Mutual Funds: Are Nris Missing Out On Indian Investments?

Non-Resident Indians (NRIs) often seek investment opportunities in their home country, and mutual funds are a popular choice due to their potential for wealth creation and diversification. NRIs can invest in mutual funds in India, but there are specific rules and requirements that must be followed. In this article, we will explore the process, benefits, and considerations for NRIs looking to invest in India's mutual funds. We will also discuss the different types of accounts and investment methods available to NRIs, as well as the tax implications of their investments.

• Taxation depends on the type of mutual fund and holding period (short-term or long-term capital gains tax).|
• Double Taxation Avoidance Treaty (DTAA) prevents double taxation if India has signed an agreement with the NRI's country of residence.
• Tax Deduction at Source (TDS) or Capital Gains Tax may be applicable on redemption of mutual fund units.

The benefits of investing in Indian mutual funds for NRIs

Non-Resident Indians (NRIs) often seek investment opportunities in their home country, and mutual funds are a popular choice due to their potential for wealth creation and diversification. Here are some benefits of investing in Indian mutual funds for NRIs:

Remote Management:

NRIs can invest, monitor, and manage their mutual fund investments from anywhere in the world. They can perform transactions, including investments and withdrawals, securely online through their NRI accounts without the need to be physically present in India.

Portfolio Diversification:

Mutual funds offer NRIs an excellent opportunity to diversify their investment portfolios. By investing in mutual funds, they gain exposure to multiple financial instruments, such as fixed deposits and equity shares. This diversification helps mitigate risk and enhances the potential for higher returns.

Range of Investment Options:

The Indian mutual fund industry provides a wide range of options to cater to the diverse investment goals and risk profiles of NRIs. NRIs can choose from equity funds, debt funds, and hybrid funds, allowing them to select the investment strategy that aligns with their financial objectives and risk tolerance.

Contribution to India's Economy:

By investing in Indian mutual funds, NRIs can actively participate in and contribute to the country's economic growth. They become integral contributors to India's financial narrative, enriching their investment portfolios while also supporting the nation's economic development.

Well-Regulated Environment:

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). This regulatory body ensures transparency and protects the interests of investors, providing NRIs with a safe and secure investment environment.

Repatriation Benefits:

NRIs can benefit from repatriation options when investing in Indian mutual funds. They can choose between repatriation and non-repatriation accounts, allowing them to transfer funds (including capital investment and gains) from their NRI accounts in India to their overseas accounts.

In conclusion, investing in Indian mutual funds offers NRIs a range of benefits, including convenience, diversification, and the ability to participate in India's economic growth. With the potential for wealth creation and a well-regulated environment, mutual funds are a popular and attractive investment option for NRIs seeking to invest in their home country.

How NRIs can invest in Indian mutual funds

Non-resident Indians (NRIs) can invest in Indian mutual funds by following a few steps and adhering to the regulations set by the Indian government. Here is a detailed guide on how NRIs can invest in Indian mutual funds:

Step 1: Understanding the Basics

Before investing in Indian mutual funds, NRIs should understand the basics of the Indian market and the specific regulations that apply to them. The Indian market offers a range of investment options, including equities, mutual funds, fixed deposits, and debt funds.

Step 2: Setting up an NRE or NRO Account

NRIs must set up either a Non-Resident External (NRE) or a Non-Resident Ordinary (NRO) bank account with an Indian bank. This is because Asset Management Companies (AMCs) in India cannot accept foreign currency investments. All investments made by NRIs must be in Indian Rupees. The NRE account is suitable for those who want to transfer their overseas earnings to India, while the NRO account is for managing Indian earnings.

Step 3: Choosing a Mutual Fund Investment Approach

There are two primary methods for NRIs to invest in Indian mutual funds: direct investment or through a Power of Attorney (PoA).

Direct Investment:

This approach involves submitting an application and the required Know Your Customer (KYC) documents. In-person verification may be required, which can be done by visiting the Indian embassy in the NRI's country of residence.

Power of Attorney (PoA):

NRIs can appoint a trusted individual in India as their PoA to make investment decisions on their behalf. Both the NRI and the PoA must sign all KYC documents for this method.

