Can NRIs Invest in Mutual Funds in India?

NRI investments are good news!

NRI investment in mutual funds in India is good news for India as funds gathered from sources abroad can then be channelised into the Indian markets, thereby increasing liquidity for Indian companies and the financial system overall – domestic investors, asset managers, companies etc. all stand to gain.

Let us see under what circumstances can NRIs invest in mutual funds in India and what are the procedures involved.

Who is an NRI

First, let us make sure who exactly an NRI is. 

1. As per Regulation 2 of Notification No. 13 of  May 3, 2000 under the Foreign Exchange Management Act (FEMA), 2000, a citizen of India who is resident outside India is an NRI.
2. As per the Income Tax Act, 1961 –
   • A person living inIndia for 120 days or more during a financial year or 365 days or more in the preceding 4 financial years and at least 60 days in that year is a resident. In other words an NRI is an Indian who visited India for less than 120 days in the financial year. This rule is applicable for those NRIs whose income accrued from Indian sources is less than Rs 15 lakh in that financial year. 
   • If the total Indian income is more than Rs 15 lakh in that financial year, then the citizen will be counted as an NRI only if their stay does not exceed 181 days.

Can NRI invest in mutual funds in India

Non-resident Indians and Foreign Institutional Investors (FIIs) are given permission under the RBI Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 for investing in or redeeming mutual funds units. Therefore NRI investment in mutual funds is allowed provided certain conditions are met.

Types of mutual funds for NRIs

Mutual funds investment by NRIs can be done on the following basis – 

Repatriable Basis

Investment on a repatriable basis means an investment whose sale or maturity proceeds, net of taxes, are eligible to be moved outside India.

In order to invest in a mutual fund on a repatriable basis the following conditions must be met by an NRI –

a. The NRI must have an NRE or FCNR bank account in India

b. The investment amount should be received by debit to the NRE/FCNR account or by inward remittance through normal banking channels.

c. The returns based on dividends/interest/maturity amount must be credited to the NRE/FCNR account or emitted via normal banking channels.

d. The investor must pay the applicable taxes

e. The mutual funds must comply with the SEBI rules and regulations.

Non-repatriable basis 

In this case, the principal and the gains must be retained within the country. Mutual funds are allowed by the RBI to offer mutual fund schemes to NRIs on non-repatriable basis as long as the funds payable to the investor are credited to the NRI’s NRO account.

Overseas Corporate Bodies (OCBs) and FIIs, and not NRIs, require permission from the RBI for investing in Indian mutual funds.

Non-resident external rupee (NRE) accounts are accounts opened by NRIs to park their foreign earnings in India.

Non-resident ordinary rupee (NRO) accounts are accounts opened by NRIs usually to keep their earnings from India.

Foreign currency non-resident (FCNR) accounts are quite like NRE accounts, but the funds are held in foreign currency.

Read More About: Types of Mutual Funds

How Can NRIs Invest in Mutual Funds in India?

An NRI can invest in a mutual fund in India by any of the methods stated below:

Self/Direct Method

If you are an NRI, you must submit the mutual fund application, together with KYC-related information. This application must state whether the investment is repatriable or non-repatriable. 

KYC documents must include:

1. Recent photograph
2. Copies of the PAN card, passport, proof of residency,
3. Bank statement. 

The bank may request an in-person verification. You can do so by contacting the Indian Embassy in the country where you are resident.

POA Method

You can also have someone else perform all the investments on your behalf. To enable this, you must give the person the Power of Attorney (POA). For investing in mutual funds in India, the KYC paperwork must contain the signatures of both the NRI investor (i.e. you) and the POA holder.

While investing in mutual funds in India, as an NRI, you must adhere to the regulations laid down by the Government of India. For example, Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Act, 2000, specifically contains the regulations that NRIs must follow during mutual fund investments. 

Remember that not all AMCs accept mutual fund applications from NRIs or OCIs (Overseas Citizens of India) who are based in the United States or Canada. This is to avoid the tedious paperwork required under the regulations of FATCA (Foreign Account Tax Compliance Act) that these mutual fund houses must maintain when they accept deposits from NRIs or OCIs based in the US or Canada. 

If you are a resident of the US or Canada, it will be better to consult a professional financial advisor and make sure there are no mistakes in your choice of fund house and the application that you are sending.

