Complete Guide To NRI Investing in Mutual Funds (2023)

The NRI Guides Team regularly reviews this article to ensure the content is up-to-date and accurate. The last editorial review and update were on 25 October 2023.

Most people migrate to other countries in search of better opportunities. With their family and friends back in their own country, most of them harbour the dream of returning. Indians are no different. Most of the Non-Resident Indians (NRIs) have dependents back here. In such scenarios, to achieve the dream of returning and living well, making investments in India is inevitable.

Traditionally, NRIs have preferred to stay on firm ground by investing in real estate. Mainly due to its higher returns than most of the other orthodox modes, such as bank FDs and gold, etc. Real estate investment gave returns at an average of about 14-17% in this decade. Other reasons may be having a place to return to or providing a house for those relatives left behind.

But if we consider the performance of the Best Equity Mutual Funds over the same time duration. Some of them have given returns in the range of 25-30%. And Sensex saw a return of over 19% in this time frame.

Though past performance cannot claim to bring a great performance in the future. Still, the pattern will stay true if the Indian economy grows, as expected, in the 8-9% range in the next decade. Therefore it makes good sense to check investment options beyond real estate!

Mutual funds are one of the most lucrative investment options for NRIs in India. This article answers all questions related to NRI investing in mutual funds.

Can NRIs Invest in Mutual Funds in India?

There is no restriction on NRIs investing in Indian mutual fund schemes, however, some mutual fund companies do not accept investment from NRIs in the US and Canada.

Investments by NRIs, in India, are governed by the Foreign Exchange Management Act 1999, commonly known as FEMA. As per the current provisions of this Act, NRIs are allowed to make investments in capital markets (including direct stocks), Exchange-Traded funds (ETFs) and mutual funds, subject to a few terms and conditions.

Therefore, these investments are allowed only if certain conditions are met including getting fresh KYC (for Mutual Funds) for NRI and setting up a rupee-denominated NRE/NRO account.

Most Mutual Funds Companies that have US Registration, and operations in India, are bound by the cap on the number of non-resident investors they can take. Therefore, they do not accept investments from Indians living in the US. Special Considerations in the case of US and Canadian NRIs have been detailed later in this blog.

Understanding the Term NRI as per Indian Law

Before we start with the procedures for NRI investments in Mutual Funds, it is important to know who according to Indian law is considered an NRI.

NRI – Non Resident Indian

A Non-Resident Indian (NRI) is an individual who is a citizen of India or a Person of Indian Origin (PIO) and who is not a resident of India. A person is deemed to be a resident of India if he satisfies any of the following conditions:

1. If he was in India for a period of 182 days or more during the previous year; or
2. If he was in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. A similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.

Any person who has been deputed overseas, by the Government, for over 6 months, also qualifies for the Non-Resident status.

PIO – Person of Indian Origin

A PIO is a foreign citizen of Indian origin residing outside India. Either he has held an Indian passport at any one time; or he, himself, or his father or grandfather was a citizen of India.

NRI KYC for Mutual Fund Investments

Documents

You have to complete KYC for NRI, even if you were making mutual fund investments as an Indian resident, before achieving non-resident status. The mandatory documents required for this KYC are:

1. PAN Card copy,
2. Copy of valid Passport (front and back pages containing Name, Photo, DOB and Address),
3. Residence Proof of Foreign Address,
4. Cancelled cheque of NRE/NRO account.

Process

To update your KYC status from Resident individual to NRI, you need to ask your previous MF Intermediary to update your KYC status in the centralized KYC database.

OR

Visit the nearest CAMs/Karvy office personally, whenever you are in India next. Submit the documentation.
KYC Update Documentation is simple.

Once KYC is completed you can start making investments into domestic Mutual Funds as an NRI investor. Such investments can be made either by self or by providing the Power of Attorney (PoA) to someone else.

How NRI Can Start Mutual Fund Investments

NRIs need to invest in the local currency, that is, the Indian Rupee. Mutual Funds Companies in India are not allowed to accept any investments in foreign currency.

