Mutual Funds have always been a great option to invest your money for safe and consistent returns. So, what is a mutual fund? Mutual fund is a pool where several investors invest their money with a common investment objective. That money is then invested in shares, bonds, gold, or other asset classes by a mutual fund manager, who is an expert appointed by the Asset Management Company (AMC). Each investor owns a part of the invested assets equal to the proportion of his investment in the fund.
It has been seen that several NRI’s, or Non-Resident Indians have a doubt whether they can invest in mutual funds. The answer is yes, they can. NRIs can invest in mutual funds, however they must follow certain procedures. But before knowing the rules, process and taxation policy for investment in mutual funds by NRI let’s be clear about who an NRI is.
Who is an NRI?
NRI means non-resident Indian. A person who has lived out of the country for at least 183 days in the previous year and has spent no more than 365 days in India in the previous 4 years is an NRI. However, the second condition is not applicable to Indian citizens working abroad or a member of a crew on an Indian ship.
Various rules applicable on NRIs in order to invest in mutual fund.
The NRI investment in the mutual fund is governed and looked over by the provisions, rules and regulations mentioned in FEMA (Foreign Exchange Management Act).
The provisions of this act say that NRIs can invest in mutual funds but there are certain conditions which are required to be fulfilled by them. These steps or procedures are-
To open an NRO/ NRE bank account
One cannot invest in a mutual fund directly in the foreign currency. So, an NRO or NRE account must be opened in order to invest the money in rupee denomination as required.
NRE is for both external and internal purpose, means the amount can be transferred to a foreign account without any restrictions. In the NRO account one can receive funds in Indian and Foreign currency. Repatriation from an NRO account is subject to charges.
An NRI needs to complete the KYC process. Even if the investor has already had a verified KYC done earlier as an Indian resident, he must get the KYC done again for investments in Mutual Funds as an NRI. For this he must submit-
• Copies of passport, with name, address and other details.
•Proof of residential address
• Bank statement
Method of investment
He can invest in mutual fund by Direct method or Regular method.
The redemption is done after deducting some expenses from the capital gains.
These were the steps for the investment in mutual fund by NRI. However, there are some special conditions in case of NRI’s residing in USA or Canada.
Special considerations for US or Canadian Investors
These are to be kept in mind by investors residing in USA and Canada, before investing in mutual funds.
Investors from these countries can also invest in mutual funds, however there is a slight difference. The investment for them is governed by FATCA (Foreign Account Tax Compliance Act) rather than by FEMA which requires an additional compliance by the Asset Management Company. Some of the company which accepts deposit from the US investors are as follows-
- Aditya Birla Sun Life Mutual Fund
- SBI Mutual Fund
- UTI Mutual Fund
- ICICI Prudential Mutual Fund
- Sundaram Mutual Fund
- L&T Mutual Fund
- PPFAS Mutual Fund
•Taxation for NRI mutual fund
The taxation rules for gains on mutual fund investments is similar for residents and NRIs.
For short-term gains from equity mutual funds, the tax applicable is 15%.
In the case of long-term, gains up to Rs.1,00,000 in a financial year are free of any tax. In case of gains in excess of this are taxed at a rate of 10%.
In case of investments in debt mutual funds, gains are considered to be short-term when the units are redeemed within 3 years from the date of investment. Such gain is taxed as per the investors income slab.
In case an investment in debt-funds is held for 3 years or more, it is considered long-term. Such gain is subject to a tax rate of 20% with indexation benefit.
|Type of Scheme||Tax Rate|
|Equity Schemes||15%||10% on long term gains exceeding Rs. 1 lakh|
|Non-Equity Schemes||As per tax bracket of investor||20% with indexation|
There are various benefits for an NRI to invest in Mutual Funds, as are discussed below-
- Investment in Mutual Funds in India can offer a good diversification to the NRI’s current portfolio.
- It is easy to manage funds online from anywhere.
- In case of rupee appreciation, it would mean a higher return from investments.
One can safely conclude that an NRI can surely invest in Mutual Funds in India, subject to certain conditions and rules. It is best to go through a verified advisor or distribution house as thy can guide you regarding the procedure of investments.