Mutual funds investment procedure for NRIs

The following steps must be taken by NRIs in order to invest in mutual funds in India –

Step 1. Open the applicable NRE/NRO account

NRIs are not allowed by the FEMA to park their money in ordinary savings accounts in India. Moreover, Mutual fund asset management companies in India cannot accept investments in foreign currencies.

Step 2. Make the Investment in either of the two following methods

1. The NRIs can directly invest by themselves. For this they will be required to give their KYC details including recent photograph, certified copies of PAN card, passport, residence proof of outside India and a bank statement. The bank may ask for an in-person verification which can be done in the Indian embassy of the residence country.
2. The NRIs, through Power of Attorney, can allow a third party to make investments on their behalf. But signatures of both the NRI and the PoA must be present on the KYC documents.

Step 3. Get the KYC done

Many mutual fund houses may choose to not accept investments from the USA or Canada because of the complex requirements under the Foreign Accounts Tax Compliance Act (FATCA). Some other companies do allow such investors with additional requirements of documents.

List of funds that allow investors from USA and Canada:

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

Step 4. Redeeming the Mutual Fund

The AMC will credit the principal and gains to the NRE/NRO account or issue a cheque. Overall, different fund houses have different procedures for the redemption of funds.

Taxation for NRI mutual fund investments

Taxes for NRI mutual fund investments are based on the holding periods and asset classes of the mutual fund investments.

Note: If India has signed a Double Tax Avoidance Agreement with a country, then residents of those countries do not have to pay tax twice to India and the country of residence.

Benefits for NRIs from Mutual Fund Investments

India is an emerging economy with a high growth rate and a booming stock market. As a result, it is an attractive destination for both NRIs and foreign investors. The following are some of the top benefits enjoyed by NRIs investing in Indian mutual funds:

1. Higher growth rates – The Indian economy and stock market are booming at a higher growth rate than many other economies. For example, in the 5 years preceding October 16, 2023, the US S&P 500 index has grown by 56.36%, whereas the Nifty 500 has grown by 101.31%. 
2. Online transactions – With the development of online investment platforms and banking solutions, NRIs can place orders and track their investments digitally, without having to visit a bank and go through the paperwork. Your Consolidated Account Statements (CAS) are sent through emails on a regular basis. 
3. Benefits from rupee appreciation –  Suppose the rupee appreciates against the currency of the foreign country where you are staying. For example, if you invested $100 when the rupee was ₹82 per dollar and withdrew from the fund at the same NAV when the rupee was ₹80 per dollar then you would get $102.5 despite no change in the fund’s NAV.

Important points for NRIs investing in mutual funds in India

• If details of only foreign bank accounts are given then the NRI’s application will be rejected
• Tax is deducted at source on capital gains on mutual funds redemption
• Right of repatriation of principal and gains is there for you only as long as you are an NRI.
• Check if your country of residence is a part of the Common Reporting Standard (CRS) related to combating tax evasion.

Mutual Fund Regulations for NRIs

• KYC regulations for NRIs

To complete the KYC process simply:

1. Submit a copy of your passport. This will include the pages that show your name, date of birth, photo, and address. 
2. Provide the current residential proof, whether temporary or permanent.

Certain fund houses may insist on an in-person verification.

2. FIRC (Remittance Certificate)

Attach a Foreign Inward Remittance Certificate (FIRC) if you have made the payment via cheque or demand draft. In case you made the payment by some other method, a letter from the bank may also be accepted. This confirms the source of funds.

• Redemption

The AMC will credit to your bank account the investment and the gains that you make upon the redemption of your mutual fund units, after deducting any applicable taxes.

Some banks will allow crediting of the redemption amount directly to your NRO/NRE account. In case you have opted for a non-repatriable investment, then the proceeds can be credited only to an NRO account. 

Final words

NRI investors gain a lot when rupee appreciates against the currency of their country of residence and vice versa. This is because, if the rupee appreciates, then for the same amount of investment in rupees, the investor will get more returns in terms of the currency of the country of residence. Along with NRIs, Overseas citizens of India (OCIs) too can invest in Indian mutual funds.

If you are interested in investing in mutual funds or the equity or commodity markets, try to open demat account and learn about investing today!

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