As per the current rules, any Indian resident who is residing out of India for employment, business, studies, etc. for 182 days or more, during a financial/calendar year, is termed as a non-resident Indian. The rules state that Non-Resident Indians (NRIs) can invest in India and can also hold on to their existing property. Historically, a major portion of the investments made by NRIs in India included real estate investments. However, NRI investors can also opt for other types of investments such as mutual funds.
Mutual Fund Regulations for NRIs
NRI mutual fund investments are mainly governed by the Foreign Exchange Management Act 1999, commonly known as FEMA. As per the current provisions of the act, NRIs are allowed to make investments into capital markets including direct stocks, exchange traded funds (ETFs) and mutual funds subject to certain terms and conditions stated as below.
- NRIs who wish to invest in Indian mutual funds will have to produce some additional documents such as a copy of passport, current residential proof, etc. Some fund houses may even ask for an in-person verification in order to complete the KYC process
- If the payment is made via cheque, the investor will have to a Foreign Inward Remittance Certificate (FIRC)
- As per the Foreign Exchange Management Regulations, 2000, an NRI investor is allowed to invest in Indian mutual funds only in the Indian currency. To do this, the NRI must open either a Non-Resident External Rupee (NRE) Account, Non Resident Ordinary Rupee (NRO) Account or Foreign Currency Non Resident (FCNR) Account
- NRIs can choose whether they want their income from Mutual Funds to be remitted back to their resident country or to a bank account in India. However, it must be noted that the latter is possible only if the investment was made through the NRO account of the investor
- NRIs investing in mutual funds in India also have an option of assigning the Power of Attorney (PoA) to someone in India, who will then take mutual fund decisions on behalf of the investor
- Alternatively, the NRI investor can also hold a joint account with a resident Indian who can then take care of the requirements of the fund
- The taxation rules on mutual fund investments in India are the same for NRIs and non-NRIs. NRIs will have to pay a STCG of 15% on equity funds, while LTCG of 10% on long term debt funds. There is not tax liability for the investor on long term equity funds
- It is important to note that for NRIs, the tax is deducted at source while the Indian residents have to pay the tax as per the advance tax schedule
NRE and NRO Accounts for NRI Mutual Fund Investments
In case of NRI investors, NRE and NRO accounts are the commonly utilized accounts and it is mandatory to have either one of these in order to be able to make mutual fund investments in India. 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 the 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, the NRO account balance is taxable as per the 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)
- The NRI should, of course, keep in mind that a resident Indian account that he/she 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
If you are currently an NRI, you will have to submit a new KYC form as an NRI after achieving the status. This is a mandatory condition even if you were already making mutual fund investments as an Indian resident and were KYC-verified.
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 the KYC is completed, you can start making investments in domestic mutual funds as an NRI investor. Such investments can be made either by self or via the power of attorney (PoA) route.
Process of Investment by NRI in India
While it is mandatory to have NRO/NRE accounts in Indian banks, there are two major methods following which the NRI can proceed with the investments in India.
Direct Investment or Self Investment Mode if Investment for NRIs
The NRIs are allowed to carry debits, credits and the basic transactions via usual banking channels. The investment application must be attached with required KYC details and also indicate that the invested amount is capable of repatriation or not. The KYC documents that must be presented include-
- Recent photograph of the investor
- PAN card copies
- Proof of current residence out of India
- Passport copies
- Certified bank statement
A proper face-to-face verification will be required by the bank which can be executed by visiting the Indian Embassy in the resident country.
NRI Investments via Power of Attorney
Following this method of investment in mutual funds, the respective investment will be made by someone else on the behalf of the NRI. The Mutual Fund houses allow the NRI to make use of Power of Attorney and invest with the help of someone who is a resident of India. However, in-person verification of the POA holder will be demanded by the Fund house.
Moreover, signatures of both the individuals involved- NRI and the POA holder must be present on all the KYC documents in order to carry out the investment.
Special Considerations for the US and Canadian NRI Investors
If you are an NRI based in countries other than the US or Canada, the investment process for you will not be much different from that of the resident investors in India. However, the formalities would be slightly different in case of NRIs residing in the US or in Canada.
The investments made by NRIs are governed by the 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 fund houses that accept NRI investments from US and Canada include-
- Birla Sun Life Mutual Fund
- SBI Mutual Fund
- UTI Mutual Fund
- ICICI Prudential Mutual Fund
- DHFL Pramerica Mutual Fund
- L&T Mutual Fund
- PPFAS Mutual Fund
- Sundaram Mutual Fund
How can NRIs Benefit from Mutual Fund Investments
The major benefit for NRIs investing in Indian mutual funds is the difference in currency rates. NRIs can buy mutual funds in India at a comparatively cheaper rate because of the Rupee (Indian currency) being of lesser value than theirs. So if the Indian Rupee has gained on the currency of the country they live in, the investors are likely to make huge profits.
However, there is also a downside to this. If the situation goes vice versa, the investor may even incur losses.
Which Indian Fund Houses Accept NRI Investments
The following fund houses in India accept investments from NRIs-
- L&T Mutual Fund
- SBI Mutual Fund
- PPFAS Mutual Fund
- Birla Sun Life Mutual Fund
- DHFL Pramerica Mutual Fund
- ICICI Prudential Mutual Fund
- Sundaram Mutual Fund
- UTI Mutual Fund
- HDFC Mutual Fund
Taxation Rules for NRI Mutual Fund Investments
Taxation rules of mutual funds for the resident Indians and the NRI investors are almost the same. The short term capital gains taxation rules apply to equity mutual fund investments made for 1 year or less at the rate of 15%. Long term capital gains taxation rule is applicable at 10% in case of equity schemes only if such investments have been held for over 1 year from the date of allocation of mutual fund units.
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 the 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.
NRI Mutual Fund Taxation Rates
| Type of Scheme | Tax Rate | |
| STCG | LTCG | |
| Equity Schemes | 15% | 10% on long term gains exceeding Rs. 1 lakh |
| Non-Equity Schemes | 30% | 20% with indexation |
| Type of Scheme | TDS Rate | |
| STCG | LTCG | |
| Equity Schemes | 15% | 10% |
| Non-Equity Schemes | 30% | 20% |
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.
Best Mutual Funds for NRIs to Invest in 2020
| Fund Name | AUM
(In Crore) |
3-Year Returns
(In %) |
5-Year Returns
(In %) |
| SBI Equity Fund | 32,470 | 2.26 | 4.55 |
| ICICI Prudential Credit Risk Fund | 12,872 | 8.59 | 9.03 |
| Parag Parikh Long Term Equity Fund | 2,795 | 4.38 | 6.32 |
| UTI Nifty Index Fund | 1,856 | -0.46 | 1.29 |
| SBI Contra Fund | 1,267 | -7.64 | -2.65 |
Data as on 7 April 2020; Source: Value Research
FAQs
Ques. Can NRI invest in mutual funds?
Ans. Yes, NRIs can invest in mutual funds in India. However, there are certain conditions that must be taken care of while making such investments.
Ques. Are mutual funds taxable for NRI?
Ans. Yes. Mutual fund investments in India are similar with respect to taxation for NRIs and non-NRIs in the country. STCG will be applicable at 15% on equity investments and LTCG will be applicable at 10% on debt investments. There is no LTCG on equity investments for the long term. However, the tax will be deducted at source for NRIs.
Ques. What are the KYC formalities that the NRI need to complete?
Ans. NRIs might be asked for an in-person verification by the fund house as part of the KYC process. Additionally, Nariz will have to submit some additional documents such as a copy of the passport, current residence proof of the other country, etc. in order to complete their KYC.