The growing popularity of mutual funds and their intact long-term return story are not only attracting Indian investors but also encouraging Non-resident Indians (NRIs) to invest their hard-earned money in mutual funds in India. However, the question is whether NRIs are allowed to invest in mutual funds or not. If yes, what is the investment process in mutual funds for NRI clients, what documents are required and what is the tax treatment?
If you are a NRI, here are all the details on how you can invest in mutual funds in India.
Can NRI invest in mutual funds in India?
Yes, Indians residing abroad (NRIs) can invest in mutual funds in India using NRE/NRO/FCNR trading account. This is great news for NRIs who can avail the opportunity of investing in mutual funds and earn solid returns. This is also beneficial for Indian markets as capital inflow from foreign clients can be invested in Indian equities.
As for NRIs' investments in mutual funds, they must comply with the principles and rules of the Foreign Exchange Management Act (FEMA). Although NRIs are allowed to park their capital in Indian mutual funds, there are some asset management companies (AMCs) that do not accept mutual fund investments from NRIs from the U.S. and Canada.
There is a wide range of mutual fund schemes (equity, debt, and hybrid funds) that NRIs can invest in. Choose the right one after matching your investment objective, risk tolerance, and investment horizon.
Does an NRI need PIS permission to invest in Mutual Funds?
No, To invest in mutual funds, NRIs do not need to obtain a PIS letter from RBI.
NRIs can open two types of accounts with brokers; Portfolio Investment Scheme (PIS) and Non-PIS account. NRI can open an NRE or NRO bank account in India and obtain a PIS permission letter from RBI to open a PIS Bank account. Many brokers in India partner with domestic banks to enable NRIs to open a PIS demat and trading account. A PIS account only allows you to invest in shares (delivery trading).
However, a non-PIS account does not require getting a PIS letter to trade or invest in the Indian stock market. It can be opened with any bank in India and allow NRIs to invest in shares, mutual funds, F&O, IPOs, ETFs, etc.
Process to invest in Indian mutual funds for NRIs
NRIs can invest in mutual funds in India directly by themselves or allow a third party to do so on their behalf. Check out a list of steps required for NRI clients to invest in mutual funds in India.
1. Opening of NRE or NRO bank account
As per FEMA regulations, NRIs have to open either a NRE (Non-Resident External) or NRO (Non-Resident Ordinary) savings bank account in any Indian bank. NRIs having NRE account can deposit and invest money in mutual funds in Indian rupees. They are even allowed to remit the money outside India or to abroad. However, NRO Non-Repatriable account does not allow NRIs to withdraw or repatriate money overseas as it can be used in Indian currency only.
2. Finish your KYC
Once NRE or NRO account is set up and gets activated, you have to complete the KYC process. To do so, NRI have to provide certain documents like a copy of passport, a valid ID proof, residential proof, overseas address proof, etc. Once the required documents are provided, you may have to undergo for in-person verification (IPV) process to successfully register your KYC status. Once KYC is done, NRIs can invest in their choice of mutual fund scheme with any fund house.
NRIs who want to invest in mutual funds through broker have to open a NRI demat account also to keep their mutual fund holdings. Many top brokers like Zerodha, Upstox, Fyers, HDFC Securities, ICICI Securities, etc. offer NRI Trading services and accept investment in mutual funds.
3. Choose to invest directly or through your broker
NRIs who get their KYC done can invest in their choice of mutual fund scheme directly with the fund house by their own. As there are plethora of options available, NRIs can select the right scheme and choose to invest via Systematic Investment Plan (SIP) or lumpsum route. NRIs are allowed to invest in multiple mutual fund schemes based on their choice.
Many mutual fund companies in India do not accept investment from NRIs in USA and Canada while other fund houses may have additional compliance requirements for NRI clients.
Some of the top AMCs who accept investment from US and Canada based NRIs are;
- SBI Mutual Fund
- Aditya Birla Sun Life Mutual Fund
- UTI Mutual Fund
- L&T Mutual Fund
- ICICI Prudential Mutual Fund
- PPFAS Mutual Fund
- DHFL Pramerica Mutual Fund
If you have opened an NRI trading and demat account in India, you can invest in mutual funds through your respective stockbroker. Some stock brokers offer direct plans that save upto 1- 1.5% extra commission while other brokers may only have regular plans on their mutual fund platform. Start a SIP or invest lumpsum money in any scheme with the broker.
4. Redeem your mutual fund investment
Likewise residents, there is no lock-in period applied on mutual fund investment for NRI clients. Whenever required, NRIs can withdraw or redeem their investment amount with the fund house or broker. The corpus amount including capital invested and total gains, net of applicable taxes will be credited back to the NRI’s NRE or NRO bank account.
On NRI mutual fund investment, tax is deducted at source and the net amount is credited to the NRI bank account.
Tax regulations on NRI Mutual Fund Investment
How NRI investment in mutual fund products is taxed is a big question. The tax treatment on mutual fund investment is the same for both residents and non-residents. The rate of tax depends upon the type of mutual fund scheme and the tenure of holding the investment.
Whether you are an existing investor or looking to invest in mutual funds, you have to pay capital gain tax on the mutual fund returns. Before proceeding, you must know the difference between short-term and long-term capital gain for equity and debt-oriented schemes.
| Equity or Equity-oriented mutual funds | Debt mutual funds | |
|---|---|---|
| Short-term capital gain | Investment is hold for less than a year or 12 months | Invest hold for less than 3 years or 36 months |
| Long-term capital gain | The period of holding MF portfolio is 12 months and more | The period of holding investment in debt-oriented MF is upto 3 years or 36 months and more |
Now, check out the applicable rate of capital gain tax on NRI mutual fund investment in India;
| Equity or Equity-oriented mutual funds | Debt mutual funds | |
|---|---|---|
| Short-term capital gain tax | 20% w.e.f. July 2024 (Earlier 15%) | As per the tax slab |
| Long-term capital gain tax | 20% after indexation |
When NRI redeem mutual fund investment, the net amount means investment along with total gains less the applicable capital gain tax is credited to their bank account. It means the tax on NRI mutual fund investment is deducted at source.
How are NRIs taxed on investment in India
Final words
For Indian staying abroad who want to take advantage of the growth in their home country, investment in mutual funds is the best way. It provides a lucrative investment opportunity to NRI clients as a small investment over a long period can turn your investment value into multiples. NRI mutual fund investment requires them to get their KYC process done by submitting all the valid proofs and starting investment in their favorite mutual fund picks.
