NRI Investment in Indian Mutual Funds: Rules, Process & Taxation

India's robust economic growth and its expanding equity market have attracted the attention of many Non-Resident Indians (NRIs) seeking investment opportunities.

Mutual Funds have emerged among the most popular choices for NRIs looking to benefit from India's growth story.

But a common question arises - Can NRIs invest in mutual funds in India?

The short answer is yes.

NRIs are permitted to invest in mutual funds in India, thanks to general approval from the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA). This approval also allows Persons of Indian Origin (PIO) and Foreign Institutional Investors (FIIs) to buy and redeem mutual fund units in India.

What is the NRI status criteria?

An individual is treated as a Resident in India in any previous year if he / she satisfies any of the following conditions:

1. If he / she is in India for a period of 182 days, or more during the previous year or
2. If he / she is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

An individual who does not satisfy both the conditions as mentioned above are treated as Non-Resident in that previous year.

Why mutual funds appeal to NRIs?

Mutual funds offer NRIs an easy and cost-effective way to diversify their investments across various market segments and asset types, without the complexity of picking individual securities.

NRIs from countries such as the UAE, the US, the UK, and Singapore are the primary contributors to mutual fund investments in India.

However, NRIs from the US and Canada face additional regulatory hurdles due to FATCA (Foreign Account Tax Compliance Act) requirements. As a result, very few mutual fund houses accept investments from these countries.

What are the steps for NRIs to invest in mutual funds?

1. Complete KYC (Know Your Customer) process

Like every investor, NRIs too must complete the mandatory KYC process before making any investment. The KYC process requires the furnishing of necessary documents such as:

• Proof of identity (such as PAN card)
• Passport-size photo
• Banking details of NRE/NRO account (like a cancelled cheque)
• Passport copy (relevant pages as specified by the fund house)
• Overseas/local address proof (as applicable), certified by a local authority/Indian embassy/consulate
• Translation of documents (if not in English)

KYC verification can be done through KYC Registration Agencies (KRAs) like CAMS or KFintech. NRIs also need to undergo In-Person Verification (IPV), which can be done at overseas branches of Scheduled Commercial Banks registered in India, Notary Public, Court Magistrate, Judge, or Indian Embassy / Consulate General in the country where the investor resides.

Once KYC is completed, it is valid for all future investments, meaning, NRIs need not repeat the process for each transaction.

2. Open an NRE or NRO Account

To invest in mutual funds, NRIs will need either a NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account in India. These accounts are used for managing foreign and Indian income, respectively:

• NRE account is suitable for investors who want to deposit/invest their overseas earnings in India. The earnings from Indian investments, such as mutual funds, can also be repatriated to a bank account abroad.
• NRO accounts is suitable for managing earnings/savings derived from India. NRO is a rupee-based account and the repatriation of money to a foreign currency is restricted.

NRIs must use the same NRE/NRO account for all transactions related to a particular mutual fund investment.

3. Choose Your Investment Mode

Once the NRE/NRO account is set up, NRIs can choose to invest directly either offline or through various online channels available for investments.

They can also choose to transact through an authorized person. For this purpose, an NRI can appoint someone in India to manage their investments by issuing a Power of Attorney (PoA).

The PoA holder, a resident Indian, can perform mutual fund transactions and sign documents on behalf of the NRI. The registered PoA holder must also be KYC compliant.

4. Know the Redemption Process

To redeem mutual fund units, NRIs must submit a redemption request form, either at the nearest AMC (Asset Management Company) office or online through the respective AMC's website. The redemption proceeds are credited to the NRE/NRO account, after the applicable tax deductions.

What are the tax implications for NRIs investing in mutual funds?

Taxation for NRIs depends on the type of mutual fund (equity or debt) and their respective holding period:

• Equity mutual funds: Long-term capital gains (LTCG) on units held for over a year are taxed at 12.5% if the gains exceed Rs 1.25 lakh (as per the Union Budget 2024). Short-term capital gains (STCG) are taxed at 20%.
• Debt mutual funds: Capital gains on debt funds are taxed at the investor's marginal tax rate regardless of the holding period.

TDS (tax deducted at source) is applicable on redemption of mutual funds by NRI. For the current FY 2025-26, TDS on equity mutual fund redemption will be deducted at the rate of 20% for short term capital gains (holding period of less than 1 year).

For long term capital gains (holding period of 1 year or more) TDS will be deducted at 12.5% provided the gains exceed Rs 1.25 lakh in the financial year.

In the case of debt mutual funds, TDS on redemption will be deducted at 30% irrespective of the holding period.

Can NRIs avoid double taxation?

India has signed Double Taxation Avoidance Agreement (DTAA) treaties with over 90 countries, allowing NRIs to avoid double taxation on income earned in India. Under these agreements, NRIs can claim tax credits for taxes paid in India when filing taxes in their country of residence.

Conclusion

Investing in mutual funds is an attractive option for NRIs who want to participate in India's growing financial markets. With the right documentation and adherence to regulatory requirements, NRIs can easily invest in a range of mutual fund schemes tailored to their risk tolerance and financial goals.

However, they must ensure making informed decisions depending on their investment objectives, risk profile, and investment horizon to optimise their investment returns.

Disclaimer: This article is for information purposes only. It is not a recommendation and should not be treated as such.