Can NRIs Invest in Mutual Funds in India?
Navigate the process of Non-Resident Indians investing in Indian mutual funds, from understanding eligibility to managing tax implications.
Non-Resident Indians (NRIs) can invest in mutual funds in India. An NRI is an Indian citizen or a person of Indian origin who resides outside India for employment, business, or any other purpose indicating an intention to stay abroad for an uncertain duration. Mutual funds are investment vehicles that pool money from numerous investors to purchase a diversified portfolio of securities like stocks, bonds, and money market instruments. Professional fund managers manage these pooled investments according to the scheme’s objectives. This investment avenue allows NRIs to participate in India’s growing economy.
Eligibility and Investment Accounts
For an NRI to invest in Indian mutual funds, maintaining specific bank accounts in India is necessary. NRIs must use either a Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) bank account for their mutual fund transactions. These accounts facilitate investments in Indian Rupees, as foreign currency investments are not permitted directly in mutual funds. NRE accounts are fully repatriable, meaning both the principal amount and the returns generated can be freely transferred outside India. Conversely, NRO accounts allow for repatriation of funds up to a cumulative limit of USD 1 million per financial year across all NRO accounts held in India.
A Portfolio Investment Scheme (PIS) account is not required for mutual fund investments; transactions are routed directly through NRE or NRO bank accounts. However, NRIs residing in countries like the United States and Canada may face additional compliance requirements due to regulations such as FATCA and CRS. Some Asset Management Companies (AMCs) or distributors might restrict investments from these regions, so investors should verify acceptance.
Required Documentation and Verification
To invest in Indian mutual funds, NRIs must complete the Know Your Customer (KYC) process. This involves submitting documents for identity and address verification. A Permanent Account Number (PAN) card is mandatory for all mutual fund investments by NRIs. This identifier is essential for tax compliance and financial transactions.
Other essential documents include a copy of the passport, specifically the relevant pages, along with proof of non-resident status like a valid visa or work/residence permit. Proof of overseas address, such as a utility bill or bank statement, is also required. If applicable, an Overseas Citizen of India (OCI) card or Person of Indian Origin (PIO) card should be provided. These documents often require self-attestation, notarization, or attestation by officials of Indian scheduled commercial banks, public notaries, or the Indian Embassy/Consulate General. An in-person verification (IPV) may also be necessary. This can be completed via video call or authorized intermediaries.
Investment Methods and Fund Flow
Funds for investment must be routed through the designated NRE or NRO bank accounts in India. The investment can be made on either a repatriable basis through an NRE account or a non-repatriable basis through an NRO account. This choice determines whether the investment proceeds, including capital and gains, can be freely transferred back to the investor’s country of residence.
NRIs have several channels available for investing in mutual funds. They can invest directly with Asset Management Companies (AMCs) through their respective websites or mobile applications. Alternatively, investments can be made through online investment platforms or financial distributors and advisors who offer services tailored for NRIs. The application process involves filling out an online form, selecting the chosen scheme, and making electronic payment from the linked NRE or NRO account.
Taxation of Mutual Fund Investments
Mutual fund investments by NRIs are subject to Indian taxation on capital gains and dividends. Capital gains are categorized as short-term or long-term based on the holding period and the type of fund. For equity-oriented mutual funds, a holding period of 12 months or less results in short-term capital gains (STCG), taxed at 15%. Long-term capital gains (LTCG) from equity-oriented funds, held for more than 12 months, are taxed at 12.5% on gains exceeding INR 1.25 lakh in a financial year.
For debt-oriented mutual funds, gains from units held for 36 months or less are considered short-term and are taxed according to the NRI’s applicable income tax slab rates. Long-term capital gains from debt-oriented funds, held for more than 36 months, are taxed at 20% with the benefit of indexation. Dividends received from mutual funds are taxable and added to their income, taxed at their applicable slab rates.
Tax Deducted at Source (TDS) is applicable on redemptions and dividends for NRIs. For equity funds, the TDS rate is 15% on STCG and 12.5% on LTCG. For debt funds, TDS on STCG is 30%, and on LTCG, it is 20% with indexation. Dividends are subject to a TDS rate of 20%. NRIs may need to file an income tax return (ITR) in India to declare income or claim refunds if excess tax has been withheld. Double Taxation Avoidance Agreements (DTAAs) between India and the NRI’s country of residence can help prevent paying taxes twice on the same income.