Indian mutual funds offer NRIs an easy, professionally managed way to participate in India’s economic growth. NRIs are allowed to invest in mutual funds in India, but they must follow certain rules and complete the required documentation.
NRI mutual funds in India offer access to professionally managed portfolios across equity and debt markets. Equity mutual funds, in particular, have the potential to deliver returns that may beat inflation over time. While the investment process is similar to that for resident Indians, NRIs must comply with specific regulations related to repatriation and foreign currency accounts.
This blog outlines the key rules and steps involved in making SIP and lump-sum mutual fund investments in India for NRIs.
Regulatory Foundation: Investment Rules for NRIs
The Foreign Exchange Management Act (FEMA), along with rules issued by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), governs the investment activities of Non-Resident Indians (NRIs) in the Indian financial markets.
Before investing in India, NRIs must open specific bank accounts for foreign currency transactions. Investments in mutual funds can be made through the following accounts:
- Non-Resident Ordinary (NRO) Account: This account is used to manage income from India, such as rent, dividends, and interest. Funds in an NRO account can be invested in mutual funds.
Repatriation: Funds from an NRO account, including sale proceeds and investment gains, can be repatriated up to USD 1 million per financial year, subject to applicable taxes and RBI documentation requirements.
- Non-Resident External (NRE) Account: This account is used to hold income earned outside India and to remit it to India. Funds from an NRE account can also be invested in mutual funds.
Repatriation: Both the principal amount and investment gains are fully and freely repatriable, making this the preferred option for many NRIs.
These regulations govern mutual fund investments for NRIs, including account eligibility, repatriation norms, and compliance requirements.
Step-by-Step Guide: How to Begin Investing
An NRI can open a mutual fund investment account in three steps: document verification, KYC completion, and transaction initiation.
Step 1: Ensure KYC Compliance
All investments must comply with Know Your Customer (KYC) requirements. Non-Resident Indians (NRIs) must complete a specific KYC process applicable to individuals residing outside India.
Documents required for KYC:
- Passport (mandatory for identity and address verification)
- Proof of NRI status, such as a valid visa, work permit, or residency permit showing a foreign address
- PAN card (mandatory)
- Communication address in India and abroad
- NRO and NRE bank account statements
In-Person Verification (IPV):
IPV can be completed through one of the following methods:
(1) Video KYC with a certified KYC officer
(2) In-person verification at an Indian Embassy or Consulate in your country of residence
(3) Submission of documents verified by authorised KYC agencies.
Step 2: Create a Mutual Fund Folio
After completing KYC, the NRI must register a mutual fund folio with a Registrar and Transfer Agent (RTA), such as CAMS or KFintech, or with a distributor or broker.
Document Submission:
One must clearly state the NRO or NRE bank account to be used for the investment in the application form and KYC documents.
FATCA Declaration:
Depending on your country of residence, you may need to submit a FATCA (Foreign Account Tax Compliance Act) declaration or CRS (Common Reporting Standard) declaration stating your tax residency outside India. This is particularly important for NRIs from the US, Canada, and other CRS-compliant countries.
Step 3: Start Investing (Lump Sum or SIP)
NRIs can invest either as a lump sum or through a Systematic Investment Plan (SIP). In both cases, the investment amount in the mutual fund is debited from the investor’s NRE or NRO account.
NRIs' SIPs in India allow investors to contribute regularly from their NRE or NRO accounts, helping them build long-term wealth through disciplined investing. SIPs help investors maintain discipline and benefit from rupee cost averaging.
The investment option should be selected based on financial goals. Debt funds generally aim for relatively lower volatility compared to equity funds.
Taxation of Mutual Fund Gains for NRIs in India
Understanding tax implications is important for calculating net returns on NRI mutual fund investments in India. The taxation of mutual fund gains depends on the type of fund and the holding period, as defined under the Income-tax Act, 1961.
Equity Mutual Funds (Funds investing 65% or more in Indian equities)
Holding period and tax treatment:
- Short-Term Capital Gains (STCG): If equity mutual fund units are sold within 12 months, the gains are treated as short-term capital gains and are taxed at 20% under section 111A (for transfers on or after July 23, 2024; previously 15%).
- Long-Term Capital Gains (LTCG): If the units are held for more than 12 months, the gains are treated as long-term capital gains. LTCG is taxed at 12.5% without indexation on gains exceeding ₹1.25 lakh per financial year (from FY 2024-25 onwards).
Debt Mutual Funds and Hybrid Funds with Less Than 65% Equity Exposure
Debt mutual funds and hybrid funds that invest less than 65% in equities follow debt taxation rules.
Tax treatment (applicable for investments made on or after 1 April 2023):
For debt mutual funds purchased on or after April 1, 2023, all capital gains, regardless of the holding period, are added to the investor’s total income and taxed at the applicable income tax slab rate, and indexation benefits are no longer available for these investments. For debt funds purchased before April 1, 2023, previous tax rules applied, including long-term capital gains treatment for longer holding periods and associated benefits under the old regime, based on applicable holding-period criteria.
Tax Deducted at Source (TDS) for NRIs
For NRIs, tax is deducted at source (TDS) on mutual fund capital gains before the redemption proceeds are credited to the NRO or NRE account.
- TDS is deducted at the applicable tax rate, which may include surcharge, health and education cess.
- The TDS rate is often higher than the actual tax liability, especially for debt mutual funds.
- NRIs can claim a refund for excess TDS by filing an Indian income tax return.
It is important to note that TDS is not the final tax; the final liability is determined while filing the income tax return.
Conclusion
NRIs can invest in mutual funds in India by complying with FEMA and RBI rules, including completing KYC and setting up an account. They should use NRE accounts for fully repatriable funds, and NRO accounts for money that cannot be sent abroad. NRIs can choose from a variety of mutual fund schemes in India, ranging from low-risk to high-risk options. Move closer to your financial goals and make informed decisions with Shriram Finance.
FAQs
1. Can NRIs invest in mutual funds in India?
Yes, NRIs can invest in mutual funds in India using funds from their NRE or NRO accounts. However, NRIs from certain countries (such as the US and Canada) may face additional compliance requirements or restrictions from some AMCs due to FATCA and CRS regulations.
2. What are the KYC requirements for NRIs investing in mutual funds?
NRIs need a valid passport, PAN card, proof of foreign address or NRI status, and an NRE/NRO account statement. Verification is usually done through In-Person Verification (IPV).
3. Are there any restrictions on the amount NRIs can invest?
There is no upper limit on mutual fund investments for NRIs, but the funds must come from an NRE or NRO account.
4. How are mutual fund gains taxed for NRIs?
Taxes depend on the type of fund (equity or debt) and holding period (short-term or long-term). TDS (Tax Deducted at Source) is applied before the amount is credited to the account.
5. Can NRIs invest in direct mutual funds?
NRIs can invest in direct mutual funds and ETFs, following KYC, FATCA, and FEMA regulations applicable to their country of residence.