Mutual Funds In India: A Smart Nri Investment?

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 indeed invest in mutual funds in India, provided they adhere to the rules set by the Foreign Exchange Management Act (FEMA). By investing in mutual funds, NRIs can directly benefit from India's economic growth and contribute to the country's financial narrative. This paragraph introduces the topic of NRI investments in Indian mutual funds, highlighting the popularity of this investment avenue among NRIs and providing an overview of the requirements and benefits associated with it.

NRI Mutual Fund Investment Accounts: NRE and NRO

NRIs can invest in mutual funds in India using either an NRE or an NRO account. The choice between the two depends on their investment goals and the source of their investment amount.

NRE Account for Mutual Fund Investments:

An NRE (Non-Resident External) account is a rupee account that allows NRIs to deposit their foreign earnings in India. NRIs can use an NRE account to invest in mutual funds on a full repatriable basis, meaning the redemption proceeds can be transferred to a bank account abroad. When the investment is made through funds in an NRE account, the proceeds can be transferred to both NRE and NRO accounts.

NRO Account for Mutual Fund Investments:

An NRO (Non-Resident Ordinary) account is a rupee account opened by NRIs for depositing their Indian or foreign currency earnings. NRIs can use funds from an NRO account to invest in Indian mutual funds, but on a non-repatriable basis. There are some restrictions on repatriating funds to a foreign country where the investor resides. Additionally, the redemption proceeds will be credited only to an NRO account.

FCNR Account:

An FCNR (Foreign Currency Non-Resident) account is similar to an NRE account, except the funds are held in one of six acceptable foreign currencies.

It is important to note that income from mutual funds is repatriable only if the investment is made via an NRE/FCNR account or through inward remittances from overseas via normal banking channels. TDS (Tax Deducted at Source) will be applicable when redemption is made to any of the accounts.

NRIs can choose to invest directly using these accounts or by granting a Power of Attorney (PoA) to a trustworthy person who can invest on their behalf.

Investing in Mutual Funds: Direct or Self

Non-Resident Indians (NRIs) can choose to invest directly in mutual funds in India. This method offers several advantages in terms of control and flexibility. By investing directly, NRIs can make informed decisions based on their financial goals and market research. This approach empowers them to have complete control over their investment choices.

To invest directly, NRIs can utilise their Non-Resident External (NRE) or Non-Resident Ordinary (NRO) accounts. NRE accounts are ideal for those looking to transfer their foreign earnings to India, as they offer tax-free interest on deposited funds. On the other hand, NRO accounts are designed for managing income generated in India, such as rental income or proceeds from property sales. NRO accounts also offer the advantage of repatriation, subject to applicable taxes.

When investing directly, NRIs must submit Know Your Customer (KYC) documents, which typically include a passport, visa, foreign address proof, Indian address proof, Permanent Account Number (PAN) card, and overseas bank account details. Some banks may also require in-person verification, which can be done at the Indian Embassy in the NRI's country of residence.

Another important consideration for NRIs is taxation. By adhering to the Foreign Exchange Management Act (FEMA), NRIs can benefit from double taxation avoidance treaties (DTAA) signed between India and their country of residence. This ensures that they do not have to pay double taxes on their mutual fund investments.

Direct investment in mutual funds offers NRIs a straightforward and autonomous approach to investing in India's thriving economy. It allows them to have full autonomy over their investment decisions and provides the flexibility to align their investments with their financial objectives.

In conclusion, the "direct or self" option for NRI mutual fund investment empowers individuals to take control of their financial journey, make informed choices, and potentially achieve their investment goals in India's dynamic market.