Step 4: Regulatory Compliance and Documentation

To ensure a smooth investment process, NRIs must adhere to regulatory requirements and submit specific documentation:

• KYC Compliance: Essential documents include a passport copy, PAN card, recent photograph, bank statement, and proof of address.
• FEMA Regulations: Investments must comply with the Foreign Exchange Management Act (FEMA).
• Foreign Inward Remittance Certificate (FIRC): For mutual fund investments, payments must be made via cheque or demand draft, along with an FIRC to verify the funds' source.
• Redemption Process: Upon maturity or exit from a mutual fund investment, the proceeds are credited to the NRE/NRO account after tax deductions. For non-repatriable investments, proceeds are credited only to an NRO account.

Step 5: Tax Considerations

Tax implications are crucial for NRIs investing in India. The risk of double taxation is mitigated if India has a Double Taxation Avoidance Treaty (DTAA) with the NRI's country of residence. The Foreign Account Tax Compliance Act (FATCA) mandates that all Indian and NRI investors file a FATCA self-declaration.

Benefits of Investing in Indian Mutual Funds for NRIs:

• Hassle-free Management: NRIs can buy and manage their MF investments from anywhere in the world online through their NRI accounts.
• Portfolio Diversification: Mutual fund investments allow NRIs to diversify their investment portfolio across various financial instruments, including FDs, equity shares, debt instruments, etc.
• Attractive Returns: Mutual funds offer low risk and decent returns compared to other investment options, and investors can start investing with a small capital of ₹500.
• Participate in India's Growth: NRIs can actively participate in India's economic growth and development by investing in mutual funds.

In conclusion, NRIs can invest in Indian mutual funds by following the steps outlined above and staying compliant with the necessary regulations. This approach allows them to benefit from India's thriving economy and diverse investment options while effectively managing their financial stability and future.

Taxation for NRIs investing in Indian mutual funds

Tax Deducted at Source (TDS)

When NRIs redeem their mutual fund investments in India, they are subject to Tax Deducted at Source (TDS). The TDS rate depends on the type of mutual fund and the holding period. For equity-oriented funds, the TDS rate is 10% for long-term capital gains (held for more than a year) and 15% for short-term capital gains (held for a year or less). For non-equity-oriented funds, the TDS rate is 20% with indexation for long-term capital gains on listed schemes and 10% without indexation for long-term capital gains on unlisted schemes. If the investment period is less than three years for non-equity mutual funds with less than 35% equity holdings, the gains are taxed as per the investor's income tax slab rate.

Capital Gains Tax

Capital Gains Tax is levied on the profit made from selling mutual fund units. For NRIs, this tax applies to both equity-oriented and non-equity-oriented funds. The tax rate for long-term capital gains on equity-oriented funds is 10% without indexation benefits, with an overall exemption limit of ₹1 lakh. For short-term capital gains on equity-oriented funds, the tax rate is 15%. For non-equity-oriented funds, long-term capital gains are taxed at 20% with indexation benefits if the investment is held for more than three years.

Tax Return of Income

NRIs are required to file tax returns in India, even if their income does not exceed the basic exemption limit of ₹2.5 lakhs. However, if their income consists solely of investment income or long-term capital gains with appropriate TDS deductions, they may not need to file a return. Filing returns can be beneficial if the NRI's income falls into a lower tax slab, as they may be eligible for a refund on the TDS deduction.

Taxation of Dividends

Dividends received from mutual funds are taxed as income for the investor. The TDS rate on dividend income for NRIs is 20%, excluding cess and surcharge.

Double Taxation Avoidance Agreement (DTAA)

To prevent double taxation, India has signed DTAA treaties with several countries, including the USA, Canada, the UK, and more. NRIs can claim tax credits in their country of residence for the taxes paid in India. This helps offset taxes and TDS deducted in India against their total tax liability.

Section 80C Deduction

NRIs can invest in Equity Linked Savings Schemes (ELSS) and claim a deduction of up to ₹1,50,000 from their total income under Section 80C of the Income Tax Act, 1961. This can help reduce their overall tax liability.

Key Considerations

• NRIs need to have either an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account to invest in Indian mutual funds.
• They must comply with Know Your Customer (KYC) regulations and provide necessary documentation.
• Some mutual fund houses may impose restrictions on NRIs from the USA and Canada due to compliance with the Foreign Account Tax Compliance Act (FATCA).
• It is essential to understand the specific tax regulations and provisions that apply to NRIs investing in Indian mutual funds to optimise returns and comply with tax laws in both their home country and India.

