Tax Laws For Nri Mutual Fund Investments: A Guide

Non-Resident Indians (NRIs) are allowed to invest in mutual funds in India, as long as they follow the rules of the Foreign Exchange Management Act (FEMA). However, some Asset Management Companies (AMCs) do not accept mutual fund applications from NRIs in Canada and the USA due to compliance obligations related to the Foreign Account Tax Compliance Act (FATCA). To invest in Indian mutual funds, NRIs must first open an NRO (Non-Resident Ordinary) account, an NRE (Non-resident External) account, or an FCNR (Foreign Currency Non-Resident) account. They must then comply with Know-Your-Customer (KYC) regulations.

NRIs investing in mutual funds in India need to be aware of the applicable tax laws. Mutual funds are taxed as per the guidelines of the Securities and Exchange Board of India (SEBI). The returns on mutual funds are in the form of dividends and capital gains, both of which are subject to taxation. The taxes on dividends are added to the individual's taxable income and taxed according to their income tax slab rate. Capital gains are taxed differently based on the holding period and type of mutual fund.

NRIs may also benefit from currency appreciation, resulting in increased profits when the Indian rupee appreciates against their resident country's currency. Additionally, NRIs can avoid paying taxes twice on the same income thanks to the Double Taxation Avoidance Treaty (DTAA) or Agreement (DTAA) signed between India and several other countries.

Tax benefits of mutual funds for NRI investors

Non-Resident Indians (NRIs) can invest in mutual funds in India, but they must adhere to the rules of the Foreign Exchange Management Act (FEMA). To do so, they need to open an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account, or an FCNR (Foreign Currency Non-Resident) account.

NRIs can benefit from investing in Indian mutual funds in several ways. Firstly, they can easily manage their funds online from anywhere in the world. They can buy, redeem, and switch units of different mutual fund schemes, as well as opt for systematic transfers or withdrawals online.

Secondly, NRIs can profit from rupee appreciation. If the value of the Indian rupee appreciates against the currency of their country of residence, they will make more profits on their investment.

When it comes to taxation, NRIs investing in mutual funds in India need to be aware of the following:

Tax Deducted at Source (TDS)

NRIs are subject to TDS when redeeming mutual funds, and the specific rate depends on the scheme type (equity or non-equity) and the duration of the investment.

Short-term and Long-term Capital Gains

Profits from the sale of a mutual fund held for one year or less are considered short-term capital gains, while those from funds held for more than one year are considered long-term capital gains.

TDS Rates

The TDS rate for short-term capital gains is 15% for equity-oriented funds and 30% for non-equity-oriented funds. For long-term capital gains, the TDS rate is 10% without indexation for equity-oriented funds and 20% with indexation for non-equity-oriented funds.

Double Taxation Avoidance Agreement (DTAA)

NRIs can benefit from the DTAA, which is a treaty signed between India and several other countries, including the US, UK, and Canada. This agreement prevents double taxation of the same income for residents of both countries. NRIs can claim the taxes and TDS deducted in India against their tax liability in their country of residence.

Section 80C Deduction

By investing in ELSS or Equity Linked Saving Schemes, NRIs can avail of tax benefits of up to Rs. 1,50,000 under Section 80C.

Tax Return of Income

NRIs are not required to file a return of income if their total income consists only of investment income or long-term capital gains with appropriate TDS deductions. However, filing returns in India can be beneficial if their 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 fund schemes, both equity and non-equity, are considered income and are taxed according to the applicable tax slab rate.

In conclusion, while investing in mutual funds in India, NRIs should be mindful of the specific tax regulations and provisions that apply to them. By understanding the taxation aspect, they can make informed investment decisions and optimise their returns while complying with the tax laws of both India and their home country.

NRI mutual fund investors and double taxation

Non-Resident Indians (NRIs) can invest in mutual funds in India, but they must adhere to the rules of the Foreign Exchange Management Act (FEMA). To do so, they need to set up an NRE (Non-resident External) or NRO (Non-resident Ordinary) account, or a Foreign Currency Non-Resident (FCNR) account.

NRIs investing in mutual funds in India need to be aware of the following tax implications to ensure compliance with the tax laws of India and their home country:

Tax Deducted at Source (TDS)

NRIs are subject to TDS when redeeming mutual funds. The specific rate is determined by the scheme type (equity or non-equity) and the duration of holding the funds. TDS is charged at the highest applicable rate, and if the NRI falls into a lower tax slab, they are eligible for a refund when filing their returns.