Power of Attorney (PoA)

Types of Power of Attorney:

There are several types of PoA, each catering to specific needs and circumstances:

• General Power of Attorney (GPA): Grants broad powers to the attorney to manage diverse affairs, including property and financial matters.
• Specific Power of Attorney (SPA): Restricts the agent's authority to specific tasks, ensuring focused delegation of powers.
• Property Power of Attorney: Authorises the agent to handle real estate transactions like buying, selling, or managing property.
• Limited Power of Attorney: Similar to SPA, it confines the agent's authority to a defined set of tasks.
• Durable Power of Attorney (DPA): Remains valid for the lifetime of the executor, unless revoked. It can include a clause stating that the attorney's power remains valid even if the principal becomes incapacitated.

Benefits of PoA for NRIs:

• Remote Decision-Making: NRIs can authorise their agent to make crucial decisions on their behalf, eliminating the need for constant physical presence in India.
• Transaction Facilitation: The appointed attorney can execute property-related tasks, such as buying, selling, leasing, or managing rentals, expediting transactions.
• Legal Formalities: The attorney can handle legalities, documentation, and compliance with local laws and regulations, which can be challenging for NRIs from abroad.
• Timely Response to Emergencies: In property-related emergencies, the attorney can act promptly, preventing delays and minimising potential risks.
• Continuous Oversight: The appointed attorney can ensure ongoing maintenance, repairs, and address tenant issues, safeguarding the property's value.

Executing PoA in India:

NRIs can execute PoA by visiting the Sub-Registrar's office in India. The process typically involves drafting the PoA on a non-judicial stamp paper, providing necessary ID proofs and photographs, and finalising the deed. Registration of PoA is not mandatory as per the Indian Registration Act, 1908, unless it is executed for the sale of an immovable asset, as ruled by the Supreme Court of India.

Executing PoA Outside India:

NRIs residing in another country can legalise their PoA through the Indian embassy in that country. Two common methods are apostillisation and legalisation:

• Apostillisation: The PoA draft is verified by local authorities under the Hague Convention, 1961, ensuring compliance with local laws. An apostille certificate verifies the authenticity of the signatory.
• Legalisation: The PoA is notarised by a local judge or authority, and then authenticated by the Indian embassy. This process is prescribed under the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948.

Important Considerations:

• The PoA must include details such as the NRI's name, overseas and Indian address, the attorney's information, the purpose, and validity period.
• The NRI (principal) must sign each page of the PoA draft.
• The PoA is valid only during the lifetime of the principal and can be revoked at any time. It also becomes null and void if the principal dies, becomes insolvent, or is declared mentally incompetent.
• A notarised PoA does not have the same legal validity as a registered PoA.
• The attorney cannot open a new bank account or start a new insurance policy on the NRI's behalf.
• The RBI bars the attorney from repatriating funds outside India but allows deposits into the NRI's NRE/NRO accounts.
• The delegation of authority does not absolve the NRI from responsibility. The NRI is ultimately accountable for the actions of the PoA holder.

Sample Format:

Below is a general format for an NRI PoA:

[Date]

I, [Name of NRI], son of [Father's Name], resident of [Overseas Address] (hereinafter referred to as the 'First Party'), do hereby appoint, nominate and constitute [Name of Attorney], son of [Father's Name], resident of [Address of Attorney] (hereinafter referred to as the 'Second Party') as my true and lawful Attorney to execute and/or do all acts, deeds, and things in my name and on my behalf in respect of the land/property situated in India.

[Details of the property and its ownership]

I am presently residing at [Current Overseas Address] and being resident outside India, I am unable to attend to/manage the day-to-day affairs of the Property effectively. Hence, I appoint the above-mentioned Attorney to act on my behalf and perform the following acts and deeds:

[List the specific powers and authorisations granted to the Attorney]

• To hold, defend, and manage the Property, including repairs, maintenance, and payment of taxes.
• To insure the Property and pay the necessary premiums.
• To prepare and sign legal documents, declarations, and applications in connection with the Property.
• To develop the Property, construct buildings, and pay the necessary charges and taxes.
• To enter into development agreements and execute relevant documents.
• To sue or be sued in my name and on my behalf in any court or legal proceedings.
• To apply for and avail of loans/financial assistance for the development/betterment of the Property.
• To execute and issue necessary documents for availing financial assistance/loans.
• To perform all acts, deeds, and things necessary for the proper management and maintenance of the Property.
• To receive money, pass receipts, and acknowledge debts on my behalf.
• To renew loans and seek extensions for repayment.
• To do all such acts, deeds, and things as may be necessary or required in connection with the Property.

