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Published on Wednesday, July 17, 2019 by Chittorgarh.com Team | Modified on Thursday, May 13, 2021
Non-resident Indians (NRIs) are permitted to invest in Mutual Funds in India with certain restrictions. Investment in Mutual Funds offers an opportunity for NRIs to invest and benefit from the growth potential in India.
NRI Mutual funds investment in India is regulated under FEMA regulations by RBI in India. NRIs from the US and Canada has additional compliance requirements under FATCA act.
An NRI is an India Resident who is residing outside India for employment, studies or business for at least 182 during a financial year. NRIs are permitted to continue holding the properties they owned as Indian Residents. They can also invest in Mutual Funds, Stock, Bonds, NCDs, and FDs, etc.
A Mutual Fund is an indirect way to invest in stocks, debt funds or fixed deposits. Each Mutual fund consists of a set of stocks, bonds, NCD, etc. The Equity Mutual Funds invest in stocks only. The Debt Funds invest in corporate or government bonds. Mutual funds come with 3 investment horizon; short-term, mid-term and long-term.
Topic covered in this article:
Mutual Funds offer multiple benefits to an NRI investor such as:
Yes, FEMA rules and RBI guidelines allow an NRI/PIO/OCI to invest in Mutual Funds subject to certain conditions and adherence to processes. NRIs are also permitted to invest in listed stocks, ETFs, Debt Funds, NCDs, etc.
An NRI has to meet two major requirements before investing in Mutual Funds in India.
NRIs Mutual Fund Investment is governed by the Foreign Exchange Management Act (FEMA). Here are some of the key guidelines:
Mutual Fund companies in India can only accept investments in Indian currency. They are not allowed to accept investments in any other foreign currency. An NRI should have an NRI bank account (NRE or NRO) to invest money in Mutual Funds in India.
For a repatriable basis, the source of funds should be NRE account and for non-repatriable basis, the source of funds should be NRE or NRO account of the investor.
NRE account balance is tax-free, whereas, NRO account balance is taxable as per your applicable slab rate. NRE account deposits can be freely repatriated, whereas, NRO account balances can only be partially repatriated (up to USD 1 million per year).
NRIs can invest directly or through a Power of Attorney (PoA) holder. PoA is a document that legally authorizes a person to act on behalf of another. To invest in a mutual fund through a PoA, both the NRI investor and his PoA needs to complete their KYC. The PoA can take investment decisions (buy/sell) on your behalf in an existing fund as well as in a new fund. A PoA holder could be an Indian Resident.
To invest in Mutual Funds in India, an NRI need 3 accounts. The easiest way to open these accounts is by approaching a bank offering NRI Investment accounts (i.e. ICICI, HDFC, Axis or SBI). If you are also planning to invest in direct stocks, you should consider opening a NRI 3-in-1 account which includes a bank, demat and trading account.
Accounts required for NRI Mutual Fund Investment in India:
The saving bank account holds the money for NRI to invest in MF. Note that money should be in Indian Rupees for investing in Mutual Funds.
The demat account is an online account. It holds Mutual Funds in electronic format. The NRI Demat Account offer flexible, easy and safe way to hold your Mutual Funds from long duration.
An NRI could open a trading account with a stock broker offering mutual fund investment services to NRI. This is the easiest way to invest in stocks, a variety of MFs, ETF, Bond, NCD, and derivatives in India.
If brokers, with whom you have an NRI trading account, don't offer mutual funds, you could open an account directly with Fund Houses or Asset Management Companies (AMCs). The Mutual Fund account with an AMC is called Folio. This account is linked with the NRI demat account and NRI Bank account.
The account with a fund house limits investor in investing only in the funds offered by the asset management company (AMC). I.e. if you have an account with Reliance Mutual, you could only invest in funds offered by the company. You cannot buy funds offered by other AMCs like HDFC, Kotak or SBI.
Know your customer (KYC) is a process by which a business identifies and verifies a customer. KYC for NRI mutual fund investments is a mandatory process. Even if you have invested in mutual funds as an Indian resident and are KYC-verified, you have to again get KYC-verified as an NRI. The KYC is a one-time process.
Documents required for NRI Mutual Fund KYC
Following are the documents required for NRI in mutual funds:
Once the NRI Mutual Fund KYC is completed, you can start making online investments in Mutual Funds in India.
Note: If you are registering a PoA to invest in your behalf then the authorized person must also complete his KYC by submitting the necessary documents along with a notarized copy of the POA.
If you are an NRI based in the USA or Canada, your investments are also governed by FATCA (Foreign Account Tax Compliance Act). FATCA requires banks to share the details of the financial transaction and foreign holdings to the government of their residence i.e. the US or Canada.
Due to additional compliance requirements, not all AMC offer their schemes to the NRIs resident of America and Canada. Some of the AMCs that accept NRI investments from the US and Canadian investors include:
Once you have required accounts in place, Mutual Fund investment is easy. An NRI can invest online or offline in Mutual funds. Here are the steps to invest in mutual funds:
Following are the steps for online investment in Mutual Fund by an NRI:
The application form can either be downloaded from the AMC website or collected from any of the branches of the company. Fill the application form and sign it.
