When Shreyas moved to Canada to pursue his MBA and then a career in Sales and Marketing, he became a Non-Resident Indian and accordingly, he was keen on opting for NRI mutual fund investments when he began working. As a finance graduate, he was aware of the varied mutual fund benefits and the provision for Systematic Investment Plan or SIP in India but he needed to know more about the possibilities of NRI mutual fund investments. Given the enormous potential for growth exhibited by India, especially in comparison with more developed economies, Shreyas knew that an NRI investment in India mutual fund would offer him robust returns, thereby bolstering his portfolio. To arrive at the best mutual funds for NRI, Shreyas began researching on aspects such as NRI investment in mutual funds, SIP for NRI, NRI mutual fund taxation and TDS on mutual fund redemption for NRI.
Who is a NRI?
An individual classified as a Non-Resident Indian (NRI) is someone who has resided outside of India for 182 days or more within a financial year. NRIs are entitled to retain properties acquired while they were residents of India and are also permitted to invest in new properties within the country's borders. While real estate investments constitute a significant portion of NRI investments, they also have the option to explore investment avenues such as mutual funds. Here is everything you need to know about NRI mutual fund investments.
Rules and regulations to consider
When it comes to investing in mutual funds, NRIs must adhere to the guidelines set forth by the Foreign Exchange Management Act 1999 (FEMA). Under FEMA provisions, NRIs are permitted to invest in various financial instruments, including direct stocks, exchange-traded funds (ETFs), and mutual funds. However, compliance with specific conditions is mandatory, such as the submission of updated Know Your Customer (KYC) documents and the establishment of a rupee-denominated Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account.
Investment procedure guidelines
Mutual fund investments for NRIs necessitate adherence to a specific procedure. Initially, NRIs are required to open either an NRE account, NRO account, or Foreign Currency Non-Resident (FCNR) account with an Indian bank, as mutual fund houses cannot accept investments in foreign currencies. Subsequently, NRIs can proceed through two primary options:
Direct Investment: NRIs can handle basic transactions, such as debiting and crediting, through standard banking channels. However, they must include the requisite KYC details with their investment applications, specifying whether the investment is repatriable or not.
Power of Attorney (PoA): NRIs have the option to authorise someone else to manage their investments by granting them Power of Attorney (PoA). In such cases, both the NRI investor and the PoA holder must sign the KYC documents at the time of investment application.
Considerations for USA and Canadian NRI investors
For NRIs from the United States and Canada, mutual fund investments entail additional complexities due to the Foreign Account Tax Compliance Act (FATCA). FATCA mandates that all financial institutions report transactions involving US citizens, including NRIs, to the US government to prevent tax evasion on overseas income. India's adherence to FATCA through the Inter-Governmental Agreement (IGA) signed on July 9, 2015, has led to mutual fund houses halting investments from USA and Canada initially. However, after consultations with experts, several mutual fund houses have resumed investments from these countries with certain conditions. For instance, ICICI Prudential AMC, Birla Sun Life Mutual Fund, and SBI Mutual Fund now accept investments from USA and Canada through offline transactions, supplemented by an additional declaration signed by the client. On the other hand, L&T Mutual Fund has opted not to allow such investments in close-ended funds. Investors like Shreyas can now undertake NRI mutual fund investments through asset management companies like Aditya Birla Sun Life Mutual Fund, SBI Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund, L&T Mutual Fund, PPFAS Mutual Fund, and Sundaram Mutual Fund asset management companies like Aditya Birla Sun Life Mutual Fund, SBI Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund, L&T Mutual Fund, PPFAS Mutual Fund, and Sundaram Mutual Fund, TATA Mutual Fund and Nippon India Mutual Fund.
Tax norms you should be aware of
The taxation regulations for both residents and NRIs investing in mutual funds are fundamentally identical – for instance, dividends derived from mutual funds are exempt from taxation for both resident and NRI investors. Accordingly, for equity mutual fund investments held for one year or less, the applicable tax rate is 15% of the gains, which falls under Short Term Capital Gains or STCG. Long Term Capital Gains tax is applicable on investments held for more than one year, with the tax rate of 10% being levied on the incremental gains over INR 1 lakh for a financial year. Alternatively, in debt mutual fund investments, units held for three years or less are subject to a tax rate of 30% on the gains whereas investments held for more than three years are taxed at a rate of 20% with indexation benefit for listed funds, or 10% without indexation benefit for non-listed funds. However, from fresh investments from April 2023, all gains of debt mutual funds are taxed at 30% irrespective of the period of holding.
Upon the sale or redemption of mutual fund units, the applicable tax calculated as mentioned above is deducted by the buyer, and the remaining amount is then transferred to the NRI. This process, known as Tax Deducted at Source (TDS), ensures compliance with tax regulations, with the deducted tax subsequently remitted to the Indian government on behalf of the NRI investor. As a result, the NRI is not required to pay any additional tax on the same transaction to the Indian government. NRIs also have the option of leveraging the Double Taxation Avoidance Agreement (DTAA) to claim benefits on TDS deducted and taxes paid in India against their tax liabilities in their resident country. For example, if INR 50,000 is deducted as tax on short-term capital gains from an equity fund in India, the NRI can utilise this deduction to offset the tax payable on the same gain in their resident country. The primary aim of DTAA is to prevent the occurrence of double taxation on the same income, thereby promoting international tax compliance and fairness.
Now that you have all the information you need to make your decision, you can start NRI investment in mutual funds right away.
An investor education initiative by Edelweiss Mutual Fund
All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