For investing in Indian Mutual Funds, therefore, an NRI needs to open any of these 3 bank accounts -with an Indian bank. The NRE (Non-Resident External Rupee) account, the NRO (Non-Resident Ordinary Rupee) account or FCNR (Foreign Currency Non-Resident) account.

NRE Account

An NRE account is a Rupee Account. From this, money can be sent back to the country of your residence. This account can be opened with money from abroad or local funds.

It can be in the form of Savings, Current, Recurring or Fixed Deposits. You need to deposit your foreign currency in this account. Indian Rupees are not to be deposited into this account.

The deposits to the NRE account can be made in foreign currency only. It will then get converted into INR at the time of deposit. Therefore, you may repatriate the money in this account (plus interest earned) at any time – hence the name. The interest received on such bank accounts is not taxable.

Transferring money from your resident country to India is free. Moreover, you earn higher interest rates. The international debit card enables you to transact 24×7. Also, mutual fund investments become easier and instant, if you link your NRE account number to the investment account.

NRO Account

An NRO account is a Non-Repatriable Rupee Account. An NRO account can be opened in the format of a savings or current account.

NRO account helps the NRIs to manage their income earned in India. It can be as rent, dividends, or pension from abroad. Hence, it is considered a good way to deposit and manage your accumulated Rupee funds. Once you deposit the money to your NRO account, that foreign currency is automatically converted to INR. Any NRI can open an NRO account.

You can apply for an NRO account jointly with a Resident of India as well. It is even possible to transfer money from your current NRE account.

You may also convert your existing resident savings account into an NRO account after your change of status from Resident to Non-Resident. You need to maintain a minimum daily balance of Rs. 10,000. Any repatriation done through this account is required to be reported to RBI.

However, the interest you earn in this account is subject to TDS (Tax Deducted at Source).

FCNR Account

An FCNR account is quite similar to an NRE account. With only one exception the funds are held in a foreign currency. Moreover, this is available only as a Fixed Deposit Foreign Currency account. The foreign income gets transferred to the same currency.

Such accounts can be opened and maintained in foreign currencies like:

US Dollars (USD)	Pound Sterling (GBP)	Canadian Dollar (CAD)
Euro (EUR)	Japanese Yen (JPY)	Australian Dollar (AUD)
Singapore Dollar (SGD)	Hongkong Dollar (HKD)

The Principal Amount or the Interest accrued thereon is not subject to tax under the Income Tax Act 1961.
It is considerably safer because there is no exchange rate risk involved.

Existing Mutual Fund Portfolios

All your existing investments are required to be connected to your NRO account. Your status should be updated in all your Investment Portfolios.

There is no provision to update this online. So you must personally visit the nearest CAMs/Karvy office. The KYC documents listed above, along with an account statement (NRO) copy are required. It must be completed within a few days of the change in status.

NRI Investing in Mutual Funds

For an NRI the procedure of investing in Mutual Funds is similar to the one followed by residents. The completed application form must be submitted at the investor service centres along with cheques or bank drafts.

Details of your NRO/NRE accounts must be furnished at the time of application. Or, Alternatively, an online application can be made.

Investments are not accepted in foreign currency. You can invest through:

• Rupee cheques drawn from your NRE/NRO bank account in India,
• Or from a foreign country payable in a bank in India. Inward remittances (FIRC) through normal banking channels,
• Or Rupee drafts purchased abroad from an exchange house, payable at the city, on its correspondent bank, where the application is made, must be provided.

Usual facilities like a nomination, and appointing the Power of Attorney are available for NRI investors as well.

You can use the NRO account and your updated portfolios linked to your NRO account to manage your existing investments as well as make further mutual fund purchases using funds generated from any continuing income in India.

You can use the NRE account to make new mutual fund purchases made using funds generated from any foreign income.

