Mutual funds are a great way for a non-resident Indian (NRI) or a Person of Indian Origin (PIO) to participate in the growth of the country and reap benefits. Though there is no separate kind of mutual fund for NRIs to invest in, many Asset Management Companies (AMC) offer NRI-targeted funds.
Who Is Considered An NRI?
NRIs are individuals who have resided in India for a period of at least 182 days over the course of a particular financial year, provided they have resided for at least 365 days over the course of the previous 4 financial years. NRIs will be able to maintain their status in case they have resided in India for over 60 days but under 182 days over the course of a particular financial year, but they must have resided in the country for at least 365 days over the previous 4 financial years. Individuals who were deputed abroad for over 6 months are also considered NRIs.
KYC For Non-Resident Indians
NRIs are required to furnish a copy of their passport when investing in mutual funds. The relevant pages of the passport which include the name of the investor along with his/her address, date of birth and photograph must be furnished. It is also compulsory for NRIs to submit their overseas address. Essentially, the correspondence address or permanent address should be an overseas address.
How To Start Investing In Mutual Funds If You Are An NRI?
NRIs who wish to invest in mutual funds will have to do so using the rupee. Indian mutual fund houses do not accept investments in any other currency except the rupee. Therefore, NRIs who wish to make investments in mutual funds will have to open either of the following 3 bank accounts: FCNR account (Foreign Currency Non-Resident Account), NRO Account (Non-Resident Ordinary Rupee Account), or NRE Account (Non-Resident External Rupee Account).
NRE accounts are basically rupee accounts that can be used to send money back to the country in which an investor resides. The opening of the account can be done with money from domestic or overseas funds.
NRO accounts are essentially non-repatriable rupee accounts, while FCNR accounts are somewhat like NRE accounts save for the funds being held in an overseas currency.
NRIs can use direct debit to make investments in mutual funds. The funds will be debited from their NRO/NRE account or paid through inward remittances via regular banking channels. NRIs will have to provide a rupee draft/cheque from their NRO/NRE account. In case of investments made via drafts or cheques, the application form must have an attachment of a confirmation letter obtained by the bank, or a FIRC (Foreign Inward Remittance Certificate). Either of these documents will work as a payment proof.
The other KYC documents that must be submitted include address proof and PAN.
Regulations around NRI Investment in Mutual Funds in India
The rules and regulations governing investment in mutual funds for NRIs are slightly different than those for resident Indians. Given below are the main regulatory points an NRI has to keep in mind:
- Conditions on investment: As per Foreign Exchange Management Regulations, 2000, an NRI can invest in mutual funds in India in Indian currency only and not in any foreign currency. So as a first step to investing in a mutual fund, an NRI needs to open one of the following accounts with an Indian bank: Non-Resident External Rupee (NRE) account, Non-Resident Ordinary Rupee (NRO) account or Foreign Currency Non-Resident Account (FCNR).
- Repatriation of fund income: The investment can be made either on a repatriable or non-repatriable basis. This means that NRIs have to choose whether they want the income from mutual funds to be remitted back to their bank account in the country they are staying in, or if the amount should be remitted to an Indian bank account. The income from mutual funds can be repatriated only if the amount is invested by inward remittance from overseas through normal banking channels or from NRE/FCNR account of the investor. It can be remitted to an Indian bank account on the above condition as well as if the investment is made through the NRO account of the investor. Certain countries, such as US and Canada, have restrictions on their citizens investing in India. One of these regulations is that fund managers handling more than 15 US-based investors have to registered in the US as well. Currently, the mutual fund houses allowed to accept investments from American citizens are: SBI, Birla Sunlife, L&T, PPFAS, DHFL Pramerica, UTI and Sundaram.
- Power of Attorney: In case an NRI does not have enough time to take decisions on their mutual fund investment, then they can assign someone in India as the Power of Attorney (PoA). The PoA holder can take mutual fund decisions on behalf of the NRI client. Another option is for the NRI to have a joint holding in a mutual fund with a resident Indian who can take care of the requirements of the fund. Resident Indians can also be made nominees by NRIs.
- Taxation: Interestingly, there is no differential taxation rate for resident Indians and NRIs. NRIs also have to pay tax on short-term capital gains on debt funds as per the person’s income tax slab and that on equity funds at a flat rate of 15%. On long-term capital gains on debt funds, they have to pay 20% tax with indexation and 10% tax without indexation, and no tax on the sale of long-term equity funds. However, for NRIs the tax is deducted at source while resident Indians have to make tax payments as per the advance tax schedule. Also, NRIs who live in countries that do not have a Double Taxation Avoidance Agreement (DTAA) with India will have to pay tax both in India and in their country.
Redemption of Mutual Funds
The proceeds from redemption of mutual funds are either credited directly to the bank account of the investor, or are paid via cheques. All the earnings will be received by the investor in rupees. Investments made from FCNR/NRE accounts or via inward remittances are totally repatriable. Therefore, earnings accrued through dividends or by the redemption of mutual funds’ units are totally repatriable. With regards to investments made via NRO accounts, however, the principal amount will not be repatriable, but the capital appreciation will be.
Advantages for NRI Investing In Mutual Funds in India
The greatest advantage for NRI investors buying mutual funds in Indian is that if Indian Rupee has gained on the currency of the country they live in, then the investor will be able to make more profits. However, the downside of this is that if the Indian currency falls against the foreign currency concerned, then the profits could even be in the negative. For example, an NRI from the US invests USD 15,000 in a mutual fund in India at an exchange rate of Rs. 65 to $1. At the end of 5 years the fund grows to 119.4% of the original investment, and the total amount remittable to the NRI is Rs. 12 lakh. Now if the exchange rate between US dollar and Indian rupee has gone down to Rs. 62, then she will get around USD 19,355, but if the rate gas gone up to Rs. 72, then she will only be able to make USD 16,667.
Alternatively, NRIs and PIOs can invest in India-based mutual funds offered by AMCs in their own countries.
GST rate of 18% applicable for all financial services effective July 1, 2017.