[Signature of NRI/Principal]

Power of Attorney is a valuable tool for NRIs seeking to invest in mutual funds and manage their financial affairs in India. It enables them to appoint a trusted representative to make decisions and execute transactions on their behalf, ensuring their interests are safeguarded even in their absence. However, it is essential to carefully choose a reliable attorney and define the scope of powers granted to them to prevent any misuse of the PoA.

Know Your Customer (KYC) Process

The Know Your Customer (KYC) process is a crucial step for Non-Resident Indians (NRIs) who want to invest in mutual funds in India. Here is a detailed guide on the KYC requirements and procedures for NRIs:

• Passport: A valid passport is mandatory for identity proof. The relevant pages containing the holder's name, date of birth, photo, and address must be submitted.
• Visa: NRIs need to provide a copy of their visa as proof of their residency status outside India.
• Foreign address proof: Documents such as utility bills, bank statements, or rental agreements can serve as proof of overseas residence.
• Indian address proof: In some cases, NRIs may also need to provide proof of their Indian address.
• PAN card: A Permanent Account Number (PAN) card is essential for tax purposes and identity verification. It must be self-attested.
• Passport-sized photos: Recent passport-sized photographs may be required during the KYC process.
• Overseas bank account details: Details of the NRI's foreign bank account may be needed for investment transactions and to comply with Foreign Exchange Management Act (FEMA) regulations.
• Recent photographs: KYC requirements may include recent photographs in a specified format.
• Residence proof: NRIs must provide proof of their current residence in the foreign country, whether temporary or permanent.
• Date of birth proof: Official documents that verify the date of birth of the NRI investor are also part of the KYC process.
• In-person verification: Some fund houses may require in-person verification, which can be done by visiting the Indian Embassy in the NRI's country of residence.
• Additional documents for US and Canada-based NRIs: NRIs residing in the US or Canada should be aware that certain fund houses impose additional requirements due to compliance regulations under the Foreign Account Tax Compliance Act (FATCA). For example, ICICI Prudential AMC, Birla Sun Life Mutual Fund, and SBI Mutual Fund only accept investments through offline transactions with an additional client declaration.

It is important to note that specific requirements may vary across different fund houses, so NRIs should consult their chosen Asset Management Company (AMC) for a comprehensive list of KYC documents.

Taxation for NRIs

NRIs investing in mutual funds in India need to be aware of the relevant tax regulations and provisions to ensure compliance with Indian tax laws. Here is a comprehensive guide to help NRIs understand the taxation implications of their mutual fund investments in India.

Key Changes in Tax Rates for NRIs

As of July 2024, the Indian government introduced revisions to the tax rates that directly impact how NRIs manage their mutual fund investments in the country. These changes include:

• An increase in the short-term capital gains tax rate on equity mutual funds from 15% to 20%.
• An increase in the long-term capital gains tax rate on equity mutual funds from 10% to 12.5%.
• An increase in the exemption amount from INR 1 lakh to INR 1.25 lakh.
• An increase in the TDS on the sale of listed equity shares and equity mutual fund units for long-term holdings from 10% to 12.5% and for short-term holdings from 15% to 20%.
• A reduction in the long-term capital gains tax on unlisted equity shares, such as startup investments, from 20% to 12.5% without indexation.
• A reduction in the LTCG tax on real estate from 20% with indexation to 12.5% without indexation, which may result in higher taxes for some NRIs.

