How Can NRIs Invest In Indian Mutual Funds?
Last Updated: Jan -21-2020
Indians are spread all over the globe. Non-resident Indians have made their mark across the world in different fields ranging from technology to arts, from science to hotel management. No matter where an Indian settles for job prospects or personal reasons, he or she wishes to be connected with the motherland in whichever way possible. The most common reason for being connected is to be able to send money to their relatives staying in India. To ensure that their financial intentions are fulfilled, NRIs always look out for lucrative investment opportunities.
Amidst the south-east Asian countries, Indian has an upcoming economy which is showing potential with a strong financial infrastructure. Due to introduction to new investments, it is a promising time for both domestic and international investors. Out of several investment options, mutual funds investment is one profitable investment options for the NRIs. However, NRIs must take care of aspects like taxes and foreign exchange regulations before making an investment.
Government has made it easier for NRIs to invest through the means for mutual funds. Hence, the age-old question of whether NRIs can invest in Indian mutual funds is now answered.
NRIs can easily invest in Indian mutual funds. Investing in mutual funds does not require any special approvals from the regulatory authorities. However, before investing, NRI must understand the rules for adhering to the Foreign Exchange Management Act (FEMA). Until 2018, it was difficult for NRIs from Canada or USA to invest in mutual funds due to cumbersome regulations of FATCA (Foreign Account Tax Compliance Act). These were additional regulations put forth by the country of residence upon its citizens who invest their money elsewhere. Even today, very few mutual fund companies in these countries are accepting money from NRIs.
Present scenario is different for NRI investors. NRIs can now easily make direct investments online rather than going through an agent or distributor. The only aspect they must focus on is the expense ratio. Keeping a track on the expense ratio while investing will ensure that NRIs obtain sufficient returns. Generally, the Asset Management Companies (AMCs) offer different expenses for direct investments. This is why direct investments are a better option than opting for an agent.
The biggest advantage for an NRI in making direct investment is low NAV and zero commission, which makes the expense ratio for direct investment lesser than the investment made through agent. However, there are some aspects that NRIs must consider before making the investment. NRIs cannot make investment in foreign currency. The investment must be made only in Indian Rupees.
There are three ways in which the NRI can make investments.
- NRE – Repatriable – NRE stands for Non-Resident External account. In this account, NRI can deposit and invest money in Indian rupees only. The advantage of NRE is that the NRI can easily remit the money outside without any permission from the RBI.
- NRO – Non-Repatriable – NRO stands for Non-Resident Ordinary account. This account can be opened within any Indian Bank in Indian rupees. The money cannot be withdrawn from the account.
- FCNR – Foreign Currency Non-Resident – NRI can deposit foreign exchange into this account after conversion from the bank. The money can be withdrawn from this account.
Each of the above accounts undergo KYC due diligence and NRI must mention on the mutual fund form whether the investment will be on a repatriable or non-repatriable basis. Now that we know what are the ways in which an NRI can make investments in the Indian Mutual Funds, let us look into the process of investment and documentation.
To begin with, here is a list of documents that one must submit to the fund house for opening an account.
- PAN or corresponding document
- Bank statements
- Overseas citizenship proof
- Copy of passport
- Any other document asked by the fund house
In case the payment is done through cheque or demand drafts, a Foreign Inward Remittance Certificate (FIRC) is issued by the fund house. Some of the fund houses demand an in-person verification. This condition can be fulfilled by visiting the nearest embassy or any other stated representative office by the fund house.
If the NRI does not want to endure all these formalities, then another way in which he or she can make investment is by giving the Power of Attorney (PoA) to a trusted person in India, who is eligible as per the fund house. This person can then make all necessary decisions regarding investments, like deposit, withdraw, or transfer. The NRI and the trusted individual can sign a document and create an identity certificate for the fund house formalities.
When the time for redemption comes, the fund house follows a similar process as for the Indian residents. On receiving the redemption request, the fund house either issues a cheque or can directly credit the amount into the NRE or NRO account. The redemption happens in Indian Rupees only.
Although this may seem the only thing of concern but there is another aspect that an NRI must consider, which is, Tax. The rate of taxation generally depends on the type of mutual fund investment made and the tenure of investment. Below is the tax rate for FY 2018-19
A. Capital Gain Taxation
1. Equity Oriented Schemes
i. Long term capital gains (on units held for more than 12 months) – 10%
ii. Short term capital gains (on units held for 12 months or less) – 15%
2. Other than Equity Oriented Schemes
i. Long term capital gains (on units held for more than 36 months) – 20% (listed) & 10% (Unlisted)
ii. Short term capital gains (on units held for 36 months or less) – 30%
Note: Tax on long term capital gains shall be levied if the amount exceeds Rs 1 Lac
B. Tax on Dividend
1. Equity and debt oriented schemes – Nil
C. Tax on Distributed Income-Dividend Distribution Tax (DDT) (Paid by mutual fund)
1. Equity Oriented Scheme – 10% + 12% Surcharge + 4% cess = 11.648% effectively
2. Debt Schemes (Other than infrastructure debt fund) – 25% + 12% Surcharge + 4% cess = 29.12% effectively
3. Infrastructure Debt Fund – 5% + 12% surcharge + 4% cess = 5.824% effectively.
D. Tax Deducted at Source
1. Equity Oriented Schemes
i. Short term capital gains – 15%
ii. Long term capital gains – 10%
2. Other than Equity oriented schemes
i. Short term capital gains – 30%
ii. Long term capital gains – 10% (unlisted) / 20% (listed)
The income generated by investing in Indian mutual funds can be taxable in the resident country of the NRI as well. India has signed Double Tax Avoidance Agreement (DTAA) with some countries which avoids double taxation on the income earned in the source as well as resident country. We recommend that you consult the income tax advisors of the respective countries to understand the tax structure and make an informed decision on the basis of that.
Investing in Indian mutual funds is a hassle free and a simple process which allows NRIs to stay connected with their motherland and transfer money to their dear ones with absolute ease.