“Can NRIs invest in mutual funds in India?” That’s one of the most asked questions in online forums regarding investments and NRIs. India is home to the largest diaspora residing in several countries across the world. Though our NRIs build a home away from home, they still retain strong ties to the motherland.
Traditionally, real estate and fixed deposits were the two popular investment products for NRIs looking to grow their wealth in their homeland. However, with mutual funds generating high returns, NRIs are now looking to build their corpus by benefitting from mutual fund investments in India.
Here, in this guide, you can find all that you need to know regarding mutual fund investments in India for NRIs – rules, procedures, tax implications and more.
First, answering the question,
Is it possible for NRIs to invest in Mutual Funds in India?
Yes. NRIs can invest in mutual funds in their home country, provided they adhere to the rules mentioned in the FEMA (Foreign Exchange Management Act). Mutual fund investments in India can help you diversify your portfolio by investing in a mix of equity and debt instruments.
Mutual fund investments offer a range of products to suit all investors. Risk-averse conservative investors can opt for debt funds that generate returns at high-interest rates without risking the capital. On the other hand, NRIs with higher risk appetites can opt for equity-oriented funds, hybrid funds or balanced funds to build their corpus.
Top Benefits of Mutual Fund Investments in India for NRIs
With a dynamically growing economy, India offers numerous opportunities for NRIs to build their wealth by investing in the home country. Here are some of the top benefits of mutual fund investments in India for NRIs.
Mutual Fund Investments can be managed anytime and from anywhere
Today, all the leading mutual fund houses offer the facility to start a mutual fund investment online. Investors can buy, sell or switch assets just by logging into their mutual fund portfolio. Systematic investments, withdrawals, and transfers – all can be handled online using your internet banking account, irrespective of where you are in the world.
Asset Management Companies (Mutual Fund Houses) send you the regular status of your mutual fund investments via email. Also, AMCs share periodic portfolio disclosures with investors to keep them informed.
Hence, it’s easy for NRIs to invest in mutual funds, track performance of funds and redeem units, all with a few clicks.
Benefits of Foreign Exchange Gains
This is one of the main reasons why NRIs prefer to invest in India. If the value of the Indian Rupee falls against the currency of the resident's country, then it leads to more significant profits for NRIs.
Let’s explain this with an example. For instance, let’s assume that an NRI residing in the United Kingdom purchases mutual fund units in India worth 500 pounds. When the value of the pound increases comparatively to Indian rupees, it means bigger returns for the NRI investor. Besides investing in mutual funds in India, NRIs can also receive the same benefits by investing in mutual funds based in India in their resident country.
Now that we have seen the benefits, let’s take a detailed look at how NRIs can commence a mutual fund investment in India.
Step-by-step Procedure to Invest in Mutual Funds in India for NRIs
Step 1: Open an NRI bank account in India
Mutual fund investments in India can receive investments only in Indian rupees and not any other foreign currency. Hence, all investors have to open a bank account in India. NRIs can choose from either of the following bank accounts:
NRO (Non-Resident Ordinary) account, which in non-repatriable
NRE (Non-Resident External) account, which is repatriable
Funds held in the NRE account can be repatriated (transferred) overseas, while funds held in the NRO account cannot be transferred abroad. It has to be used for local payments in Indian rupees.
Opening an NRO or NRE account is hassle-free, and the entire process can be completed online within a few minutes. You can choose any bank that you prefer for an NRE/NRO account.
Step 2: Ensure KYC Compliance
All NRIs have to submit the required KYC-compliant documents before he/she can invest in mutual funds. Some of the standard KYC documents include:
Passport copies for proof of name, date of birth.
Proof of current residential address (outside India)
Bank statement for the last six months
Note that in some instances, the AMC that offers the mutual fund scheme will send authorised representatives to your current residential address to complete in-person verification. Sometimes the mutual fund house completes the in-person audit via the Indian embassy in the NRIs resident country. However, mostly this step is not required if you provide the necessary KYC documents.
Step 3: Choose your Preferred Mode of Investment
NRIs have two ways to invest in mutual funds in India. While you begin a mutual fund investment, you have to choose the method that you prefer. Let’s take a closer look at both these methods.
