Step-by-Step Guide to NRI Investment in Mutual Funds

The stock market of India is a great opportunity for NRIs to grow their income in India. If they have expertise, NRIs can invest directly in the stock market. However, investing the money in mutual funds is a cost-effective and smart solution for all types of investors.

Want to know more about it in detail? This blog provides information on how NRIs can invest in Indian mutual funds, eligibility criteria, bank requirements, and more. So read on and sharpen your understanding of it. 

NRI Investment in Indian Mutual Funds

Mutual funds are one of the most sought-after investment options for NRIs. Considering this, yes, NRIs can invest in Indian mutual funds as long as they follow the Foreign Exchange Management Act (FEMA) guidelines. This provides several investment opportunities for NRIs to take part in the Indian market. Additionally, they get benefits from the market growth.

However, it is noted that some mutual fund houses may not accept the application process of NRIs living the Canada and the US. It is because of the complex documentation requirements of the Foreign Account Tax Compliance Act (FATCA). Although many reputable mutual fund houses do accept investment applications from these NRIs, they do so with specific terms and conditions.

So, this was all about NRI investment in Indian mutual funds. Moving ahead, let's know the eligibility & compliance for NRIs investing in these funds. 

Eligibility & Compliance for NRIs Investing in Indian Mutual Funds

The eligibility and compliance that NRIs need to follow while investing in Indian mutual funds are as follows:

NRI Definition: Determined as per FEMA notification, May 3, 2000, if you conform to the definition of NRI:

• You are an Indian citizen living overseas.
• In a financial year, for less than 120 days, you were physically present in India. The 120-day rule will apply only if you have more than INR 15,00,000 taxable income in India in a financial year.
• If your income in India is less than INR 15,00,000, then you can stay in the country for 181 days without impacting your NRI status for taxation purposes. 

Indian Bank Account: Requires a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account. 

PAN Card: It is mandatory to have a Permanent Account Number to invest in Indian mutual funds. 

This was all about the eligibility criteria and compliance requirements that NRIs need to follow to invest in Indian mutual funds. Moving further, let's know how NRIs can invest in mutual funds in India. 

How NRIs Can Invest in Mutual Funds?

Now that you know the eligibility criteria to invest in mutual funds, let's know the process to invest. 

Open the Correct NRI Bank Account

The Asset Management Companies (AMCs) in India do not accept investment in foreign currency. Considering this, to invest in India, NRIs need to open an NRE, NRO, or FCNR (Foreign Currency Non-Resident) account with an Indian bank. The bank account choice depends on the nature and purpose of your investments.

Non-Resident External (NRE) Account: NRIs who want to manage and save their foreign earnings in Indian can open an NRE account. It allows you to hold your foreign earnings in Indian currency. Additionally, the principal + interest amount is fully repatriable without any threshold limits. In simple words, this account allows NRIs to transfer their foreign earnings back to their resident country without any limitations.

Non-Resident Ordinary (NRO) Account: NRIs can open an NRO account to manage income generated in India and foreign income. Funds held in these accounts, with certain limitations, can be repatriated. This means that when transferring funds to your resident country, you face certain restrictions. Generally, the repatriation limits in this account are $1 million per financial year, including the principal and interest amount. However, you can also use these accounts for several purposes in India, such as applying for loans, making local payments, or investing.

Foreign Currency Non-Resident (FCNR): Through these accounts, NRIs can deposit their overseas income in one of the 6 acceptable currencies. It includes currencies such as CAD, GBP, USD, JPY, and AUD Complete the KYC Process

It is mandatory to complete the Know Your Customer (KYC) process before investing in Indian mutual funds. Complete this first, and your portfolio, SIPs, and redemptions will work smoothly. It is the most common hurdle that NRIs face while investing in mutual funds in India. So, follow the given checklist closely. 