Short-term and Long-term Capital Gains

Capital gains are profits earned from the sale of a mutual fund. If the holding period is one year or less, it is considered a short-term capital gain. If the holding period is more than one year, it is considered a long-term capital gain. The tax rate for capital gains depends on the type of scheme and the holding period.

Tax on Short-term and Long-term Capital Gains

For equity mutual funds, short-term capital gains (held for less than a year) are taxed at 15%. Long-term capital gains (held for more than a year) exceeding Rs. 1 lakh are taxed at 10% without the indexation benefit.

For debt-oriented funds, short-term capital gains are taxed according to the NRI's income tax bracket. Long-term capital gains (held for more than three years) are taxed at 20% with indexation or 10% without indexation.

Double Taxation Avoidance Treaty (DTAA)

NRIs can benefit from the DTAA, which is an agreement between India and several other countries, including the US, UK, and Canada, to prevent double taxation of the same income for residents. Under the DTAA, NRIs can claim a deduction in their resident country for taxes already paid in India on a particular income.

Section 80C Deduction

By investing in ELSS or Equity Linked Saving Schemes, NRIs can avail of tax benefits of up to Rs 1,50,000 under Section 80C.

Taxation of Dividends

Dividends received from dividend schemes, both equity and non-equity, are considered income and are taxed according to the applicable tax slab rate.

Key Terms

• Capital Gains Tax: A tax levied on the profit from selling assets like property or investments, categorised into Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG) based on the holding period.
• TDS: A mechanism where the payer deducts a percentage of tax from the payment made to the recipient and submits it to the government on their behalf to ensure tax compliance.
• LTCG: Profit obtained from the sale of assets held for a specified period, subject to a different tax rate and benefits like indexation.
• STCG: Profit gained from the sale of assets held for a short duration, taxed at a different rate than long-term gains.
• Indexation: A technique to adjust the cost of acquiring an asset for inflation, reducing the tax burden on LTCG.
• IDCW: A dividend payout option where unitholders receive investment profits and a portion of their invested money back at regular intervals.
• 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.

Mutual fund regulations for NRIs

Non-Resident Indians (NRIs) are allowed to invest in mutual funds in India, as long as they adhere to the rules of the Foreign Exchange Management Act (FEMA). To invest in mutual funds, an NRI must open an NRO (Non-Resident Ordinary) account, an NRE (Non-resident External) account, or an FCNR (Foreign Currency Non-Resident) account. This is because, under FEMA, an NRI cannot invest with a regular savings account in a bank, nor can they invest in foreign currency.

There are some restrictions on NRIs from the USA and Canada due to compliance obligations related to the Foreign Account Tax Compliance Act (FATCA). However, some fund houses permit these NRIs to invest under specific conditions and via offline transactions.

To complete the KYC (Know-Your-Customer) process, NRIs must submit a copy of their passport, including the pages with their name, address, age, photo, and other relevant information. They must also provide proof of residence. At times, fund houses do not accept e-KYC and require in-person verification, which can be completed at the Indian Embassy in the country of residence.

When making payments via cheque or draft, NRIs must attach a Foreign Inward Remittance Certificate (FIRC) to verify the source of funds. In the absence of an FIRC, a letter from the bank is also acceptable.

After redeeming the corpus, investments, and gains, the Asset Management Company (AMC) will credit the amount, after any applicable tax deductions, to the NRI's bank account. The amount can also be credited directly to the NRO/NRE account, and if the NRI has opted for a non-repatriable investment, the amount can only be credited to the NRO account.

NRIs investing in mutual funds in India need to consider the following tax implications:

• Tax Deducted at Source (TDS): NRIs are subject to TDS when redeeming mutual funds, with the specific rate determined by the scheme type and duration of holding the funds.
• Short-term Capital Gains: Profits earned from the sale of a mutual fund with a holding period of one year or less.
• Long-term Capital Gains: Profits earned from the sale of a mutual fund with a holding period of more than one year.
• TDS on Distributed Income under IDCW Option:
• Other than Equity Oriented Fund:
• Listed: 20% with indexation
• Unlisted: 10% without indexation

The tax rate for capital gains on mutual funds depends on the type of scheme and the holding period. For equity mutual funds, a holding period of less than one year is considered short-term, with a 15% tax on short-term capital gains. Long-term capital gains, exceeding Rs 1 lakh per year, are taxed at 10% without the indexation benefit.