An NRI who wants to invest in MF cannot make the investment in foreign currencies. He needs to issue a cheque or draft in rupees from his NRE, NRO bank account in India. A rupee cheque or draft issued by an exchange house abroad drawn on its correspondent bank in India can also be given.
If an NRI investor invests in Mutual Funds through Rupee draft/Bankers cheque, then any of the following documents need to be attached:
Note: Post-dated Rupee cheques will not be accepted. Please ensure that the cheques are correctly dated at the time of submission of the application forms
Send or submit the completed application form along with the cheque to any of the branches or acceptance centers of the company.
An NRI can invest in Mutual funds through his trading account with a stock broker. Following are the steps:
NRIs have to pay two types of taxes on mutual fund gains; Capital Gains Taxes and Dividend Distribution Taxes.
Fund Type | Long Term Capital Gains (LTCG) | Short Term Capital Gains STCG) |
|---|---|---|
Equity Funds | 10.30%* | 15.45% |
Money market/Liquid schemes/debt funds | Listed - 20.60%** Unlisted - 10.30%*** | 30.90%^ |
The above tax rates include applicable surcharge and cess.
* On long-term capital gains exceeding Rs 1 lakh.
** With indexation.
***Without indexation.
^ Assuming the investor falls into the highest tax bracket.
The NRI Dividend Distribution Tax (DDT) based on the fund type is explained below:
Fund Type | DDT Rate |
|---|---|
Equity Mutual Funds | 11.64% |
Money market or Liquid schemes/debt schemes | 29.12% |
Infrastructure Debt Fund | 5.824% |
*The above tax rates include applicable surcharge and cess.
Direct Mutual Funds are Mutual Funds which are directly bought from the asset management companies (AMC). There is no commission paid to the middle man like brokers. This saving is passed on to the customer. This results in 1% to 2% per year higher earnings on investment.
Leading stock brokers like Zerodha and 5paisa offers direct mutual fund platform that let you buy direct mutual funds online directly from AMC.
Unfortunately, these Direct Mutual Fund platforms are not available to NRI customer because of complex compliance requirements.
But the direct mutual fund investment for NRI is available through some of the AMC's online. An NRI has to open a Mutual Fund investment account with a particular AMC to invest into direct MF through them.
ICICIdirect is a retail broking and investment service from ICICI Securities. It is one of the largest retail stock brokers in India and part of the ICICI group. The company offers a wide range of investment choices to NRIs including equity, derivatives, ETF, IPOs and Mutual Fund Services.
ICICIDirect offers online mutual fund investment services to NRIs. It is an instant and paperless mutual fund process without the hassles of filling application forms or any other paperwork.
Key Features of ICICI NRI Mutual Fund Services
Some of the important features of ICICI online mutual fund services are-
HDFC Securities, the broking arm of HDFC Bank and part of HDFC group, offers Mutual Fund Services to NRIs. It offers a 3-in-1 account combining trading, demat and bank account which facilitates online mutual fund investments to NRIs.
SBICAP Securities Limited (SSL), part of SBI group, offers a full suite of investment services to NRIs including investments in stocks, derivatives, IPOs and Mutual Funds. SBI CAP doesn't offer an online mutual fund facility to NRIs. It only accepts investment in physical form. However, the mutual fund investment services are also available for NRIs who don't have a trading account with the company.
Kotak Securities, a part of Kotak group, offers a wide range of investment options including investments in stocks, derivatives, IPOs and mutual funds to NRIs. It offers a completely online mutual fund investment services through its NRI trading account.
Axis Direct is the online brand of Axis Securities Limited, a part of Axis Bank in India. In addition to other investment options, it also offers mutual fund investment services to NRIs. The company offers NRIs the choice to select from 6000 schemes from 23 Mutual Fund companies. It also doesn't charge any transaction fee on NRI Mutual Fund Investments.
Tradeplus is a discount stock broker offering trading & investment services to NRIs from across the globe. It offers an online mutual fund platform to NRIs which allows them to invest in direct mutual funds. The platform offers several other benefits such as-
Yes, any person with the status of NRI can invest in Mutual Funds India as long as they comply with the FEMA (India) regulations as well as regulations of the country where they reside.
An NRI has to go through an account opening and KYC process before investing in Mutual Funds. They need 3 accounts including an NRI bank account, a demat account and a trading account with a broker or folio account with AMC.
Once all the accounts are set up correctly, the online mutual fund investment is very easy.
Yes, US-based NRIs can invest in Mutual Funds in India provided mutual fund house accepts investments from them. The NRI Mutual Fund investment is governed by FATCA (US) and FEMA (India) regulations.
Most stock brokers and national banks who offer NRI account to US resident NRIs also offer online Mutual Funds investment.
No, NRI's don't need a PIS certificate from RBI to invest in mutual funds. As Mutual Fund companies are only allowed to accept investments in Indian rupees, an NRI has to source the investments from a non-PIS NRE or NRO accounts.