As the name implies, here all mutual fund transactions – investments, withdrawals and asset switches – are carried out by the NRI. The NRI uses regular online banking channels for these transactions.
When you choose the direct mode, you have to mention whether you want to repatriate or non-repatriate the proceeds gained from the investments.
Power of Attorney
In this method of investment, all investment decisions are carried out by a person nominated as the PoA (Power of Attorney). The NRI appoints a local resident (usually a family member) as the PoA to handle all mutual fund transactions on his/her behalf.
If you choose this method, then besides the KYC documents of the investor (the NRI), you also have to provide the KYC documents of the PoA holder.
Step 4: Disclose the Source of Funds
All NRIs have to disclose the source of funds while investing in mutual funds in India. If payments are made via cheques/DDs to the mutual fund, then it's mandatory to provide a FIRC (Foreign Inward Remittance Certificate). If the FIRC is not available, you can also provide a letter from your bank, confirming the same.
Additionally, if you're residing in the USA or Canada, you have to provide additional documents to comply with the strict regulations imposed by the FATCA (Foreign Account Tax Compliance Act). Make sure to get in touch with your preferred mutual fund house to know more about the regulations about your resident country.
Step 5: Choose your Preferred Mutual Fund Scheme
The final step is filling the application form for your preferred mutual fund scheme. You can set up standing instructions for SIPs (Systematic Investment Plans). Once you start investing in a mutual fund of your choice, you will receive regular updates from your AMC via email.
Step 6: Redeeming Funds
Generally, most AMCs transfer the funds accumulated in the mutual fund directly to the associated NRE/NRO bank account on maturity. Note that the AMC deducts the appropriate withholding tax on the capital gains earned. Sometimes, the AMC may also issue a cheque for redeeming the accumulated funds.
Note that if you have opted for non-repatriable mutual fund investment, then the credits from your proceeds can only be sent to an NRO account and not to your NRE account.
Taxation on Mutual Fund Investments for NRIs
The main reason why the majority of NRIs are hesitant to invest in mutual funds in India is that they are worried about double taxation. They are concerned whether their investments would attract tax both in India as well as their resident country.
However, that isn't the case. This is because India has signed the DTAA (Double Taxation Avoidance Treaty) with several countries. In such cases, the gains are taxed only in the country of origination. For mutual funds, your profits are only taxed in India and not in your resident country.
Taxes on Equity-Oriented Mutual Funds
Gains from equity mutual funds are taxed based on the investment horizon. Short-term capital gains are taxed at 15%, and long-term capital gains (over Rs. 1 lakh) are taxed at 10%.
Taxes on Debt-Oriented Mutual Funds
Short-term capital gains from debt funds are taxed at 30%. Long-term capital gains are taxed at 20% with indexation benefit. The long-term capital gains on funds without indexation is 10%.
Which AMCs accept mutual fund investments from NRIs?
Not all mutual fund houses in India accept investments from NRIs. The nine mutual fund houses that offer mutual funds for NRIs are:
Birla SunLife Mutual Fund
DHFL Pramerica Mutual Fund
HDFC Mutual Fund
ICICI Prudential Mutual Fund
L&T Mutual Fund
PPFAS Mutual Fund
SBI Mutual Fund
Sundaram Mutual Fund
UTI Mutual Fund
Few Points to keep in mind, before Investing in Mutual Funds in India
The funds accumulated in your mutual fund scheme can only be repatriated until you are an NRI. If your resident status changes, you no longer can repatriate the gains. It can be utilised only in India.
It’s mandatory to submit proof of residence for your current address in the resident country.
Note that the rules for foreign investments from Canada and the US are stricter compared to other countries. So make sure that you comply with all FATCA guidelines to avoid any negative consequences.
Benefit from Mutual Fund Investments in India, Even if you’re an NRI
Wrapping up, NRIs can invest a portion of their overseas earnings in India to build a large corpus in their home country, in the long run. However, make sure that you comply with all regulations before you invest in mutual funds in India to avoid penalties due to tax evasions.