NRI Mutual Fund Investment in India: Options & Tax Guide

For Non-Resident Indians (NRIs), the idea to participate in India’s growing economy often comes with some practical questions: Can NRIs invest in mutual fund schemes in India? What rules apply? 

The answer is yes, but the process involves specific regulations, account types, and documentation. This article discusses the complexities and offers key insights for NRIs keen on exploring mutual fund investments in India while adhering to legal and financial guidelines.

Can NRIs Invest in Mutual Funds in India?

Can NRIs invest in mutual funds in India is a common question, and the answer is yes. But the process comes wrapped in layers of compliance checks, banking formalities, and regulatory approvals, all governed by guidelines from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). 

The overall process of NRI investment in mutual funds requires understanding account types, tax norms, and repatriation rules. Similarly, NRI investment in Indian real estate has its own set of guidelines and legal requirements that must be adhered to.

Indian mutual fund houses welcome NRI funds, but depending on the country of residence (especially the US and Canada), some funds might slam the door shut due to FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) obligations. 

But broadly speaking, the Indian mutual fund playground is open to NRIs, with a few hoops to jump through.

The key takeaway here is that a mutual fund investment for NRIs is accessible but requires adherence to the strict norms in place. Other NRI investment options in India include real estate, shares, and fixed deposits, which can further diversify an NRI’s portfolio.

How Can NRIs Invest in Mutual Funds?

The road to becoming an NRI mutual fund investor isn’t rocket science, but it does demand attention to detail. Can an NRI invest in Indian mutual funds? Absolutely, as long as the right procedures are followed.

Step 1: Open an NRE or NRO Account 

An NRI needs either an NRE (Non-Resident External) account or an NRO (Non-Resident Ordinary) account. The NRE account is typically for repatriable funds – money you want to move back abroad without restrictions. The NRO account, on the other hand, is better suited for income earned within India that you don’t plan to fully repatriate. The account you choose determines how freely you can move your mutual fund gains across borders.

Step 2: Do KYC

KYC, or Know Your Customer, is a regulatory requirement. You’ll need to submit documents proving your identity and address (passport, visa, overseas address proof, PAN card, etc.), and complete an in-person verification (IPV), often facilitated by fund houses.

Step 3: Select a Platform

You’ve got options here. You can invest directly, managing everything yourself. Or, you can appoint a Power of Attorney (PoA) to handle investments on your behalf.

As for the investment style, you can either go all-in with a lump sum or set up a Systematic Investment Plan (SIP), where you invest a fixed amount regularly and reduce the risk of market ups and downs over time. However, do note that this varies from AMC to AMC, as some fund houses accept both lumpsum and SIP investments, while others may allow only lumpsum investments for NRIs. It’s always a good idea to check the AMC’s guidelines before you proceed.

Step 4: How to Redeem

When it’s time to cash out, each fund house has its way. Typically, the redemption proceeds, after tax deduction, are credited straight into your NRO or NRE account. Some AMCs even issue cheques if needed. Just make sure you follow their redemption instructions, or you might face delays.

Taxation on Mutual Fund Investments for NRIs

One of the biggest myths floating around is that NRIs have to face double taxation when investing in India. Thankfully, that’s not quite true.

India has signed Double Taxation Avoidance Agreements (DTAAs) with several countries, including the US, meaning you can claim tax relief back home if you’ve already paid taxes in India. 

Mutual fund tax for NRI investors varies depending on the fund type and holding period. Equity mutual funds attract short-term capital gains tax at 20% (if held under a year) and long-term gains above ₹1.25 lakh are taxed at 12.5%. 

And remember – there’s Tax Deducted at Source (TDS) on your redemptions, so the government takes its cut before the money hits your account.

Repatriation of Mutual Fund Returns

Want to move your returns back overseas? That’s possible. Funds invested via NRE accounts are fully repatriable. 

NRO accounts, however, have a $1 million annual repatriation cap, and you’ll need to provide a certificate from your Chartered Accountant confirming tax compliance. Keep an eye on those limits, especially if you’re sitting on a sizable corpus. 

Other Investment Options in India for NRIs

Mutual funds aren’t the only assets for investments. NRIs often diversify across various investment options for NRI in India:

1. Shares – Direct equity investment via Portfolio Investment Scheme (PIS) accounts is an option, but brace for even more paperwork and market volatility.
2. NRI Investment in Indian Real Estate – NRIs can invest in residential and commercial properties in India, but they’re restricted from purchasing agricultural land, plantation plots, or farmhouses.
3. Fixed Deposit – NRE and NRO fixed deposits are popular for their fixed returns and lower risk, though inflation tends to eat away at the returns.

Conclusion

Yes, the NRI mutual fund investment route has its share of paperwork and legal hurdles. But once you’re past the setup, it offers a smart way to participate in India’s growth story and diversify your portfolio. 

Don’t let the initial friction scare you off. Do your research, stay compliant, and enjoy the benefits of investing in one of the world’s fastest-growing economies. 

FAQs