Non Resident Indians (NRIs) can invest in India and historically, a major portion of the investments made in India by this investor group have included real estate investments. However NRI investors can opt for other types of investments too including but not limited mutual funds. The following are some key considerations to keep in mind if you are planning to make NRI mutual fund investments:
Who is a Non Resident Indian?
As per current rules any Indian resident who is residing out of India for employment, business, studies, etc. for at least 182 days during a financial/calendar year is termed as a non-resident Indian. As a non-resident, you can not only hold on to property that you bought as a resident, but also make new investments into various asset classes.
Applicable Rules for NRI Mutual Fund Investments
NRI mutual fund investments is mainly governed by the Foreign Exchange Management Act 1999, commonly known as FEMA. As per the current provisions of the act, NRI are allowed to make investments into capital markets including direct stocks, exchange traded funds (ETFs) and mutual funds subject to key terms/conditions. However, these investments are allowed only if certain conditions are met including performing fresh mutual fund KYC for NRI and setting up of a rupee-denominated NRE/NRO account.
Non-Resident External (NRE) and Non-Resident Ordinary (NRO) Accounts for NRI MF Investments
In case of NRI investors, NRE and NRO accounts are the commonly utilized accounts and having either of them is a mandatory requirement if you plan to make mutual fund investments in India as a non-resident Indian. Both of these are rupee-denominated accounts i.e. the balance amount is in Indian rupees (after applicable conversion) irrespective of the currency in which the initial deposits were made. While both accounts are susceptible to rupee depreciation and are similar in many respects, there are a few key differences to consider when choosing one over the other:
- NRE account can be used to deposit foreign earnings into a rupee denominated account, while NRO account can be used to hold income generated in India by an NRI from rent, dividend received, etc.
- NRE account balance is tax free, whereas, NRO account balance is taxable as per your applicable slab rate.
- NRE account deposits can be freely repatriated, whereas, NRO account balances can only be partially repatriated (up to USD 1 million per year).
You should of course keep in mind that any resident Indian accounts you might have had prior to attaining NRI status can easily be converted to a NRE/NRO account. This offers a simpler option to opening a new NRE/NRO account altogether.
Documents Required for Mutual Fund KYC for NRI
Even if you were already making mutual fund investments as an Indian resident and are KYC-verified, you have to complete re-KYC for NRI after achieving non-resident status. Documents required for NRI Mutual Fund investment KYC include the following:
- PAN Card
- Copy of valid Passport (front and back pages)
- Proof of foreign address residence
- Cancelled cheque of NRE/NRO account
Once KYC is completed you are allowed to start making investments into domestic mutual funds as a NRI investor. Such investments can be made either by self or via the power of attorney (PoA) route.
Special Considerations for US and Canadian NRI Investors
If you are a NRI based in countries other than the US or Canada, the investment process for you will not be much different from resident investors. However, the case is slightly different in case of NRIs residing in US or Canada. These investments are governed by FATCA (Foreign Account Tax Compliance Act), which requires an additional compliance by the AMC for investments originating from the US and Canada. Some of the top fund houses that accept NRI investments from US and Canada include:
- Aditya Birla Sun Life Mutual Fund
- SBI Mutual Fund
- UTI Mutual Fund
- ICICI Prudential Mutual Fund
- L&T Mutual Fund
- Sundaram Mutual Fund
The above list is not exhaustive and other fund houses may also accept investments from NRI investors based in the US or Canada.
Taxation Rules for NRI Mutual Fund Investments
Taxation rules of mutual funds for resident and NRI investors are almost exactly the same. For example, dividends are tax free in the hands of the investor whether resident or NRI. Similarly short term capital gains taxation rules apply to equity mutual fund investments made for 1 year or less and the applicable tax rate is 15% of gains. Long term capital gains taxation rule is applicable in case of equity schemes if such investments have been held for over 1 year from unit allocation date. Applicable LTCG tax rate is 10% on incremental capital gains over Rs. 1 lakh for a financial year.
In case of debt mutual fund investments, short term capital gains taxation rules are applicable for investments made for 3 years or less. The applicable tax rate for short term gains on debt investments is same as the income tax slab rate of the investor but in case of NRI investors, the TDS applicable is 30% (the highest tax slab). In case of long term debt mutual fund investments, you have to stay invested for at least 3 years from the date of unit allocation. The applicable tax rate for LTCG on debt schemes is 20% with indexation benefit in case of listed funds or 10% without indexation benefit in case of unlisted funds. Know about about how mutual funds are taxed.
NRI Mutual Fund Taxation Rates*:
|Type of Scheme||Tax Rate|
|Equity Schemes||15%||10% on long term gains exceeding Rs. 1 lakh|
|Non-Equity Schemes||30%||20% with indexation|
|Type of Scheme||TDS Rate|
DTAA Benefit on NRI Mutual Fund Investments
NRIs may be able to claim Double Taxation Avoidance Treaty (DTAA) benefits on the TDS deducted and tax paid in India against the tax payable in their country of residence. For example, if tax of Rs 1.5 lakh has been deducted on short term capital gains on equity funds, the NRI can claim the same against the tax on the same gains payable in his/her country of residence. The principle behind these treaties is to ensure that the same income is not taxed twice.