management companies (AMCs) offer online portals for document submission and KYC completion, including video KYC options.
Once bank accounts are established and KYC documentation is completed, NRIs can invest in Indian mutual funds. The process begins with selecting a suitable mutual fund scheme based on investment goals and risk tolerance. Various types of funds are available, including equity, debt, and hybrid funds, catering to different investment strategies.
NRIs have several channels through which they can invest. Many Asset Management Companies (AMCs) offer direct investment options through their official websites or mobile applications, providing a streamlined online experience. Alternatively, investments can be made through financial advisors, mutual fund distributors, or bank channels. Some NRIs may also choose to appoint a Power of Attorney (PoA) in India to manage their investments, although both the NRI and the PoA holder must complete KYC requirements in such cases.
The transaction process involves initiating a purchase request, which can be done online by selecting the chosen fund and scheme. Payment must be made from the linked NRE or NRO account. Funds can be transferred via net banking, remittance, or by submitting a cheque or bank draft. Upon successful application and fund transfer, mutual fund units are allotted at the applicable Net Asset Value (NAV), and the investor receives confirmation. Post-investment, investors receive statements and can track portfolio performance through online portals provided by the fund house or registrar and transfer agent.
Taxation of mutual fund gains for Non-Resident Indians (NRIs) in India is governed by the Income Tax Act. Capital gains are categorized as short-term or long-term, depending on the holding period. For equity-oriented mutual funds, units held for 12 months or less are short-term, taxed at 15%. Long-term capital gains (LTCG) on equity funds, held over 12 months, are taxed at 10% on gains exceeding ₹1 lakh, without indexation benefits. Recent changes effective July 23, 2024, increased short-term capital gains tax on equity mutual funds to 20% and long-term capital gains tax to 12.5%, with the exemption amount also increased to ₹1.25 lakh.
For debt-oriented mutual funds, the short-term capital gains holding period is 36 months or less. Short-term gains from debt funds are added to the NRI’s total income and taxed at applicable income tax slab rates, up to 30%. Long-term capital gains on debt funds, held over 36 months, are taxed at 20% with indexation benefits. Indexation adjusts the purchase cost for inflation, reducing the taxable gain.
Tax Deducted at Source (TDS) is applied to capital gains for NRIs upon redemption of mutual fund units. For equity-oriented funds, TDS rates are 15% for STCG and 10% for LTCG. For non-equity-oriented funds, TDS is 20% with indexation for LTCG and at the NRI’s applicable income tax slab rates for STCG. Dividends received from mutual funds are also subject to tax at slab rates, with TDS deducted.
Double Taxation Avoidance Agreements (DTAAs) are bilateral tax treaties India has signed to prevent income from being taxed twice. These agreements specify which country has the primary right to tax certain income and provide mechanisms for tax relief, such as reduced TDS rates or tax credits. NRIs can leverage DTAA provisions to avoid paying tax on the same income in both India and their country of residence by claiming a credit for taxes paid in India. To avail DTAA benefits, NRIs need a Tax Residency Certificate (TRC) from their country of residence and must submit Form 10F to Indian tax authorities. NRIs with taxable income or gains in India are required to file an income tax return in India by July 31st of the assessment year.