How NRIs can invest in mutual funds in India – Explained in 5 Simple Steps

How NRIs can invest in mutual funds in India - Explained in 5 Simple StepsHow NRIs can invest in mutual funds in India – Explained in 5 Simple Steps


India is a fast-growing economy. Many young individuals are aspiring to go to onsite (foreign country) for a few years to earn handsome money. Once they go on-site, they become NRIs. Many NRIs want to park their surplus funds in the country through capital market, and mutual funds, but could not find the right way and procedure to hit them. How NRIs can invest in mutual funds in India? How NRIs can redeem their mutual fund schemes? Which are the best mutual fund schemes where NRIs can invest? Here is the complete guide for NRIs to invest in mutual funds in India along tax liability. 

Also Read: Best Investment Options for NRIs to invest in India

Who are NRIs?


As per the definition given by the Foreign Exchange Management Act (FEMA) 1999, an NRI is a person residing outside India who is holding either the citizenship of India or a person of Indian origin (PIO). It further clarifies that a PIO is a foreign citizen of Indian origin residing outside India who has held the passport of India at any time or who himself or father or grandfather was a citizen of India. 

The residential status is decided under two different acts – the Income Tax Act, 1961 and under the Foreign Exchange Regulation Act, 1973. The former Act determines the status of a person on the basis of the number of days spent in a country, whereas the latter decides according to the intention of a person to be in India or outside India.

Many fund houses of India do not allow NRIs from USA and Canada to invest in their schemes because of the legal formalities involved in it. The burdensome compliance requirements under Foreign Account Tax Compliance Act (FATCA) refrains them from inviting investments from American or Canadian NRIs.  

The NRIs can invest in Indian mutual fund schemes, subject to provisions applicable in the Foreign Exchange Management Act (FEMA). All the investments in the mutual funds have to be in the local currency, i.e. the rupee. So, for the purpose of investing, an NRI needs to open any of these bank accounts with a Bank account in India.

1) Non-Resident External Rupee (NRE) account- it is a rupee account from which money can be sent back to the country of residence (repatriable).

2) Non-Resident Ordinary Rupee (NRO) account – it is a non-repatriable account.    

How NRIs can invest in mutual funds in India – 5 Simple Steps


Here are some of the steps involved where NRIs can invest in mutual funds in India. Most of the process would retain same with minor changes depending on the bank and mutual fund account.

1) NRIs has to open NRE/NRO bank account


The very first step involves opening an NRE or NRO bank account. NRIs can invest on repatriable basis using funds from the NRE account and on non-repatriable basis using funds from the NRO account. First NRIs has to decide how they want to use the funds when they want to redeem. Based on this the decision about opening NRE or NRO would depend.

2) NRI’s need to do KYC


NRI’s can invest in mutual funds in two ways. They can do it themselves or through Power of Attorney. The holder of power of attorney must be KYC compliant. The NRI needs to complete Know Your Client (KYC) formalities by filling up a form and submitting documents. The documents have to be attested by an authorized official who can carry out in-person verification.

3) Few legal formalities


Investment in mutual funds by NRIs could be little complicated, especially who are from USA and Canada. Most of the Mutual Fund houses do not allow NRIs from USA and Canada to invest in their mutual fund schemes due to cumbersome requirements under FATCA. There are few fund houses like ICICI Pru Mutual Fund, Aditya Birla Sun Life Mutual Fund and SBI Mutual Funds that would allow these investors to invest through online with additional declaration. Otherwise the documentation for NRIs in other countries is little simple compared to USA/Canada.

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4) Investing money


There are two ways of investing in mutual funds in India- self or through a power of attorney. Payment can be made by cheque drawn on the NRE or NRO account. A foreign inward remittance certificate may also be required to confirm the source of income.

5) Redemption of mutual funds


The redemption procedure is to be followed as per mentioned by the respective fund house. The proceeds shall be credited to the respective NRE/NRO bank account of the investor. On redemption of units, the tax will be deducted at source on the capital gains made on the investment. In case of investments made through NRO account, only the capital appreciation is repatriable and not the principal amount.

