How Can NRIs Invest In Mutual Funds?

For NRIs planning to invest in mutual funds in India, the process is straightforward; however, there are certain compliance requirements you must adhere to. You must complete KYC using an NRE/NRO bank account and comply with the FEMA regulatory framework in India. You can make an investment either online, via an online platform, or through a Power of Attorney in Indian (PoA).

In this blog, we will examine in detail how NRIs invest in mutual funds, including tax considerations and key factors.

Can NRIs Invest In Mutual Funds In India?

The very first question that arises is whether NRIs are even allowed to invest in the Indian mutual fund industry? Yes, they are. NRIs can invest in mutual funds in India as long as they comply with the regulatory framework set out in the Foreign Exchange Management Act (FEMA).

In terms of Regulation 2 of the FEMA notification No. 13 dated May 3, 2000, a person who resides outside India but is a citizen of India.

As per the Income Tax Act, 1961, a resident is a person who lives in India for 120 days or more during a financial year, or 365 days or more during the preceding four financial years, and a minimum of 60 days in that year. Therefore, the NRIs include those individuals who visit India for less than 120 days in a FY.

The amendment was brought in the current financial year. Earlier, the 120-day threshold was 182 days. But there's a catch: if the total Indian income earned and accrued in India during the financial year exceeds Rs 15 lakh, the 120-day rule applies. The visiting NRIs whose total taxable income in India is up to Rs 15 lakhs during the financial year will remain NRIs only if their number of stay days does not exceed the 181-day threshold, as was the case earlier.

The definition of NRI in the FEMA framework determines whether an NRI can invest in India, while the definition of NRI in the Income Tax Act specifies how such investments will be taxed.

How Can NRIs Invest in a Mutual Fund

The following are steps on how NRIs can invest in mutual funds;

Step 1: Set Up An Account

Generally, the mutual fund asset management companies in India cannot accept investments in foreign currencies.

Indian laws, specifically the Foreign Exchange Management Act (FEMA), do not allow you to deposit your money in a regular resident savings account in India once you have attained the NRI status. Indian tax laws have made it compulsory for NRIs to have end-to-end knowledge of NRE and NRO accounts and to determine which suits them better.

• NRE Account: This type of account is well-suited for those who want to send money to India that they have earned overseas.
• NRO Account: Any money kept in an NRO account is money you have earned in India, and this money cannot be easily repatriated to a foreign currency. NRO accounts can be used by NRIs to deposit their earnings in India.

Once the NRI-designated account for NRIs is activated in India, an NRI can invest by any of the following methods:

1: Self or Direct

An NRI can carry out transactions such as crediting or debiting through normal banking channels.

Their application, with the required KYC details, must show whether the investment is on a repatriable or non-repatriable basis.

For the KYC application, the documents include a recent photograph, certified copies of the PAN card, proof of residence outside India, a passport copy, and recent bank statements. Furthermore, the banks will require in-person verification, which an NRI can meet by visiting the Indian Embassy in their country of residence.

2: Through The Power Of Attorney

Investing through the power of attention in some of the common methods to invest in India as an NRI.

In India, mutual fund companies permit the holder to invest on their behalf and to take other decisions or actions pertaining to their investments. However, on the KYC documents, the signatures of both the NRI investor and their POA should be present to make such an investment.

Step 2: Get The KYC Done

It is essential for you, as an NRI, to complete the KYC process before even starting an investment in Indian mutual funds.

To complete KYC, you must submit a copy of your passport (ensure only the relevant pages with your name, date of birth, address, and photo are submitted). Proof of current residential status is also required, whether you are a permanent or temporary resident of that country. In India, some fund houses also insist on in-person verifications.

Some mutual fund houses do not permit NRIs from Canada and the USA to invest in their schemes. This is done due to complex compliance requirements under the Foreign Account Tax Compliance Act (FATCA). Then there are certain fund houses that require certain conditions to be met before they permit NRIs from the USA or Canada to invest in their schemes.

The following is a list of mutual fund houses that accept investment from NRIs based in Canada and the USA:

• Aditya Birla Sun Life Mutual Fund.
• L&T mutual fund
• SBI Mutual Fund
• UTI Mutual Fund
• ICICI Prudential Mutual Fund
• DHFL Pramerica Mutual Fund
• Sundaram Mutual Fund
• PPFAS Mutual Fund

Step 3: How To Redeem?

As an NRI, to redeem mutual fund investments, you can do so by following the redemption procedure mentioned by the fund houses. Different fund houses in India generally follow different procedures for NRI redemptions.

The designated asset management company (AMC) will credit your corpus, including both the investments and gains, to you after deduction of the taxes. The fund will be credited to the investor's respective NRE or NRO bank account. The AMC can also write you a cheque for the same.

How Are NRIs Taxed On Mutual Funds In India

There is a common fear among NRIs investing in India, particularly in mutual fund schemes, that they will have to pay tax twice. However, that is not the case if India has signed a Double Taxation Avoidance Agreement Treaty (DTAA) with the respective country of residence.

Let us understand this with an example:

India has signed the Double Taxation Avoidance Agreement treaty with the US. Hence, any NRIs living in the US can claim the tax relief in the US if he/she has already paid taxes in India. Furthermore, any gains from the requirement or the original fund are taxable based on the investment's holding period.

The following table demonstrates the holding periods defined for different types of mutual funds.

The table below shows the capital gains tax on mutual fund investments for NRIs.

Key Points For NRIs To Remember

The following are important points for an NRI to note:

• Foreign bank account details may be required for FATCA/CRS compliance and tax reporting purposes. However, redemption proceeds are generally credited only to designated NRE/NRO accounts.

• When redeeming mutual fund units, tax will be deducted at the source of the capital gains realized on the investment.
  • Your investments made in mutual fund schemes carry the right to repatriate the amount invested and the amount earned, only until your residential status is that of an NRI.
• For NRIs investing in mutual funds, compliance requirements in the USA and Canada are far more stringent than those in other countries. As per the FATCA guidelines, all financial institutions must share details of their financial transactions involving a person from the USA who is working with the Government of the USA.
• As an NRI, you must check if you are a resident of any of the 90 countries that have signed the Common Reporting Standards (CRS). The CRA is the global reporting system to combat tax evasion.

The Bottom Line

As an NRI, you can choose to invest in the mutual fund industry in India; however, the process does have some initial hassles. But as they say, the greater the risk, the riper the fruit.

As an NRI, if you are planning to invest in mutual funds in India and are seeking professional assistance, Savetaxs is the name to trust. Our experts will assist you with regulatory compliance, KYC, investment advisory, tax optimization, portfolio management, repatriation services, PoA management, and more.

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