Can NRIs Invest in Mutual Funds in India?

As India embraced globalisation, the number of Indians living abroad has been on the rise. The government has made it easier for Non-Resident Indians (NRIs) to invest in Indian equity markets. Also, as the digital infrastructure improves, NRI investing is becoming more seamless. These developments have increased the participation of the NRI fraternity in Indian financial markets. Mutual funds, being one of the most preferred investment options for gaining exposure to equity markets, have seen a surge in investors, both resident Indians and those living abroad.

Under FEMA (Foreign Exchange Management Act), NRIs are allowed to invest in Indian mutual funds. Just that, for those living in the United States or Canada, have additional compliance restrictions, which can be adhered to with the right guidance.

FEMA Framework for NRIs Investing in Mutual Funds

FEMA (Foreign Exchange Management Act): The Foreign Exchange Management Act, 1999, is the main legislation governing NRI investments in India. Under FEMA, NRIs are allowed to invest in mutual funds, both repatriable and non-repatriable.

Bank Account Requirements

NRIs must have specific bank accounts in India to invest in mutual funds.

NRE Account (Non-Resident External)

The following are the features of an NRE account.

• Maintained in Indian rupees.
• Funded through foreign currency transfers from abroad.
• Both principal and interest are fully repatriable.
• Interest earned is tax-free in India.
• Joint accounts are allowed only with other NRIs.
• Ideal for NRIs who want to bring money to India and later repatriate it.

NRO Account (Non-Resident Ordinary)

The following are the features of an NRO account.

• Maintained in Indian rupees.
• Can be funded through rupee income earned in India such as rent, dividends, pension.
• Principal repatriation is limited to USD 1 million per financial year.
• Interest earned is taxable in India.
• Joint accounts can be held with resident Indians.
• Suitable for managing India-sourced income.

Linking Accounts with Mutual Funds

When investing in Indian mutual funds, investors must do the following.

• Link their NRE or NRO account with the mutual fund folio.
• Ensure the bank account is active and KYC (Know Your Customer) compliant.
• Use the same account for investments and redemptions to maintain clear transaction records.
• The choice of account determines repatriation status.

KYC Requirements for NRIs

The following are the KYC requirements for NRIs planning to invest in mutual funds.

Documents Required

• Passport (with photo, name, date of birth, address)
• Valid visa or work/residence permit
• Overseas address proof
• Permanent Indian address (optional but useful)
• PAN card (mandatory)
• FATCA declaration form

Modes of KYC

KYC can be done both offline by submitting the required documents or online by doing on-call verification through a video call. Central KYC Registry, which is a one-time process. You complete KYC with one mutual fund house, and that fund house uploads the KYC to a Central KYC Registry, where all the details are stored.

How Can NRIs Invest in Mutual Funds?

NRIs can invest in mutual funds through three modes. First is the online mode, in which one can invest online through the websites of mutual fund companies or investment platforms like Upstox. The other method is investing offline by filling out physical application forms and submitting them to the fund house. The third option is to appoint a Power of Attorney (PoA) holder in India who can make investments on their behalf.

Mutual Fund Investment Options for NRIS

Based on the underlying asset, Indian mutual funds are categorised into funds like equity funds, debt funds, hybrid funds, and tax-saving Equity-Linked Savings Schemes (ELSS). NRIs can invest in all types of mutual funds through both Systematic Investment Plans (SIPs), which allow for regular investments, and one-time lump sum investments, subject to applicable regulations and fund house requirements.

Tax Considerations

The taxation of mutual fund investments for NRIs depends on the type of fund, the holding period, and the applicable tax rules. So, for NRIs, the capital gains from mutual funds may be taxable in India. Short-term capital gains and long-term capital gains are taxed as per prevailing tax laws. Additionally, NRIs should consider the tax laws of the country they reside in, as some countries tax global income. To avoid this double taxation, India has signed tax treaties with many countries. NRIs should consult tax advisors to understand their complete tax obligations.

Repatriation of Funds

Repatriation rules depend on whether they invested through an NRE or NRO account. Funds in NRE accounts are freely repatriable, subject to applicable rules, while repatriation from NRO accounts is subject to prescribed limits and conditions.

FAQs

Can NRIs invest in Indian mutual funds?

Yes, NRIs can invest in Indian mutual funds under FEMA rules. However, those living in the US and Canada must follow extra rules.

Which bank account do NRIs need to invest in mutual funds?

NRIs need an NRE or NRO account to invest in Indian mutual funds. The choice depends on where their money comes from and whether they want to send it back abroad.

What documents are required for NRIs to invest in mutual funds?

NRIs need a PAN card, passport, valid visa or residence permit, overseas address proof, and a FATCA declaration.

Can NRIs invest in mutual funds through SIPs?

Yes, NRIs can invest through monthly SIPs or make a one-time investment in different types of mutual funds.

Do NRIs have to pay tax on mutual fund profits?

Yes, profits earned on mutual funds may be taxed in India. NRIs may also need to pay tax in their country of residence, depending on its tax rules.