What is the Tax Liability for an NRI in mutual fund returns?


The redemption in mutual funds is subject to capital gains. If the funds are redeemed within 12 months, they attract short-term capital gain and if redeemed later than that, attracts long-term capital gain. The tax liability of an NRI investing in India is same as that of a resident investor. However, NRIs are subject to TDS. If the Indian Government has signed the Avoidance of Double Taxation Treaty (ADTT) with the country NRI is residing in, the NRI will be spared from paying the tax twice. For instance, India has an ADTT with the U.S. If an NRI based in the U.S. makes short-term capital gain from equity investments in India, he pays 15% tax in India. The rate for such gain in U.S. is 30%. So, the NRI is required to pay tax only for the difference in rate. He gets a deduction on the tax paid in India from his taxes payable in the U.S. One should be careful while computing income tax and if required, consult a tax consultant before paying necessary taxes.

Which are the best mutual funds NRIs can invest in India?


There are several mutual fund schemes in India. This would depend on your risk appetite, tenure and financial goal.

1) Invest in Largecap / Diversified mutual funds – Post SEBI classification of mutual fund schemes in May-2018, the majority of fund managers are betting on large cap stocks and diversified funds. Hence a large cap mutual funds have become favorite for many investors. If you are moderate to high risk taker and willing to invest for 8-10 years, you can invest in these large caps and Diversified mutual fund schemes.

2) Invest in Midcap/Smallcap Funds – Many investors believe that post SEBI Categorization of mutual funds, midcap/small cap funds have become un-favourable. However, experts believe that these midcap/small cap funds would bounce back in medium to long term. If you are a high risk taker and willing to invest for over 10 years, these could be the best bet for you.

3) Invest in Balanced Funds – Balanced funds invest up to 65% in equity and balance in debt instruments. If you are low to moderate risk taker and willing to invest for 5-10 years time frame, you can invest in Top Balanced Mutual Fund Schemes.

4) Invest in a combo – Instead of particular mutual fund categories, you can invest in Top 10 Mutual Funds that would have large cap, midcap/small cap, diversified and balanced funds. One need to invest them for 8-10 years to get good returns in such long term.

Conclusion: NRIs can invest in mutual funds following these simple steps. While NRIs in USA/Canada, the documentation process is a little cumbersome, but other NRIs can easily close the documentation part. NRIs can invest in some of the best equity mutual fund schemes.

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Suresh

How NRIs can invest in mutual funds in India – Explained in 5 Simple Steps

The Author

Suresh KP

Suresh KP i.e. me have written 1,800+ articles on this blog. I love doing analysis on various Best Investment Plans like mutual funds, Stocks, IPO's, NCD Bonds, Insurance products. If you like our blog, you can share some of the good articles on your Facebook or Twitter. This would be the BIGGEST gift which you would be giving to us.

5 Comments

Add a Comment
  1. Hi Suresh,

    I used to work in US on H1b Visa but now came back last year in the month of Dec (2018).
    Some one told me that I have to stay in India for 6 months and then I became non NRI again. Enlighten me on this please. Currently I am investing in MFs and Equity with mr NRE a/c.

    Regards,
    Deepak P

    1. please share details on manojkdamani@gmail.com I will do necessary things.

  2. Hello Sir,

    Thank you for this information.

    Regarding tax, I have few questions :

    1. If NRI invest in MF (large cap) with NRE account and also with NRO account and redum after 3 years, in that case should he/she need to file a return ? or Tax will deduct at source on capital gain for both the cases and so no need to file a return (as no other earning in account) ?

    2. I lost my father and so last year one of his fund transfer to my name. Local agent didnt make clear things and transferred the fund on my name as local residence. Now I am having 1 fund as a NRE and 1 fund as a local residence. What should I do ?

    Thank you for your help

  3. The article actually does not provide any guidance or clear any doubts or provide any guidance except saying NRI’s have to follow certain procedures which obviously is known.

    1. Sabharish, As the title indicated, this article described about how a NRI can invest in mutual funds in some simple steps. Yes, this does not talk about any doubts which NRI might have. Pls post your query, I should be able to help you on clarifying this

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