Can NRIs Invest in Mutual Funds in India?

Non-Resident Indians (NRIs) often seek avenues to invest in India, connecting with the country’s economic growth while building their wealth. Indian mutual funds present a structured and professionally managed option for such investments. While the process is generally permissible, it involves adherence to specific regulatory frameworks and requirements designed for non-resident investors. Understanding these considerations is important for NRIs looking to participate in the Indian financial markets through mutual funds.

Eligibility and Permissible Investment Avenues

Non-Resident Indians are permitted to invest in Indian mutual funds, with eligibility primarily governed by the Foreign Exchange Management Act (FEMA) of 1999 and the Income Tax Act of 1961. A fundamental requirement for these investments is the establishment of specific bank accounts in India: the Non-Resident External (NRE) account or the Non-Resident Ordinary (NRO) account.

The choice between an NRE and NRO account depends on the source of funds and repatriation goals. An NRE account is designed for funds earned outside India, allowing for full repatriation of both the principal investment and any accrued returns. Conversely, an NRO account is typically used for income generated within India, such as rent or dividends, and allows for repatriation up to a cumulative limit of USD 1 million per financial year, subject to applicable taxes. All transactions must be routed through these rupee-denominated accounts.

Most categories of mutual funds are accessible to NRIs, including equity funds, which invest primarily in stocks, and debt funds, which focus on fixed-income securities. Hybrid funds, offering a mix of both, and thematic funds, concentrating on specific sectors or themes, are also available. However, some Asset Management Companies (AMCs) may have restrictions on investments from NRIs residing in certain countries, such as the United States or Canada, due to compliance with international regulations like the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS). Therefore, prospective investors should verify with the specific AMC regarding their acceptance of investments from their country of residence.

Essential Requirements for Investment

Before initiating any mutual fund investment in India, NRIs must complete the Know Your Customer (KYC) process. This one-time verification ensures compliance with anti-money laundering regulations. The comprehensive KYC process for NRIs necessitates submitting several key documents for identity and address verification.

Required documents typically include a Permanent Account Number (PAN) card, a copy of a valid passport (including pages with personal details, photograph, and signature), and proof of overseas address, such as a utility bill or a valid driving license. Additionally, a recent passport-sized photograph and a specimen signature are essential.

An in-person verification (IPV) step might be required as part of the KYC process, which can be completed at an AMC branch, through authorized distributors, or by having documents attested at an Indian Embassy or Consulate. US tax residents must provide a FATCA declaration. The NRE or NRO bank account details, from which investments will be made, must also be linked and verified during this preparatory phase.

NRIs also have the option to appoint a Power of Attorney (PoA) holder in India to manage their mutual fund investments. If choosing this route, both the NRI investor and the PoA holder must complete their respective KYC formalities. The PoA document itself must be properly executed and submitted, detailing the scope of authority granted to the representative.

Investment Process and Post-Investment Considerations

After successfully completing the KYC requirements and setting up the necessary Indian bank accounts, NRIs can proceed with making mutual fund investments. The investment can be made either directly with the Asset Management Company (AMC), through a registered mutual fund distributor or broker, or via various online investment platforms. Investors can opt for lump sum investments or choose to invest through Systematic Investment Plans (SIPs), which allow for regular, fixed contributions over time. The application process, whether physical or online, will require specifying whether the investment is on a repatriable or non-repatriable basis.

Understanding the taxation rules for mutual fund gains and income is important for NRIs. Capital gains from mutual funds are categorized as short-term or long-term, depending on the holding period and the type of fund.

For equity-oriented funds, units held for 12 months or less are considered short-term and are taxed at a rate of 15%. Long-term capital gains on equity funds, for units held for more than 12 months, are taxed at 10% on gains exceeding INR 1 lakh in a financial year. For debt funds and other non-equity oriented funds, gains from units held for 36 months or less are taxed at the NRI’s applicable income tax slab rate, while long-term gains (held for more than 36 months) are taxed at 20% with the benefit of indexation. Dividend income from mutual funds is taxable in the hands of the investor as “income from other sources” according to their individual income tax slab.

Tax Deducted at Source (TDS) is applicable on mutual fund redemptions and dividend payouts for NRIs. On short-term capital gains from equity funds, TDS is 15%, while for long-term equity gains exceeding INR 1 lakh, it is 10%. For debt funds, TDS on short-term capital gains is 30%, and on long-term gains with indexation, it is 20%. Dividends received by NRIs are subject to a 20% TDS. India has Double Taxation Avoidance Agreements (DTAAs) with many countries, including the United States, which can help prevent investors from being taxed twice on the same income by allowing a credit for taxes paid in India against their tax liability in their country of residence.

Repatriation of funds also follows specific guidelines. Funds invested through an NRE account are fully and freely repatriable, meaning both the principal and gains can be transferred without limits. However, for investments made via an NRO account, repatriation is capped at USD 1 million per financial year, a limit that includes all Indian earnings, not just mutual fund proceeds. To facilitate repatriation, especially from an NRO account, specific documentation like Form 15CA and Form 15CB (certified by a chartered accountant) is required to ensure tax compliance. NRIs should also be aware of any reporting obligations regarding their overseas investments in their country of residence.