Home/Article/What NRIs must know about investing in mutual funds in India..?

What NRIs must know about investing in mutual funds in India..?

05 Jan 2023

For a very long time, Non Resident Indians only invested in bank deposits and real estate in India. In the last few years NRIs have started investing aggressively in Indian mutual funds too. What must NRIs know about investing in Indian mutual funds? How NRIs can invest in mutual funds in India? Are there specific mutual funds for NRIs to invest in or can they invest in funds of any AMC?  Let us look at investments by NRIs in mutual funds and what these NRIs need to know about investing in Indian mutual funds.


Understanding Repatriable versus Non-Repatriable MF investments
Since NRIs are based abroad, they need to comply with the guidelines of the Foreign Exchange Management Act (FEMA) before they can invest in mutual funds. The first thing that NRIs need to do before investing in Indian mutual funds is to complete the comprehensive Know Your Client (KYC) process for investing in India. The KYC is almost the same as for resident Indians, but it is a little more stringent and comprehensive considering that detailed PMLA guidelines also apply in the case of NRIs.

The next step is for NRIs to decide whether they want to invest on a Repatriable basis or on a non-Repatriable basis. To invest on a repatriation basis into Indian mutual funds, the NRI must either have an NRE (Non Resident External) account or a FCNR (Foreign Currency Non Resident) account. Both the NRE and the FCNR accounts are Repatriable accounts and only thee two accounts can be used for investment on a repatriation basis. In case, the NRI wants to invest on a non-repatriation basis, then the NRI can also use the NRO (Non-Resident Ordinary) account which is a rupee account that can be used for rupee payments. But investments in MFs made from the NRO account cannot be repatriated. However, the NRI is permitted to invest on a non-repatriation basis from the NRE and FCNR account also.


Process for NRIs to invest in Indian mutual funds
The process for NRIs to invest in Indian mutual funds is quite simple and the RBI has tried to make the NRI on-boarding process as simple as it is for a resident Indian. While submitting the application after completion of the KYC, the details of the Indian bank account must also be mentioned in detail in the application form. The mutual fund will not accept any foreign currency cheque and these cheques or drafts must be payable to the fund in Indian rupees only. In case the NRI wants to transfer funds through a dollar cheque, then they need to contact their Authorized Dealer (bank) to issue a rupee draft against their dollar cheque. The NRI can choose to invest in mutual funds directly or he can also choose to invest through power of attorney (POA).
Redemption of mutual funds

When mutual funds are redeemed by NRIs it can be done by them directly or they can also do it through a POA. When the fund is redeemed, the rules of capital gains will apply in the same way as in the case of resident Indians. We will look at the subject of capital gains in greater detail in the subsequent section. Your redemption credit will be based on whether the investment came on Repatriable basis or non-Repatriable basis. For example, if you have invested from an NRO account, then the redemption will only be credited into the favour of that particular NRO account. If you invested by debit to your FCNR or NRE account then the redemption proceeds will also be credited to the same account. However, in case of NRI / FCNR investments, you can opt for redemption into your NRO account.


Calculation of capital gains for NRIs
There are 3 things you need to know about capital gains taxation for NRIs..

In case of equity funds, the short term capital gains (up to 1 year) will be taxed at 15.45% (15% + cess), while LTCG will be taxed at 10% flat above Rs.1 lakh of capital gains in the year.

In case of debt funds, the STCG (up to 3 years) will be taxed at the peak rate of tax applicable to the NRI. In case of LTCG on debt funds, the taxation will be at 20.6% after considering the benefit of indexation.

Mutual funds being financial assets are not subjected to wealth tax in the case of NRIs.

TDS on capital gains and dividends
This is something unique that NRIs need to be aware of when they invest in Indian mutual funds. If the capital gains or dividends paid to the NRI are taxable, then the fund will deduct the TDS and only pay the net amount to the NRI. This is where the tax treatment for NRIs differs from the practice applicable to resident Indians.

You may also like…

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Take your next step

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C