How can NRIs invest in Indian Mutual Funds

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Non-resident Indians have made India proud at many levels across the globe. While they might be living a successful and settled life in a foreign country, NRIs always want to be connected to their motherland. Be it for financial purposes or to send money to families, NRIs are always on the lookout for investment opportunities for them in India. The attraction of India as an investment destination is not far off. They might not come back to their country but the financial success is a huge draw for them.

Mutual Fund for NRIs

In Asia, after Singapore and Hong Kong, India is one of the largest emerging economies with a strong financial infrastructure and introduction of new investments. It is an interesting time for investors domestic or international. And Mutual Funds take the cake in making the decision on which option to choose.

However, NRIs need to be mindful of a number of issues like tax and foreign exchange regulations before seeking to invest,

So, the most common question in NRIs’ minds is whether they can invest in Indian mutual funds. The answer is YES and it has been made simple by government initiatives to allow foreign money to flow into the country.

Current Legal Scenario for Mutual Fund Investment

Investing in mutual funds in India does not require special approvals from any of the regulatory authorities. However, for an NRI it is important to understand the rules for adhering to the Foreign Exchange Management Act (FEMA). Till early 2018, many mutual funds were not accepting investments from NRIs from Canada/USA because of the cumbersome FATCA (Foreign Account Tax Compliance Act) regulations. It is an additional disclosure required by their governments on individuals from these countries investing elsewhere.

The purpose is to detect tax evasion if any. However, the pace and mindset is changing and knowing that bulk of NRI money is in these two countries, banks and fund houses have started accepting deposits from these NRIs subject to extensive scrutiny and form filling. As of now only a handful of mutual fund houses are accepting from NRIs in these countries.

NRIs Can invest in Indian mutual funds via direct Schemes

NRIs can easily take the route of direct investments online where they do not need to go through a distributor or agent. They should focus on the expense ratio which is an important ratio for keeping a tab on returns. NRIs should follow this simple investment strategy while investing to ensure that expenses do not chip away their returns.

The direct plans have been made less expensive according to market regulator SEBI’s directive in 2012 where Asset Management Companies (AMCs) were to provide different expenses for direct investments.

Why are Direct Investment a Boon for NRIs

With a separate NAV and zero commission, the expense ratio of direct investment is very low. Post the SEBI directive, all fund houses now offer direct investment for all schemes. Apart from this, there would be no easy way to invest in Indian mutual funds.

Repatriable and Non-Repatriable

Few things than an NRI need to look out for while investing in Indian mutual funds

While an NRI is allowed to invest in direct plans like any ordinary citizen, he cannot do so in foreign currency as Indian laws do not allow so. He needs to decide if he will be doing so on a repatriable or non-repatriable basis.

  • NRE – Repatriable – NRE or Non-Resident External Accounts are those in which NRIs can deposit and invest through them in Indian rupees. Here the investment can be credited back and the NRI can freely remit the money outside without any permissions from the RBI.
  • NRO – Non-Repatriable – NRO or Non -the resident ordinary account has to be opened with an Indian bank in Indian rupees and the money in this account cannot be withdrawn.
  • FCNR - a Foreign Currency Non-Resident (FCNR) allows an NRI to deposit foreign exchange and invest through it after conversion from the bank. Even under this account, the money repatriable.

The accounts undergo a KYC (Know Your Customer) due diligence and also your mutual fund form asks you to indicate whether the investment will be on a repatriable or non-repatriable basis

Process of Investing and Documentation

The various documents required to be submitted to the fund house for opening an account are as follows –

  • PAN or corresponding document
  • Bank statement
  • Overseas Citizenship Proof
  • Photographs
  • Copy of Passport
  • Any other documentation required by the fund house

For payments done through cheque or demand drafts, a Foreign Inward Remittance Certificate (FIRC) is essential to be shown. It’s only in lieu of this that an investor can show a confirmation of the sources of funds confirmed by his bank.

Many fund houses might also require in-person verification (IPV) which can be completed by a visit to eh nearest Indian Embassy or stated representative office by the fund house. The same documents might be required for the IPV as well.

Another method for an NRI to invest is by giving the Power of Attorney (PoA) to a trusted person in India as allowed by Indian Mutual funds. The person can make investments, withdraw and take any other decisions regarding this mutual fund portfolio. Here both the NRI and the said individual have to sign the documents and create an identity for the fund house.

Redemption of Mutual Fund for NRIs

The process of redemption follows a similar pattern and the fund house can either issue a cheque on receiving the redemption request for even credit the amount directly to the linked NRE or NRO account. The redemption happens in Indian rupees and if the investment is deemed as non-repatriable by the investor then the redemption is made only in an NRO account.


The next thing which investors need to know is the tax treatment on the return of the investment. The rate of taxation would depend on the type of mutual fund and the tenure of investment. The tax rate for FY 2018-19 can be summarized as below:

  1. Capital Gain Taxation
    1. Equity Oriented Schemes:
      1. Long term capital gains (on units held for more than 12 months) :- 10%
      2. Short term capital gains(on units held for 12 months or less):-15%
    2. Other than Equity Oriented Schemes:
      1. Long term capital gains (on units held for more than 36 months) :- 20% (Listed) & 10% (Unlisted)
      2. Short term capital gains(on units held for 36 months or less) :-30%

    Note: - Tax on long term capital gains will be levied if the amount exceeds Rs. 1lakh.

  2. Tax on Dividend
    1. Equity and Debt Oriented Schemes:- NIL
  3. Tax on Distributed Income-Dividend Distribution Tax (DDT)(Paid by Mutual Fund)
    1. Equity Oriented Schemes:- 10% + 12% surcharge +4% cess= 11.648% effectively
    2. Debt Schemes(Other than Infrastructure debt fund):- 25% + 12% surcharge +4% cess= 29.12% effectively
    3. Infrastructure debt fund:- 5% + 12% surcharge +4% cess=5.824% effectively
  4. Tax Deducted at Source (TDS)
    1. Equity Oriented Schemes
      1. Short term capital gains:- 15%
      2. Long term capital gains:- 10%
    2. Other than Equity Oriented Schemes
      1. Short Term Capital gains:- 30%
      2. Long term Capital gains:- 10% (Unlisted)/ 20% (Listed)

The income generated on mutual fund investment in India may also be taxable in the country of residence of NRI/PIO and need to be consulted with the income tax advisors of the respective country to ensure proper compliance with the tax laws. India has signed Double Tax Avoidance Agreement (DTAA) with some countries to avoid double taxation on the income earned in the source country and residence country.

Final thought

Thus, as an Indian staying abroad, if you want to take advantage of the growth in the home country, mutual funds are easy and hassle free way of investment by diversifying the portfolio across different segments and sectors of the market. The basic process to start investing in Mutual Fund is to complete KYC process with the required document or someone else invest on your behalf via PoA mode. If you like to start Mutual Fund Investment in India, please leave your contact information here.

Last updated on 30th Jun 2019



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