DO NOT: Invest in a portfolio linked to your NRE account using your NRO account, and vice versa. This inconsistency may lead to order rejection(s) by AMCs, redemption issues and even laborious/delayed refund(s) in case of order rejection.

FIRC (Foreign Inward Remittance Certificate)

If you have made the payment for new investments, after the change in status. Whether by a cheque or a draft. You must attach a FIRC with it. If for some reason, it is not possible, a letter from the bank would be required. This is required to confirm the source of funds.

If the investment is made by cheque or draft, you need to attach the FIRC with the application. Otherwise, you need to attach a letter issued by the bank confirming the source of funds.

FIRC is proof of payment received by you from outside the country in a foreign currency. It gets issued by the bank where you have the account to receive the funds.

Redemption of Mutual Funds

Redemption proceeds are given in Indian Rupees.

• The AMC will credit your total fund, investment + gains, to your account after deducting taxes.
• Alternatively, you can ask them to write a cheque for the same. To the account number provided in the application.
• Some selected banks allow crediting the redemption amount directly to the NRO/NRE account.
• If you have opted for a non-repatriable investment, they can credit the proceeds only to your NRO account.

If your status had changed after purchasing the units. In that case, the maturity proceeds will not qualify for repatriation. However, dividends are fully repatriable in all cases.

Taxation for NRI Mutual Fund Investors

If you are not investing in Mutual Funds in India due to a fear that you will have to pay double tax, well, fear not!!
You just need to know if India has signed the Double Taxation Avoidance Treaty (DTAA) with the country of your residence. For example, this treaty has been signed with the US. Thereby making you eligible to claim tax relief in the US, if you have already paid taxes in India.

All gains from the Best Equity Mutual Funds are taxable based on the holding period. Short-term capital gains attract a tax rate of 15%. However, Long Term Capital Gains (LTCG), more than Rs 1 Lakh in one financial year, are taxable at the rate of 10%. This taxation rule is applicable in the case of Equity schemes if such investments have been held for over 1 year from the unit allocation date.

In the case of Debt Funds, Short Term Capital Gains are taxable at the rate of 30%. Keeping invested in the fund for more than three years will result in a 20% tax on the gains with indexation benefits. LTCG on non-listed funds will be taxed at 10% without indexation.

Mutual fund units do not attract wealth tax.

DTAA Benefit

You can claim the Double Taxation Avoidance Treaty (DTAA) benefits on the TDS deducted and tax paid in India against the tax payable in their country of residence. For example, if a tax of Rs 1.5 lakh has been deducted on short-term capital gains on equity funds, you can claim the same against the tax on the same gains payable in your country of residence.

The principle behind such treaties is to ensure that the same income is not taxed twice.

Fund House Accepting NRI Payments

Below are the fund houses that accept payments from NRIs towards Mutual Fund Investments:

1. UTI Mutual Fund
2. SBI Mutual Fund
3. HDFC Mutual Fund
4. Aditya Birla Sun Life Mutual Fund
5. ICICI Prudential Mutual Fund
6. L&T Mutual Fund
7. Sundaram Mutual Fund
8. DHFL Pramerica Mutual Fund
9. PPFAS Mutual Fund

Points to Remember When NRI Investing in Mutual Funds

• You have the right of repatriation of the amount invested and amount earned, only until you remain an NRI.
• The residential address in the resident country is a compulsory field. Therefore, you must also attach an attested proof along with the application.
• The compliance requirements in the US and Canada are far more stringent than those of the other nations. According to FATCA guidelines, all financial institutions must share the details of financial transactions involving a person residing under the US Government.
• Are you residing in any of the 90 countries that have signed the Common Reporting Standard? CRS is a global reporting system to combat tax evasion.

To summarise, you can choose to invest in your home country. You may encounter some hassles in initializing the process. However, over the long term, the ROI would be worth it. So, there is certainly no reason why you should be left out of investing in one of the fastest-growing economies.

This post was originally written by Reema, a content writer with WealthBucket. It has been updated with new regulations.

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