For debt-oriented funds, short-term capital gains are taxed according to the NRI's income tax bracket. Holding the fund for more than three years results in a 20% tax on long-term capital gains with indexation benefit, or 10% without indexation.

NRIs may be concerned about double taxation, but this can be avoided under the Double Taxation Avoidance Treaty (DTAA) or Agreement (DTAA). India has a DTAA with several countries, including the US, UK, and Canada. This allows NRIs to claim a deduction in their resident country for taxes paid in India on the same income.

NRIs paying higher TDS than their lower tax slab can claim a refund when filing taxes. TDS initially deducts income tax at the highest rate, so if an NRI's tax slab is lower, they can reclaim the extra tax through refunds.

NRIs are not required to file a return of income if their total income consists only of investment income or long-term capital gains with appropriate TDS deductions. However, filing returns in India can be beneficial, as those in a lower tax slab are eligible for a refund on the TDS deduction.

Types of mutual funds for NRI investors

NRIs can invest in mutual funds in India, but they must comply with the Foreign Exchange Management Act (FEMA) and open an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account. NRIs can invest in mutual funds directly or by granting power of attorney to someone else.

There are three main types of mutual funds for NRI investors: debt, equity, and hybrid funds.

Debt funds invest in bonds, securities, and government bonds. They are taxed at 20% after indexation for short-term capital gains and 10% without indexation for long-term capital gains.

Equity funds primarily invest in stocks. They are taxed at 15% for short-term capital gains and 10% for long-term capital gains.

Hybrid funds invest in both stocks and debt instruments. They are taxed at 10% without indexation for short-term capital gains and 20% without indexation for long-term capital gains.

Other types of mutual funds that NRIs can invest in include:

• Multi-cap mutual funds
• Thematic mutual funds
• Large-cap mutual funds
• Mid-cap mutual funds
• Small-cap mutual funds
• Aggressive hybrid mutual funds

Tax implications for NRIs investing in mutual funds

Non-resident Indians (NRIs) can invest in mutual funds in India, but they must adhere to the rules of the Foreign Exchange Management Act (FEMA). To do so, they need to open an NRO (Non-Resident Ordinary) account, an NRE (Non-resident External) account, or an FCNR (Foreign Currency Non-Resident) account.

NRIs investing in mutual funds in India need to be mindful of the following tax implications:

Tax Deducted at Source (TDS)

NRIs are subject to TDS when redeeming mutual funds. The specific rate is determined by the scheme type (equity or non-equity) and the duration of the holding period.

Short-term Capital Gains

Profits earned from the sale of a mutual fund with a holding period of one year or less are considered short-term capital gains. The TDS rate for short-term capital gains on equity mutual funds is 15%, while for non-equity schemes, it is taxed at the individual's income tax bracket, which can be up to 30%.

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. For equity-oriented funds, long-term capital gains exceeding Rs 1 lakh per year are taxed at 10% without the indexation benefit. For non-equity schemes, long-term capital gains are taxed at 20% with indexation.

TDS on Distributed Income under IDCW Option

• Other than Equity-Oriented Fund: TDS is charged at 20% with indexation for listed funds and 10% without indexation for unlisted funds.
• Equity-Oriented Funds: TDS is charged at 10%.

The TDS is initially charged at the highest applicable rate, and if an NRI falls into a lower tax slab, they are eligible for a refund when filing their returns.

Taxation of Dividends

Dividends received from both equity and non-equity schemes 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 DTAA, a treaty signed between India and several other countries, including the US, UK, and Canada, to prevent double taxation. Under the DTAA, NRIs can claim taxes and TDS deducted in India against their tax liability in their country of residence.

Section 80C Deduction

By investing in ELSS (Equity Linked Saving Schemes), NRIs can avail tax benefits of up to Rs 1,50,000 under Section 80C.

It is important to note that some Mutual Fund houses impose restrictions on NRIs from the USA and Canada due to compliance obligations related to the Foreign Account Tax Compliance Act (FATCA). However, certain fund houses permit these NRIs to invest under specific conditions, usually via offline transactions.

Frequently asked questions