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How can NRIs invest in Indian mutual fund schemes?

You can invest in the best opportunities in the country while staying outside. However, you need to follow certain procedures.

The Indian economy is one of the fastest growing in the world. Its booming stock market has created considerable wealth for patient equity investors. If you are an NRI (Non-Resident Indian), seeking a slice of Indian equities, there is good news. 

You can invest in the best opportunities in the country while staying outside. However, you need to follow certain procedures. 

Check your status

Your residential status under the Foreign Exchange Management Act (FEMA) and Income Tax (IT) Act could be different. And both are important for you, since FEMA decides whether you are eligible to invest in mutual funds, while the IT Act decides how its income will be taxed. 

While the NRI status as per IT Act is based on the number of days of stay (less than 182* days) in India in a financial year, FEMA also considers intent. Moreover, the criteria have changed recently. It is therefore important to, first of all, check your residential status for the purpose of making investments. 

* 120 days since Budget 2020, if you have Indian income of more than Rs 15 lakh. 

How to invest?

It is mandatory to maintain a bank account in India for such purposes. 

There are three types of accounts that can be maintained by NRIs:

a. NRE : Non-Resident (External) Rupee Account

b. NRO : Non-Resident (Ordinary) Rupee Account


c. FCNR – B : Foreign Currency (Non –Resident) Accounts (Banks)

You can invest in units of the schemes on a fully repatriable basis or a non-repatriable basis. In case of the latter, the principal is non-repatriable but the income distributions are repatriable.

To invest on a repatriable basis, you need to have an NRE or FCNR (B) account in India, while a NRO or FCNR (B) account is required for investing on a non-repatriable basis. 

What are these accounts?

NRE is a rupee account from which funds are freely repatriable, while NRO account is a rupee account which is usually non-repatriable. However, NRO funds could be remitted abroad subject to limits (upto $ 1 mn in a year) and conditions. Both can be opened either with funds remitted from abroad or from your local funds.

FCNR (B) accounts in turn are term deposits denominated in foreign currency and maintained with Indian banks.

To invest on a repatriable basis, you need to have an NRE or FCNR (B) account in India, while a NRO or FCNR (B) account is required for investing on a non-repatriable basis. 

KYC process

You need to complete the KYC process to invest. For this a copy of your passport (front and back pages), PAN card and proofs of foreign and Indian address along with a cancelled cheque of your NRE or NRO account, are required. Some fund houses might also insist on in-person verification. 

If you are giving POA (Power of Attorney) to someone to operate investment procedures on your behalf, signatures of both the investor and POA are needed on the KYC documents. 

US and Canada 

Many mutual fund houses are currently not allowing NRIs in US and Canada to invest in their schemes due to stringent laws in these countries. And those who are allowing insist on certain requirements or additional documentation. 

Mutual fund houses that currently allow NRIs to invest in US and Canada include:

SBI Mutual Fund

UTI Mutual Fund

ICICI Prudential Mutual Fund

Aditya Birla Sun Life Mutual Fund

L&T Mutual Fund

Sundaram Mutual Fund

PPFAS Mutual Fund

How to Sell?

On putting the online redemption request, the fund house usually credits proceeds after making the necessary tax deductions directly to your NRE or NRO account. It’s possible that they might also issue a cheque. The procedures might differ across fund houses.

Investments in cases where the investor was a resident of India and subsequently became a non-resident, will not qualify for repatriation of redemption proceeds.
However, the income distribution on the investment will qualify for full repatriation. 

Taxation

Do you have to pay double taxation while investing in Indian mutual fund schemes? 

Not really, if the country of your residence has a DTAA (Double Tax Avoidance Treaty) with India. About 90 countries have a treaty in this regard with India.

Taxation structure is the same for NRIs as well as for Indian residents. However, there is a compulsory tax deducted at source (TDS) from the redemption proceeds for capital gains made by the NRIs. While dividends are tax-free in the hands of the unit holder, there is a dividend distribution tax that is applicable for equity-oriented and debt-oriented schemes at the effective rate of 11.6% and 29.1% respectively. 

And in case of equity-oriented funds, short-term capital gains (STCG) are taxed at 15 percent, while long-term capital gains (exceeding Rs 1 lakh in a year) are taxed at 10 percent. STCG for debt-oriented schemes gets taxed at your slab rate, while it is 20 percent (with indexation benefits) for LTCG.

Takeaway

NRIs can invest in Indian mutual funds , while those in US and Canada can do so selectively. While they might have to go through initial procedural hassles, in the long run, the return on such investments would be worth it. 

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