Are you an NRI wanting to invest in Indian mutual funds? Here is how to go about it

NRI or non-resident Indian is a citizen of India or a person of Indian origin who goes out from the country for some official purpose or with employment, carrying on their own business or maybe s/he goes with the intention to stay outside the country for more than 182 days or more during a financial year and 365 days or more during the preceding four financial years. If you meet these stipulations, you can carry an NRI tag, but you can still make investments in India.

Amar Pandit, Founder & Chief Happiness Officer at HappynessFactory.in said that Non-Resident Individuals can invest in various asset classes in India such as real estate, stocks, mutual funds, NRE deposits, NPS etc. “Traditionally, the preferred asset classes for NRIs were real estate and NRE Deposits. Recently, NRIs have shifted their focus to investing in mutual funds,” he said. Here we look at how NRIs can take advantage of the Indian capital market through the mutual fund route.

Investment process

An NRI investor should be KYC Compliant before making investments in mutual funds. Manish Kothari - Director & Head of Mutual Funds, Paisabazaar.com said that NRIs can invest in Indian mutual funds subject to FEMA regulations. As mutual fund houses are not allowed to accept investments in foreign currencies, they have to first open an NRE/NRO account with a bank in India to route their investments. Investments routed through NRE account are freely repatriable whereas those routed through NRO are not. “NRIs will have to submit copies of his passport and foreign address proof to the fund house as part of KYC documentation procedure,” he said.

Also, after submitting the above documents, if you are visiting India, you should get your in-person verification (IPV) done at the respective AMC, distribution house, CAMS or Karvy.

Here are five procedural things NRIs should know while investing in Indian mutual funds

=> NRIs can open two types of rupee-denominated bank accounts in India – NRE (Non-Resident External) A/c and NRO (Non-Resident Ordinary) A/c.

=> NRE A/c is an account to transfer foreign earnings to India and is prone to foreign exchange risk. It has no limit on repatriation and the interest earned on NRE deposits is tax-free.

=> NRO A/c is an account that manages NRI’s income earned in India and is also subject to foreign exchange risk. It has a set limit on repatriation and the interest earned is taxable.

=> Both accounts can be used for making investments in India. Hence, based on the source of income earned and repatriation decision, NRI can decide which account to opt for.

=> NRI investors can also appoint a Power of Attorney (POA) holder to invest and redeem mutual funds on their behalf. While purchasing the units, the POA holder has to submit the original POA or duly notarised copy of it to the fund house. Once the POA is registered, the POA holder can purchase or redeem mutual fund units on the behalf of NRI.

However, NRIs residing in USA and Canada have additional compliance and regulatory restrictions. Due to this, they cannot invest in all mutual funds in India. However, most of the AMC can accept investments from NRIs who are based in the United States and Canada, besides those in other countries. Therefore, you need to check with the fund houses (AMC) that accept investments from US/Canada based NRIs. Also, declarations need to be made by NRIs, before investing. At times, things may get complicated for US-based NRIs as many fund houses do not allow investments by US-based NRIs due to the cumbersome compliance requirements of Foreign Account Tax Compliance Act (FATCA).

Tax treatment for NRI’s

An NRI could make an investment in either an equity mutual fund or a debt mutual fund. Further, the gains could either be a short-term capital gain or a long-term capital gain. The rate of taxation would depend on the type of mutual fund and the tenure of investment.

Archit Gupta, Founder & CEO ClearTax said that Long Term Capital Gains (LTCG) from equity mutual funds(gains will be long-term if they have been held for more than 1 year), after 1 April 2018, will be taxed at the rate of 10% for gains in excess of Rs 1 lakh  during a year. Short Term Capital Gains (STCG) on such equity mutual funds will be taxed at 15%.

“In the case of debt funds, those that are held for a tenure less than three years, the gains are added to the NRI’s income and taxed are slab rates. If the debt mutual funds are held for greater than 3 years, the LTCG will be taxed at 20% with indexation or 10% without indexation benefits,” he said.