Home / Mutual Funds / Here’s all NRIs should know while investing in MFs in India

NRIs can invest in mutual funds in India, although they are subject to certain special rules when it comes to tax and foreign exchange. Several platforms allow NRIs to invest in India from their country of residence in a fully online process such as Kuvera, Clear and Scripbox. However, some mutual fund houses do not take mutual fund applications from the US or Canada because of the heavy paperwork involved under the FATCA (Foreign Account Tax Compliance Act). Fund houses that allow US/Canada residents to invest in India include some AMCs that allow US/Canada resident investments are L&T MF, Nippon India MF, PPFAS MF and UTI MF. The investments are subject to certain terms and conditions.

How to invest: First, NRIs must open an NRE (non-resident external) account or NRO (non-resident ordinary) account to invest in mutual funds in India. You can park your foreign earnings in India in Indian Rupees through the NRE account. You can park your Indian earnings in India in Indian Rupees through the NRO account. Anup Bansal, chief investment officer, Scripbox said, “NRE is a rupee account from which funds are freely repatriable, while NRO account is a rupee account which is usually non-repatriable. However, NRO funds could be remitted abroad subject to limits (up to $1 million in a year) and conditions under liberalized remittance scheme (LRS) scheme. The NRE account can be opened with funds remitted from abroad only, but NRO accounts may be opened with your local funds or funds remitted from abroad."

Complete your KYC: NRIs must complete their know your customer (KYC) requirements before investing in mutual funds in India. The NRI must submit the duly filled KYC form and attested KYC documents by courier/post to the Sebi registered intermediaries who are completing the KYC such as a mutual fund distributor or registered investment advisor. Online platforms may have enabled webcam based KYC in some cases. Raj Khosla, managing director, said, “An NRI has to submit a recent photograph, certified copies of permanent account number (PAN) card, proof of residence outside India, passport copy and a bank statement for verification purposes. In some cases, the NRI may have to visit the Indian embassy in the country of residence for in-person verification. The KYC form will also enquire whether the funds will be repatriable or not." Further, suppose you give someone POA (Power of Attorney) to operate investment procedures on your behalf. In that case, you and the POA need to sign the KYC documents. Once KYC is complete, the NRI can invest in mutual funds and give redemption orders online. However, NRIs should be mindful of the exchange rate risk involved. Indian mutual funds mostly invest in rupee denominated assets and hence the value of such investments declines if the rupee falls against other currencies. This affects the total returns that NRIs get from their mutual fund investments. However, there are fund-of-funds that invest in markets outside India also. These operate on par with other mutual funds in India.

Taxation: The NRI tax rate is not different from what Indian residents have to pay. But the tax rules for NRIs are different when it comes to the redemption of mutual funds. NRI investments are subjected to Tax deduction at Source (TDS) when redeemed. The TDS is 30% on Short Term Capital Gains (STCG) in non-equity mutual funds and 20% on Long Term Capital Gains (LTCCG) in non-equity mutual funds. For equity mutual funds, the corresponding STCG and LTCG TDS rates are 15% and 10% respectively. On dividends, the TDS is 20% along with a surcharge in case of incomes above 50 lakh and a 4% health and education cess. The mutual fund’s redemption procedure for NRIs varies across AMCs. “The mutual fund house will credit the redemption amount (investment + capital gains, if any) after deducting appropriate taxes to your specified NRE/NRO account," said Archit Gupta, Founder and CEO, Clear. AMCs accepting investments from NRIs in US and Canada in their mutual fund schemes must comply with FATCA requirements. Under FATCA, it is obligatory for mutual fund houses to share transactions of US citizens, including NRIs, with the US government under Foreign Account Tax Compliance Act. CRS applies similar requirements to NRIs from other countries.

“FATCA ensures that US citizens do not evade taxes on their overseas investments. The AMCs share client transaction details with the Indian government, which shares them with the US government. To comply with this, some AMCs may allow their US and Canadian NRI clients to invest only through the offline route and may impose additional declarations," said Gupta. However, NRIs can take advantage of the double taxation avoidance agreement (DTAA) if there is an agreement with the country of their residence. As per DTAA, the NRIs can pay tax in either country or both countries and claim tax relief from the country of their residence. “Around 90 countries have a DTAA treaty with India," said Bansal.

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