The best mutual funds for NRIs to invest in

Investing in Indian mutual funds is a great option for NRIs, as it allows them to participate in the country's growth and benefit from the appreciation of the Indian rupee. However, before investing, NRIs must ensure they comply with the Foreign Exchange Management Act (FEMA) regulations and have the necessary accounts, such as NRE or NRO, to facilitate their investments. Here are some of the best mutual funds for NRIs to consider:

ICICI Prudential Credit Risk Fund

ICICI Prudential is one of the leading mutual fund houses in India, and its Credit Risk Fund offers NRIs an opportunity to invest in a well-diversified portfolio of debt and money market instruments. This fund aims to generate optimal returns while maintaining a balance between safety and a steady income stream.

Parag Parikh Flexi Cap Fund

The Parag Parikh Flexi Cap Fund is a flexible equity fund that invests across large, mid, and small-cap stocks. This fund has a strong track record of delivering consistent returns and is suitable for NRIs seeking long-term capital appreciation.

UTI Nifty Index Fund

The UTI Nifty Index Fund is an index fund that aims to replicate the performance of the Nifty 50 Index. This fund provides NRIs with exposure to the top 50 companies listed on the NSE, offering a well-diversified investment option.

Nippon India Small Cap Fund

Nippon India Small Cap Fund is a small-cap equity fund that focuses on investing in small-cap companies with high growth potential. This fund is suitable for NRIs who are comfortable with higher risk and seek long-term capital appreciation.

PGIM India Midcap Opportunities Fund

The PGIM India Midcap Opportunities Fund invests primarily in mid-cap stocks, offering NRIs exposure to the dynamic mid-cap segment of the Indian equity market. This fund aims to provide long-term capital appreciation by investing in a diversified portfolio of mid-cap companies.

To invest in these mutual funds, NRIs must follow the necessary procedures, including setting up the required accounts, completing the Know Your Customer (KYC) process, and deciding on a self-investment or power of attorney (PoA) route. It is essential to carefully review the scheme information document (SID) of the desired mutual fund and consult with financial advisors to make informed investment decisions.

The process of redeeming Indian mutual funds for NRIs

The process of redeeming Indian mutual funds for Non-Resident Indians (NRIs) involves several steps and considerations. Here is a detailed guide on the redemption process:

• Understanding Redemption Procedures: Different fund houses in India follow varying procedures for redemption by NRIs. It is important to refer to the specific fund house's guidelines for detailed instructions on their redemption process.
• Redeeming Mutual Fund Units: To initiate the redemption process, NRIs need to follow the redemption procedure mentioned by their respective fund houses. This typically involves submitting a redemption request, which can often be done online through the fund house's website or mobile application.
• Tax Deductions: When redeeming mutual fund units, NRIs should be aware that taxes will be deducted from the redemption amount. The type and amount of taxes depend on the nature of the mutual fund and the duration of the investment. Capital gains tax and Tax Deducted at Source (TDS) are applicable to NRI mutual fund redemptions.
• Receiving Redemption Amount: After the applicable taxes have been deducted, the Asset Management Company (AMC) will credit the remaining amount (corpus or investment + gains) to the NRI's bank account. This amount can be credited to the NRI's NRE or NRO account. Alternatively, the AMC may issue a cheque for the redemption amount after tax deductions.
• Repatriation Considerations: NRIs should be mindful of repatriation rights when redeeming mutual funds. The investment carries the right of repatriation of both the invested amount and any earnings, but only while the investor maintains their NRI status.
• Double Taxation Avoidance: If India has signed the Double Taxation Avoidance Treaty (DTAA) with the NRI's country of residence, they can avoid double taxation. In such cases, NRIs can claim tax relief in their home country if they have already paid taxes in India.
• Tax Compliance: NRIs must comply with the tax regulations of both India and their country of residence. It is essential to understand the tax implications of redeeming mutual funds in India, including any applicable capital gains tax and TDS.
• Documentation: Proper documentation is crucial for a smooth redemption process. NRIs may be required to submit documents such as a copy of their passport, proof of residence in their current country, and a remittance certificate (FIRC) if payment was made via cheque or demand draft.
• In-Person Verification: Some fund houses may require in-person verification as part of the Know Your Customer (KYC) process. NRIs can typically comply with this requirement by visiting the Indian Embassy in their country of residence.
• Special Considerations for US and Canadian NRIs: NRIs based in the United States and Canada may encounter additional paperwork and compliance requirements under the Foreign Account Tax Compliance Act (FATCA). Certain fund houses may have specific conditions for accepting investments from NRIs residing in these countries.

Frequently asked questions