How Can NRIs Invest in Mutual Funds?

A Non-Resident Indian (NRI) is defined under the Foreign Exchange Management Act (FEMA) as a person residing outside India who is either a citizen of India or a Person of Indian Origin (PIO). This status is acquired when an individual leaves India for employment, business, or any other purpose indicating an intention to stay outside India for an uncertain period. This article guides NRIs through investing in Indian mutual funds, outlining eligibility, procedural steps, tax considerations, and repatriation rules.

Understanding NRI Eligibility and Investment Options

NRIs are permitted to invest in a variety of mutual funds in India, offering avenues to participate in the country’s economic growth. These investment options commonly include equity-oriented funds, which primarily invest in stocks, debt funds focused on fixed-income instruments, and hybrid funds that combine both equity and debt.

A fundamental requirement for NRIs to invest in Indian mutual funds involves establishing specific bank accounts: the Non-Resident External (NRE) account and the Non-Resident Ordinary (NRO) account. An NRE account is designed for NRIs to deposit their foreign earnings in Indian Rupees, with the funds being fully repatriable. The interest earned on an NRE account is also exempt from tax in India. Conversely, an NRO account is primarily for managing income generated within India, such as rent, dividends, or pensions. Funds in an NRO account are not fully repatriable without restrictions, and the interest earned is subject to Indian income tax. These accounts serve distinct purposes regarding the source of funds and their repatriability.

The NRI Mutual Fund Investment Process

Investing in Indian mutual funds as an NRI begins with fulfilling Know Your Customer (KYC) requirements, a mandatory process to verify identity and comply with regulatory standards. Key documents for NRI KYC typically include a PAN card, passport (front and back pages), proof of overseas address, and sometimes an Overseas Citizen of India (OCI) card if applicable. These documents are submitted to a KYC Registration Agency (KRA), and an in-person verification (IPV) might be required, which can often be completed through authorized officials at Indian embassies, consulates, or certain bank branches abroad. Once KYC compliant, this status generally applies across various mutual fund houses, simplifying future investments.

Following KYC, opening NRE and/or NRO bank accounts with an Indian bank is a practical step for facilitating mutual fund transactions. The process involves submitting necessary identity and address proofs, similar to KYC documentation, to the chosen bank. These accounts are fundamental because investments in Indian mutual funds must be made in Indian Rupees, and these accounts provide the necessary platform for fund transfers.

Once the accounts are established, NRIs can proceed to select mutual funds through various channels, including direct investment with fund houses, online investment platforms, or financial brokers. The application process can be completed digitally or via physical forms, with payments for investments directly linked to the NRE or NRO accounts. For instance, foreign earnings can be remitted to an NRE account, converted to Indian Rupees, and then used for mutual fund purchases. Similarly, income accrued in India can be routed through an NRO account for investment purposes.

Tax Implications for NRI Mutual Fund Investments

NRIs investing in Indian mutual funds face specific tax implications on capital gains and dividend income. For equity-oriented mutual funds, if units are held for less than one year, the gains are classified as Short-Term Capital Gains (STCG). These STCGs are generally taxed at a rate of 15%. However, new rules effective July 23, 2024, indicate STCG from equity-oriented mutual funds will be taxed at 20% plus cess.

Long-Term Capital Gains (LTCG) from equity-oriented mutual funds are realized when units are held for more than one year. If these gains exceed INR 1 lakh (approximately USD 1,200), they are taxed at 10%. From July 23, 2024, the LTCG tax rate for equity mutual funds exceeding INR 1.25 lakh will be 12.5% plus cess. For debt-oriented mutual funds, gains from units held for less than 36 months are considered STCG and are taxed at the NRI’s applicable income tax slab rates. If held for 36 months or more, they are LTCG and taxed at 20% with indexation benefits.

Dividend income distributed by mutual funds to NRIs is subject to a Tax Deducted at Source (TDS) of 20%. Double Taxation Avoidance Agreements (DTAAs) between India and certain countries can help NRIs avoid paying tax on the same income twice, allowing them to be taxed under the more beneficial of either the DTAA provisions or the Indian Income Tax Act. NRIs are generally required to file income tax returns in India if their total income exceeds the basic exemption limit.

Repatriating NRI Mutual Fund Proceeds

Repatriating funds from Indian mutual fund investments involves distinct rules depending on whether the proceeds are held in an NRE or NRO account. Funds held in NRE accounts, including both the principal invested and the gains, are fully and freely repatriable to the NRI’s country of residence without any upper limits. No specific documentation like Form 15CA/CB is typically required for repatriation from NRE accounts, apart from standard bank statements and identity proofs.

In contrast, repatriation from NRO accounts is subject to certain limitations. NRIs can repatriate up to a maximum of USD 1 million per financial year from their NRO accounts. This limit applies to the principal amount and any income earned in India, such as dividends or capital gains, after applicable taxes have been paid. For amounts exceeding this USD 1 million limit, prior permission from the Reserve Bank of India (RBI) is generally required.

For repatriation from NRO accounts, specific documentation is necessary to ensure compliance with regulatory guidelines. This typically includes Form 15CA, which is a self-declaration of payment details for tax purposes, and Form 15CB, a certificate from a Chartered Accountant confirming that all applicable taxes have been cleared. Banks will also require an application for remittance abroad or a request letter, along with proof of the NRO account’s existence and the NRI’s valid visa or residence permit.