• A photocopy of your passport photo and signature page
• Valid visa, OCI card, or equivalent residency proof
• Indian Permanent Account Number (PAN)
• Overseas address proof (bank statement or utility bill, generally within three months)
• Recent passport-size colored photograph
• Bank proof for the funding account (bank letter or cancelled cheque for NRE/NRO)
• FATCA and Common Reporting Standard (CRS) self-declaration 

Choose the Investment Method

NRIs have two ways to invest in mutual funds in India. These are as follows:

Self or Direct Investment: NRIs through normal banking channels can manage their investments and carry out transactions themselves. In their investment application, they need to clarify whether the investment is on a repatriable or non-repatriable basis. Further, to invest directly, you can register your profile online on the investment platform and start investing.

Power of Attorney (POA): Additionally, by granting a Power of Attorney (PoA) to someone, you can authorize them to invest on your behalf. Considering this, on your behalf, they will be able to take investment decisions and carry out transactions. Also, to enable this type of investment, NRI and PoA holders need to sign the KYC documents. 

Invest in Mutual Funds

Once your account is set up and you complete the KYC process, you can start investing in Indian mutual funds. There are wide range of mutual funds available for NRIs in India. Additionally, it is advisable to take the help of a wealth manager or financial advisor to choose schemes that match your risk appetite, investment goals, and time horizon. Further, online apps and platforms provide a convenient way for NRIs to invest in mutual funds according to their resident country and financial goals. 

So, this is how NRIs can invest in mutual funds in India. Moving ahead, let's know the taxation of these for NRIs. 

Taxation of Mutual Funds for NRIs

As an NRI, when investing in mutual funds, taxation is an important aspect. Let's explore the key taxation points for NRIs investing in Indian mutual funds:

Capital Gain Tax

For NRI investors, investment profits from mutual funds are taxed as capital gains. The table below showcases the list of tax rates and holding times for several types of mutual funds:

Tax Deduction at Source (TDS)

NRIs who invest in mutual funds need to pay TDS in India. Considering this, TDS is deducted from your long-term capital at 20% for debt and other non-equity funds. 

These were the tax obligations on mutual funds that NRIs need to fulfill while investing in the Indian market. Moving further, let's know the repatriation rules for mutual funds. 

Repatriation Rules for Mutual Funds

From AMC to AMC, the redemption procedure varies. Considering this, you can redeem your mutual fund investment by following the process stated by the respective fund house. The fund house will credit the corpus (investment + capital gains) to your account you are supposed to get after redemption, and applicable taxes. The amount will be credited to your respective NRE or NRO bank account. Additionally, for the same, you can also receive a cheque.

This was all about the repatriation rules for mutual funds. Moving ahead, let's know the key risks and considerations that NRIs need to consider while investing in Indian mutual funds Key Risks & Consideration for NRIs

Here are some key risks and considerations that NRIs need to consider while investing in Indian mutual funds:

• Once you gain the NRI status, you cannot continue your investments with your Indian residential status. It is a violation of FEMA regulations. Considering this, you may face a penalty from INR 10,000 to 3x the investment amount.
• It is compulsory to provide your residency proof in your current country. It should be attached to your investment application.
• After 36 months, capital gains from debt funds qualify for indexation. From this, the effective tax rate reduces to 6-8%. Many NRIs sell the debt funds early, resulting in paying 30% tax.
• Having 15-20 funds does not reduce the investment risk; it offers mediocre returns. Considering this, across different categories, many NRIs only need 4-5 well-selected funds.
• The funds that performed well last year are often considered for the next year. So, focus on constant performers over 5-7 year periods, not the recent ones.
• When SIPs perform well, market crashes. In this scenario, you purchase more funds at lower prices. Here, NRIs who in March 2020 stopped SIPs missed the 100% recovery rally.

These were some of the points that NRIs need to consider while investing in mutual funds in India. 

Final Thoughts

Lastly, investing in mutual funds provides NRIs with the opportunity to get benefits from the growing Indian market and increase their income. By following the information stated in this blog, completing the documentation, and staying compliant with the tax regulations, you can make correct investment decisions. Additionally, achieve your desired financial goal. 

Further, to maximize your returns and ensure a well-diversified investment portfolio, connect with Savetaxs. We have financial experts in our team who conduct research and help you choose the right investments as per your risk appetite and financial goals. So, contact us now and enjoy the benefits of the growing economy of India.