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Mutual funds are one of the most profitable investing opportunities available. These schemes aggregate money from diverse investors with common goals and invest it in a portfolio of equities, debt funds, or a combination of the two. Mutual funds mitigate volatility risk by providing diversification.
However, amid many benefits of this plan, one question is can NRIs invest in mutual funds in India. Before we answer this, let’s first understand the concept of NRI.
Who is NRI?
According to FEMA, an NRI is a person who stays outside India for any purpose other than:
- Employment
- Business
- Vocation
- Any other circumstance that indicates an intention to stay outside India for an uncertain period
FEMA also defines an NRI as someone who stays in India for less than 182 days during the preceding financial year.
However, per the Income Tax Act of 1961, you are NRI if you meet the following conditions.
- You are in India for at least 182 days in the financial year or
- At least 60 days in the financial year and 365 days or more in the four years immediately preceding the financial year.
Exceptions to the above rules:
- The 60-day condition is relaxed to 182 days for Indian citizens who work abroad, are crew members of an Indian ship, or who visit India.
- The 60-day condition is also relaxed to 120 days for Indian citizens or persons of Indian origin whose overall earnings, other than income from foreign sources, exceed Rs 15 lakh in the financial year.
The difference between the two definitions is that FEMA considers the intention and purpose of the stay, while the Income Tax Act considers only the duration of the stay.
NRI investment in mutual funds in India
So, can NRIs invest in mutual funds in India? The answer is yet. NRIs SIP or lump sum investment in mutual funds is possible if they follow the FEMA or Foreign Exchange Management Act guidelines. You must follow the steps outlined here to invest in mutual funds as an NRI.
Step 1: Set up an Account
As an NRI, you can choose from the following accounts:
- Non-Resident External (NRE) account: It is a rupee-denominated account allowing deposit and withdrawal in foreign currency. The money in this account is fully repatriable, and NRIs can transfer it to their foreign account without any restrictions. Also, in India, there are no taxes on the interest earned from this account.
- Non-Resident Ordinary (NRO) account: This is another example of a rupee-denominated account, but the money in this account is partially repatriable. After paying taxes, you can transfer up to USD 1 million per financial year to your foreign account. Any interest earned from this account is taxable in India.
- Foreign Currency Non-Resident (FCNR) account: This is a foreign currency-denominated account. It allows you to deposit and withdraw money in major foreign currencies, such as USD, GBP, and EUR.
Step 2: Gather documents
You will need the following documents to invest as an NRI.
- Copy of valid passport
- Recent photographs in the specified format
- Proof of foreign residence address
- Proof of Indian residence address (if any)
- Cancelled cheque of NRE/NRO account
- Person of Indian Origin (PIO) or Overseas Citizen of India (OCI) certificates (if applicable)
- In-person verification (in some cases)
Note: If you are an NRI associated with the USA or Canada, you must also provide a FATCA declaration.
Step 3: Choose the investment mode
You can choose among the following modes as an NRI to invest in a mutual fund scheme.
- Self: You can invest in mutual funds directly through the fund house’s website or app without involving any intermediary. This mode offers lower costs and higher returns, as no commissions or fees are involved. However, do more research and effort, as you do not receive expert guidance for fund management.
- Power of attorney: Another option is to invest through a power of attorney (POA). POA is a legal document that authorises another person to act on your behalf. The POA holder can be a resident Indian or another NRI, subject to certain conditions and limitations.
Step 4: Choose the Fund House
Next, select the fund house, followed by the scheme. The final step is to make a payment, after which you will be allocated units based on the amount invested. This allows SIP investment for NRIs as well as lump sum investment.
Understanding taxation for NRIs investing in mutual funds
The tax rate on mutual funds is based on the holding period and the type of scheme you invest in.
| Type of Mutual Fund | Holding Period | Capital Gains Tax Rate | TDS Rate |
| Equity Mutual Fund | Less than one year | 15% | 15% |
| Equity Mutual Fund | More than one year | 10% on gains exceeding Rs. 1 lakh (without indexation) | 10% |
| Debt Mutual Fund | Less than three years | As per the income tax slab | 30% |
| Debt Mutual Fund | More than three years | 20% (without indexation) | 30% |
| Hybrid / Balanced Mutual Fund | Less than three years | 15% | 30% |
| Hybrid / Balanced Mutual Fund | More than one year | 10% (without indexation) | 30% |
Note:
- The TDS rate for long-term ownership of listed non-equity funds is 20% with indexation. Unlisted ones have a rate of 10% without indexation.
- The NRIs can claim the benefits of the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence by obtaining a Tax Residency Certificate (TRC) from their tax authorities.
- For distributed income that falls under the IDCW option, the TDS rate is 20% for all categories of mutual funds.
Conclusion
To sum up, yes, lump sum and SIP investment for NRIs is possible. However, as an NRI, keep all the essential KYC documents handy and know the taxation rules before investing. It is also important to invest as per financial goals and risk appetite. To learn more about investing in India, read StockGro blogs.
Frequently asked questions
Yes, NRIs can invest in mutual funds in India as long as they adhere to the FEMA and the Income Tax Act.
NRE stands for Non-Resident External Account, and NRO stands for Non-Resident Ordinary Account. NRE account is ideal for those who wish to transfer the money they have earned overseas to India. NRIs can use NRO accounts to deposit their earnings in India.
NRIs taxation on mutual fund investments depends on their residency status, source of income, and tax treaty benefits. Generally, NRIs are taxed on their capital gains and dividends at their resident country’s tax rate unless they qualify for the Double Taxation Avoidance Agreement (DTAA) benefit.
Yes, SIP investment is possible for NRIs. SIP is a way of investing a fixed sum at predefined intervals in a mutual fund.
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