How can NRIs invest in Mutual Funds?

How can NRIs invest in mutual funds?
June 28, 2022

How can NRIs invest in Mutual Funds?

NRIs are individuals who have resided in India for a period of over 60 days but under 182 days over the course of a particular financial year and must have resided in India for at least 365 days over the period of 4 financial years. Also, individuals who are deputed abroad for over 6 months are also considered NRIs. Many Indians who stay out of India might have dependents in India. In such cases, making investments in India is a smart option.

Can NRIs Invest in Mutual Funds in India?

NRIs can invest in mutual funds, nevertheless, they are subject to certain rules when it comes to tax and foreign exchange. NRI can invest in mutual funds as long as they adhere to the rules mentioned in Foreign Exchange Management Act (FEMA).

However, there are fund houses that do not accept applications from US and Canada-based NRIs as there is tedious paperwork involved under FATCA (Foreign Account Tax Compliance Act). The purpose of FATCA is to report financial assets owned by United States persons to the United States tax authorities.

It also ensures that the US citizens do not evade taxes on their overseas investments. The AMC shares the client transaction details with the Indian government which shares them with the Indian government.

How do NRIs invest in Mutual Funds?

Primarily, NRIs must open an NRE (non-resident external) account or NRO (Non-Resident Ordinary) to invest in mutual funds in India.

NRE Account

NRIs can park their foreign earnings in India in Indian rupees. As of today, the balance in the NRE account is repatriable. That is, one does not need any permission to transfer the funds to his/her overseas account which can be converted into foreign currency at any time.

NRO Account

It is for NRIs who have earnings in India in Indian rupees. While the NRO account is designed for investments that are not freely repatriable. The NRO accounts are usually used to manage NRIs earnings in India from sources such as rent, pension, dividends, and more. As per RBI guidelines, NRIs can remit up to USD 1 million per financial year from the NRO account, provided that the NRI follows a certain procedure.

The NRE account can be opened with funds remitted from abroad only, but NRO accounts may be opened with your local funds or funds remitted from abroad.

Complete KYC Procedure through Elevo

NRIs must complete their Know Your Customer (KYC) formalities before investing in mutual funds in India. For this, the NRIs must submit the duly signed KYC form and attested KYC documents like scanned copies to SEBI registered Elevo’s team.

These attested KYC scanned documents include- PAN card, Aadhar Card (Indian address proof), Passport, and Foreign address proof (electricity bill, telephone bill, bank account statement, lease agreement, or driving license, cancelled cheque of NRE/NRO account). And then An person verification video for verification purposes.

Once the KYC formalities are completed, the NRIs can invest in mutual funds online through Elevo and give redemption orders. However, NRIs should be mindful of the exchange rate involved. Indian mutual funds majorly invest in rupee-denominated assets and hence the value of such investments appreciates if the rupee appreciates against the resident’s country’s currency and this results in more profits for the investors.

Don’t forget to check: Advantages and Disadvantages of Mutual Funds

Taxation for NRIs

NRIs can take advantage of the Double Taxation Avoidance Agreement (DTAA) if there is an agreement with their country of residence. With this NRIs can pay tax in either country or both countries and claim tax relief from their country of residence. Around 90 countries have a DTAA treaty with India.

The NRI tax rate is not different from that of Indian residents. For equity-oriented funds, NRIs must pay 15% tax on short-term capital gains and 10% on Long Term Capital Gains (LTCG) exceeding Rs 1 lakh. While in Debt oriented funds, NRIs have to pay tax as per their applicable tax slab rate.

Holding the fund for more than three years will result in a 20% tax on the Long-TermCapital Gains with indexation benefit. NRIs have to pay LTCG tax on un-listed mutual funds taxed at the rate of 10% without the indexation benefit. 

Moreover, NRI investments are subjected to Tax deduction at source (TDS) on capital gains when redeemed. In non-equity mutual funds, the TDS is 30% on Short Term Capital Gains (STCG) and 20% on Long Term Capital Gains (LTCG) with indexation benefit.

Also, for unlisted units, TDS would be 10%. For equity mutual funds, TDS on capital gains is:  STCG rate is 15% and the LTCG, exceeding Rs 1 lakh per year, are taxable at the rate of 10% without the indexation benefit. On dividends, the TDS is 20% along with a surcharge in case of income above 50 lakh and a 4% health and education cess.

NRIs can start their mutual fund investment journey through Elevo