NRIs can invest in mutual funds in India directly or through a PoA. A PoA is a legal document authorizing a designated person to operate a mutual fund folio or account on his behalf. The PoA holder can make transactions on a folio as per the powers vested to him on the PoA document.
Key facts about PoA for NRI Mutual Funds:
An NRI investor can add a POA in his existing mutual fund folio by writing a separate letter. In the letter, he can mention the details of the person authorized as POA and request to add him in the scheme. Necessary documents like Copy of the PAN card and KYC copy of the PoA holder along with the notarized PoA also need to be submitted along with the letter.
Once the PoA registration is completed, the POA starts transacting on behalf of the investor.
To cancel a POA you need to write a letter to the mutual fund company informing that you no longer want to continue with the PoA and will directly participate in the scheme.
No, NRI investors don't have to pay double taxation.
If India has signed the Double Taxation Avoidance Treaty (DTAA) with your current country of residence then you have to only pay the balance of taxes, in case taxes are higher than India, in your current country of residence.
Example: Say you pay STCG at 15% in India and the taxes for the same instrument is 25% in your present country of residence then in that case you have to pay only the balance i.e. (25%-15%) 10%.
Yes, NRIs can benefit from indexation on certain funds.
If investments are made in listed Money market/Liquid schemes/ debt funds, then 20% tax is levied on the gains after indexation. This means that NRIs can apply indexation and adjust their price of acquisition of the units and then pay taxes.
Indexation is a technique to adjust the purchase price of a fund to factor in the effect of inflation on it. A higher purchase price means a lesser profit, resulting in a lesser tax.
Say you bought 100 units of a debt fund at a NAV of Rs 10. After 3 years, you sell the units at Rs 15.
Your gains= (Rs 15-Rs 10)X 100= Rs 500.
Taxes without indexation= Rs 500 X 20.60% = Rs 103.
To calculate taxes, when indexation is applied, we need to first calculate the indexed cost of purchase using the following formula:
ICoP = Original cost of purchase * (Cost Inflation Index of the year of sale/Cost Inflation Index of the year of purchase)
Cost Inflation Index data is released by the Government of India every year.
Say CII is 1500 on the year of purchase and will be 1700 on the year of sale.
So, ICoP= 10 X 1700/1500=11.33
Your gains= (Rs 15-Rs 11.33)X 100= Rs 367.
Taxes with indexation= Rs 367 X 20.60%= Rs 75.60.
Indexation enables you to pay lesser tax on your mutual fund gains.
Yes, An NRI could buy direct Mutual Funds by opening an account (folio) with an Asset Management Company (AMC) i.e. ICICI, HDFC, Kotak, Reliance, etc.
The NRI Direct Mutual Fund investment is not available with popular brokers like Zerodha and 5paisa.
No, NRIs cannot purchase the mutual fund units in the foreign currency. An NRI has to make payment in Indian Rupees from his NRI bank account (NRE/NRO) in India.
NRI may also send a rupee check payable in Indian banks. However, NRIs have to compulsorily open an NRE or NRO Bank Account with an Indian bank to invest in India.
NRI can invest in India on both a repatriable and non-repatriable basis.
Yes, NRIs can invest in a mutual fund with just a PAN card and NRE/NRO account. They have to complete the KYC again, even if they have already done it while owing Indian resident status. On the other hand, to start investing in shares, you will need NRE/NRO accounts under PIS bank, bank account, and Demat account.
To start investing in mutual funds, you have to visit the AMC (Asset Management Company) which offers MF schemes. The next step is to register with the AMC to get your KYC done. Lastly, link your bank account with the scheme and start investing.
If you are investing with residential status like an ordinary investor, you are violating FEMA acts.
According to FEMA rules, you have to change your residential status within the specified period in your bank accounts and other investments including mutual funds. As there are different taxation rules for residents and NRIs, you are not allowed to invest freely. If you will be caught violating the Income Tax Act, you have to face penalties.
Since you have an option to continue investing even after changing the status to NRI, it is always better to update the correct residential status for any hassle-free investment.
Yes, a Power of Attorney (PoA) holder can invest in Mutual Funds on behalf of the NRI investor. He/she has the authority to sign documents for redemptions, additional purchases, and invest on behalf of the NRIs depending on the kind of PoA executed by the NRI.
There are three types of PoA an NRI can opt for:
Specific PoA is assigned for a specific purpose and has restricted limits. When the purpose completes, the rights and duties of PoA are ceased.
General PoA is granted broad powers to make the decision. They can carry out various activities on behalf of the principal without restrictions.
Durable PoA has more power than the above two types of PoA. They remain valid for a lifetime unless the NRI cancels the rights.
Yes, NRIs can invest in Indian Mutual Funds including tax savings or ELSS schemes on repatriation or non-repatriation basis.
By investing in such schemes, NRIs can avail of a rebate up to Rs 150,000 per annum under Section 80C of the Income Tax Act 1961.
An important point to remember is that NRIs cannot purchase the units of mutual funds in foreign currency but only Indian currency from their NRE or NRO account.
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