Tax Deducted at Source (TDS)

NRIs are subject to Tax Deducted at Source (TDS) when they redeem their mutual fund investments. The specific TDS rate depends on the type of mutual fund scheme (equity or non-equity) and the duration of the investment.

Short-Term Capital Gains

Profits earned from the sale of a mutual fund held for one year or less are considered short-term capital gains. The TDS rates for short-term capital gains vary depending on the type of fund:

• Equity-oriented funds: 10% without indexation.
• Balanced mutual funds: 10% without indexation.
• Debt-oriented funds: 20% after indexation.

Long-Term Capital Gains

Long-term capital gains refer to profits from the sale of a mutual fund with a holding period of more than one year. The TDS rates for long-term capital gains are as follows:

• Equity-oriented funds: Gains exceeding INR 1 lakh are taxed at 10% without the benefit of indexation.
• Non-equity oriented funds: Taxed according to the applicable income tax bracket.
• Listed funds: 20% with indexation.
• Unlisted funds: 10% without indexation.

TDS on Distributed Income under IDCW Option

The Income Distribution Cum Capital Withdrawal (IDCW) option in mutual funds allows unitholders to receive investment profits and a portion of their invested money at regular intervals. The TDS rates for distributed income under the IDCW option are as follows:

• Listed funds: 20% with indexation.
• Unlisted funds: 10% without indexation.

Refund for NRIs in Lower Tax Slabs

It is important to note that TDS deducts income tax at the highest applicable rate initially. If an NRI falls into a lower tax slab, they can claim a refund when filing their tax returns.

Tax Return of Income

NRIs are not required to file an income tax return solely based on their mutual fund investments or long-term capital gains, provided that the appropriate TDS deductions have been made. However, filing returns in India offers benefits, such as the ability to claim a refund on TDS deductions if their income falls within a lower tax slab.

Taxation of Dividends

Dividends received from mutual fund schemes, including equity and non-equity dividend options, are considered income for the year and are taxed according to the applicable tax slab rate.

Double Taxation Avoidance Agreement (DTAA)

NRIs can benefit from the Double Taxation Avoidance Agreement (DTAA), a treaty signed between India and certain countries to prevent double taxation of the same income. Under the DTAA, NRIs can claim tax relief in their country of residence if they have already paid taxes in India. This can be done by providing specific documents, such as a self-declaration cum indemnity format and proof of citizenship or Person of Indian Origin (PIO) status.

Section 80C Deduction

NRIs can avail of tax benefits under Section 80C of the Income Tax Act by investing in Equity Linked Saving Schemes (ELSS). This allows for deductions of up to INR 1,50,000 from their taxable income.

Key Terms to Remember

• Capital Gains Tax: A tax levied on profits from the sale of assets, categorised into Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) based on the holding period.
• TDS: Tax Deducted at Source is a mechanism where the payer deducts tax from the payment made to the recipient and submits it to the government on their behalf.
• LTCG: Refers to profits from the sale of assets held for a specified longer period, subject to specific tax rates and benefits like indexation.
• STCG: Pertains to profits from the sale of assets held for a shorter duration, taxed at a different rate than long-term gains.
• Indexation: A technique used to adjust the cost of acquiring an asset for inflation, helping reduce the tax burden on long-term capital gains.
• IDCW: Income Distribution Cum Capital Withdrawal is a dividend payout option in mutual funds that provides regular payouts of investment profits and a portion of the invested capital.
• Equity-Oriented Funds: Mutual funds that predominantly invest in equity shares of companies.
• Non-Equity Oriented Funds: Mutual funds that primarily invest in assets other than equities, such as debt instruments.

Final Thoughts

Understanding the taxation implications of mutual fund investments in India is crucial for NRIs to make informed investment decisions and ensure compliance with tax laws. By staying updated on the provisions and benefits of the DTAA and considering the tax implications, NRIs can navigate the investment landscape with confidence and maximise their financial outcomes.

Frequently asked questions