Mutual Funds For Nris: Best Indian Investment Options

Non-Resident Indians (NRIs) can invest in mutual funds in India, but there are a few things to keep in mind. Firstly, NRIs must comply with the Foreign Exchange Management Act (FEMA) regulations and have either an NRE, NRO, or FCNR account to invest. Secondly, they need to complete the Know Your Customer (KYC) process and submit documents such as a copy of their passport, proof of residence, and bank statements. NRIs can invest directly using their NRE/NRO accounts or through a Power of Attorney (PoA). Mutual funds offer NRIs a way to diversify their investment portfolio and benefit from India's growing economy. Additionally, NRIs can take advantage of rupee appreciation, which can lead to higher returns. When choosing a mutual fund, NRIs should consider their financial situation, investment goals, risk tolerance, and portfolio diversity.

NRI Mutual Fund Regulations

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).

FEMA Regulations

According to FEMA, an NRI is defined as:

> a person resident outside India who is a citizen of India.

FEMA also states that NRIs cannot use the regular savings accounts available to Indian citizens. Therefore, to invest in Indian mutual funds, NRIs must open either an NRE (Non-Resident External Rupee) Account, an NRO (Non-Resident Ordinary Rupee) Account, or a Foreign Currency Non-Resident (FCNR) Account.

Income Tax Act, 1961

The Income Tax Act, 1961, defines an NRI as:

> an Indian citizen who is a foreign resident for a minimum of 120 days in that financial year or [...] for a minimum of 365 days in the previous four financial years and at least 60 or more days in that year.

However, there is a caveat. If the total income accruing in India during the financial year is more than Rs 15 lakh, then the 120-day rule will apply. If the total taxable income in India is up to Rs 15 lakh, then a person is considered an NRI if they reside outside India for at least 182 days in that financial year.

KYC Requirements

To start investing in Indian mutual funds, NRIs must complete the Know Your Customer (KYC) process. This involves submitting the following documents:

• A copy of the passport (including name, date of birth, photo and address)
• Recent photographs in the specified format
• Resident proof in the foreign country
• Proof of date of birth
• Foreign Inward Remittance Certificate (FIRC) if payment is made via cheque
• In some cases, in-person verification may be required

Taxation

NRIs often worry about being taxed twice on their mutual fund investments. However, if India has signed the Double Taxation Avoidance Treaty (DTAA) with the country of residence, this will not be the case.

The gains from mutual funds are taxed based on the holding period. Short-term capital gains on equity-oriented funds are taxed at 10% without indexation, while 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 investor's income tax bracket. Long-term capital gains are taxed at 20% with indexation benefit if the fund is held for more than three years.

NRI Mutual Fund Accounts

Non-Resident Indians (NRIs) can invest in mutual funds in India, but they must comply with the rules set out in the Foreign Exchange Management Act (FEMA). NRIs can invest on a repatriation or non-repatriation basis, but they must have either an NRE, NRO, or FCNR account to invest in mutual funds in India.

Setting Up an Account

Under FEMA, an NRI investor cannot use a regular savings account; they must open either a Non-resident External (NRE) or Non-resident Ordinary (NRO) account.

NRE accounts are suitable for NRIs who want to transfer money earned overseas to India. These accounts are repatriable, and only Indian Rupees can be held in the account.

NRO accounts are for NRIs to deposit their earnings in India. These accounts are only partially repatriable, up to US$1 million annually, and only Indian Rupees can be held in the account.

The Investment Process

Once an NRE or NRO account is opened, NRIs can invest in mutual funds in the following ways:

• Direct or Self: NRIs can invest directly in mutual fund schemes via regular banking channels using their NRE/NRO account. They will need to submit KYC documents, including photographs, self-attested copies of their Adhaar, PAN, passport, bank statements, and foreign residence proof. Some banks may also require in-person verification, which can be done by visiting the Indian Embassy in the investor's country of residence.
• Via Power of Attorney (PoA): NRIs can also choose to have someone else invest on their behalf. The PoA holder will need to complete the KYC process, and both the NRI and PoA holder must sign the KYC papers.

Taxation

NRIs investing in mutual funds will be taxed on their short-term and long-term capital gains. The tax rate depends on the type of mutual fund and the investor's country of residence. If India has signed the Double Taxation Avoidance Treaty (DTAA) with the investor's country of residence, they will not have to pay double taxes.

Benefits of Mutual Funds for NRIs

• Easy to Buy and Manage: NRIs can buy and manage mutual funds online from anywhere in the world through their NRI accounts.
• Portfolio Diversification: Mutual funds distribute their funds into multiple financial instruments, including equity shares and fixed-income instruments, allowing NRIs to diversify their investment portfolios.
• Potential for More Profits: If the Indian Rupee appreciates against the currency of the NRI's country of residence, they will generate more profits.

Best Performing Mutual Funds for NRIs

Some of the best-performing mutual funds for NRIs in India include:

• Parag Parikh Flexi Cap Fund
• UTI Nifty Index Fund
• Nippon India Small Cap Fund
• PGIM India Midcap Opportunities Fund

NRI Mutual Fund Taxation

The taxation rules for NRIs (Non-Resident Indians) investing in Indian mutual funds are similar to those for residents. NRIs can invest in both equity and debt mutual funds, but the taxation depends on the type of fund and its holding period.

For equity mutual funds, a holding period of less than a year is considered short-term, and a 15% tax on short-term capital gains is applicable. If held for more than a year, it is considered long-term, and a 10% tax is applied if capital gains are more than Rs 1 lakh during that year.

Debt mutual funds are treated differently for taxation purposes. If held for less than three years, they are considered short-term, and the capital gains are added to the NRI's income and taxed at 30%. When held for more than three years, they become long-term, and the tax on the long-term capital gains is 20% with indexation, or 10% without indexation.

NRIs may be concerned about double taxation, as they may be earning an income in their country of residence and also in India. However, under the Double Tax Avoidance Agreement (DTAA), NRIs can avoid paying taxes twice. India has a DTAA with several countries, including the US, UK, Canada and Australia. This means that if an NRI has already paid tax in India on a particular income, they can claim a deduction in their country of residence for the same income.

When investing in mutual funds, NRIs must adhere to the Foreign Exchange Management Act (FEMA) and open either an NRE (Non-Resident External) account, an NRO (Non-Resident Ordinary) account, or an FCNR (Foreign Currency Non-Resident) account.

Before investing, NRIs must complete the Know Your Customer (KYC) process and submit relevant documents, including a copy of their passport, proof of residence, and bank statements.

Upon redemption of mutual fund units, the taxes deducted from the returns are either the Tax Deduction at Source (TDS) or the Capital Gains Tax, which can be Short-Term or Long-Term, depending on the holding period.

NRI Mutual Fund Redemption

NRIs can redeem their mutual fund investments by following the redemption procedure mentioned by the respective fund houses. Different fund houses follow different procedures for redemption by NRIs.

The Asset Management Company (AMC) will credit the total returns to the NRE or NRO account of the NRI after tax deduction. The AMC may also write a cheque for the same.

On redemption of mutual fund units, the tax will be deducted at the source of the capital gains made on the investment. TDS rates for NRIs are 10% for long-term capital gains and 15% for short-term capital gains on equity-oriented funds. For non-equity-oriented funds, TDS is 20% with indexation for long-term capital gains on listed schemes and 10% without indexation for unlisted schemes. TDS is also applicable at the highest rate for short-term capital gains.

NRIs can claim a TDS refund on mutual funds if the TDS amount is higher than their actual tax liability. To do so, they need to file an income tax return in India and claim the refund.

It is important to note that the redemption proceeds can be remitted abroad after deducting taxes. Additionally, the right of repatriation of the amount invested and earned is only valid as long as the individual remains an NRI.

NRI Mutual Fund Benefits

Non-resident Indians (NRIs) can invest in mutual funds in India, and doing so offers several benefits. Here are some key advantages of mutual fund investment for NRIs:

Hassle-Free Management:

NRIs can buy and manage their mutual fund investments from anywhere in the world. They can invest, buy, switch, or redeem their investment portfolios online through asset management company portals or mutual fund houses. This means that NRIs do not need to be physically present in India to manage their mutual funds.

Portfolio Diversification:

Mutual fund investments allow NRIs to diversify their investment portfolios. Mutual funds distribute their funds across multiple financial instruments, including fixed deposit options and equity shares. As a result, NRIs can enjoy the benefits of a diversified portfolio without being physically present in India.

Low Risk and Decent Returns:

Mutual funds are considered a low-risk investment option compared to other alternatives. They offer decent returns and help generate a smooth flow of income in the form of gains.

Flexibility:

Mutual fund investments offer flexibility with features such as systematic investment plans, systematic withdrawal plans, and dividend reinvestment options.

Affordability:

Mutual funds are available in units, making them affordable for small investors. Due to the large corpus, even a modest investor can benefit from the fund's investment strategy.

Liquidity:

Open-ended mutual fund schemes provide the option to withdraw or redeem money at any time based on the current net asset value (NAV).

Professional Management:

Mutual funds are managed by expert fund managers who analyse investment options based on experience and research. These fund managers have access to information and insights from leading economists and analysts worldwide, enabling them to make more informed investment decisions.

Potential for Higher Returns:

Due to differences in currency exchange rates, NRIs can sometimes buy mutual funds at cheaper rates in India compared to their resident country. This provides the potential for higher returns if the Indian rupee appreciates against their home currency.

Low Costs:

Mutual funds benefit from economies of scale, resulting in lower costs for investors. Reduced fees are achieved through brokerage, custodial, and other fee savings.

Investor Protection:

The mutual fund sector in India is regulated to safeguard investors' interests. This provides NRIs with peace of mind and ensures that their investments are protected.

Overall, mutual funds offer NRIs a simple and flexible way to invest in India's growing economy, with the potential for decent returns and the advantage of professional fund management.

Frequently asked questions