Investing in India’s mutual funds offers Non-Resident Indians (NRIs) a unique opportunity to participate in one of the world’s fastest-growing economies. This blog discusses the frequently asked questions regarding NRI investments in mutual funds, providing comprehensive insights to ensure a smooth investment journey.

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1. Can NRIs invest in mutual funds in India?

Yes, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIO) can invest in Indian mutual funds on a full repatriation as well as non-repatriation basis. NRIs need to fulfil all KYC and regulatory requirements before investing in mutual funds.

2. Are there restrictions for NRIs from certain countries?

Yes, a few countries such as the USA and Canada have restricted investments by NRIs in mutual funds without relevant disclosures. Some AMCs do not accept mutual fund applications from NRIs in Canada and the USA due to cumbersome compliance requirements under the Foreign Account Tax Compliance Act (FATCA).

3. Can NRIs invest via Systematic Investment Plans (SIPs)?

Of course, NRIs can invest through Systematic Investment Plans (SIPs), which allow for regular, smaller investments over time.

4. Can NRIs choose between growth and dividend options?

Yes, NRIs can opt for both growth and dividend options while investing in mutual funds in India.

5. Can NRIs repatriate redemption proceeds anytime?

The redemption proceeds received in NRE/FCNR accounts can be repatriated, but not from NRO accounts.

6. What types of bank accounts can NRIs open?

NRIs can choose from three main types of accounts:

NRE (Non-Resident External): For foreign earnings, fully repatriable.
NRO (Non-Resident Ordinary): For income earned in India, non-repatriable.
FCNR (Foreign Currency Non-Resident): Fixed deposits in foreign currency.

Each serves different purposes related to their income and investment needs.

7. What is an NRE account?

An NRE (Non-Resident External) account is a rupee-denominated account that NRIs can open to deposit their foreign currency earnings. The advantage of an NRE account is that it has high liquidity and allows for full repatriation of funds when required.

8. Who is eligible to open an NRE account?

An NRE account can be opened by an NRI, a Person of Indian Origin (PIO), or a person who has become a non-resident under FEMA.

9. Can a Power of Attorney holder manage an NRE account?

No, a resident Power of Attorney holder cannot open or close an NRE account on behalf of an NRI.

10. What is an FCNR account?

FCNR stands for Foreign Currency Non-Resident Account. This is a type of fixed deposit account opened for depositing income earned overseas. The account is held in foreign currency and can be opened by NRIs and Overseas Corporate Bodies (OCB).

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11. What is an NRO account?

A Non-Resident Ordinary (NRO) Account is a popular way for many NRIs to manage their deposits or income earned in India, such as dividends, pensions, or rent. This account allows you to receive funds in either Indian or foreign currency.

12. What is FEMA?

The Foreign Exchange Management Act (FEMA) is legislation that regulates the inflow and outflow of foreign exchange in India. The Central Government of India formulated FEMA to encourage external payments and cross-border trade.

13. What are the investment procedures for NRIs in mutual funds?

The following are the investment procedures for NRIs in mutual funds:

NRIs need to open NRE, NRO accounts with an Indian bank.
NRIs must submit a mutual fund application along with KYC documents, including a passport, PAN card, and proof of address outside India.
KYC documents also include recent photographs and attested copies of the passport, PAN card, and bank statements.
NRI investors can select a Power of Attorney (PoA) holder to invest on their behalf, with the signatures of both the NRI and PoA holders on the KYC documents.

14. What are the mutual fund regulations for NRIs?

NRI investors need to complete the KYC process along with investment proposals.
If payment is made by a cheque or demand draft, a Foreign Inward Remittance Certificate or letter from the bank is required.
At the time of redemption, TDS is applicable as per the highest tax bracket, and the remaining sale proceeds are credited to the bank account If the investment is non-repatriable, the proceeds are credited to the NRO account only.
NRIs can submit an income tax return and get a refund of the excess TDS amount paid.

15. How are NRI mutual fund investors taxed?

Equity Taxation: 20% on short-term gains and 12.5% on long-term gains above ₹1.25 lakhs gains.
Debt Taxation: Short-term and long term gains are taxed as per the investor’s tax slab.

16. What is the TDS rate on NRI mutual fund redemptions?

For equity-oriented mutual funds, TDS is deducted at 12.5% for LTCG and 20% for STCG. For other than equity-oriented mutual funds, the TDS rate is 30% for STCG and LTCG.

17. Do NRIs need to file income tax returns in India?

Any individual, including NRIs, with a total income exceeding ₹2.5 lakhs needs to submit an income tax return in India. This is according to the old regime. Those opting for the New Tax Regime (introduced in 2020) must file ITR if their total income in India exceeds ₹3 lakhs in a financial year.

18. Do NRIs pay taxes on capital gains in their resident country?

Yes, NRIs may be subject to capital gains tax in their resident country but can benefit from Double Taxation Avoidance Agreements (DTAA) with India.

19. What are the residential status classes under the Income Tax Act?

The classes are Resident and Ordinarily Resident, Resident but Not Ordinarily Resident, and Non-Resident Indian (NRI).

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20. Can NRIs avoid double taxation?

India has Double Taxation Avoidance Agreements (DTAA) with more than 90 countries across the globe If an NRI resides in a country that has signed a DTAA with India, they can avoid double taxation.

21. Can a Hindu Undivided Family (HUF) become an NRI?

An HUF can become an NRI provided all the members of coparceners become NRIs For determining whether an HUF is a resident or not, the residential status of its ‘Karta’ for the relevant previous year is irrelevant.

22. Can NRIs invest in ELSS to claim section 80C deductions?

Yes, NRIs can invest in ELSS (Equity-Linked Savings Scheme) mutual funds to be eligible for Section 80C deductions of up to ₹1.5 Lakhs.

23. What deductions are allowable under section 80C for NRIs?

Allowable deductions include:

Life insurance premium payments
Principal repayments on loans to purchase house property
Unit-Linked Insurance Plans (ULIPs)
Investments in ELSS mutual funds

24. What deductions are disallowed under Section 80C for NRIs?

Disallowed deductions include investments in:

Investments in Public Provident Fund (PPF).
Investments in National Savings Certificates (NSCs).
Post office 5-year deposit schemes.
Senior Citizen Savings Schemes (SCSS).

25. Is interest earned in NRI bank accounts tax-free?

Interest earned in NRE and FCNR accounts is tax-free, while interest in NRO accounts is fully taxable in India. Interest in NRO accounts is subject to TDS without any threshold limit.

26. What is the difference between NRI and PIO?

NRIs are Indian citizens residing abroad, while PIOs are foreign citizens (other than Bangladesh or Pakistan) who once held an Indian passport or were born abroad to Indian parents or parents who once held an Indian passport.

27. How do you determine the residence status of an individual?

An individual is said to be a resident in India in any previous year if they satisfy any one of the following basic conditions:

a.) They were in India for 182 days or more in the previous year.

b.) They stayed in India for at least 365 days during the 4 preceding years and 60 days or more in the relevant financial year.

Also, if an individual’s total income, excluding foreign income, exceeds ₹15 lakhs and their stay in India is 120 days or more in the relevant previous year, they shall be deemed to be a resident of India.

28. What is a Resident Not-Ordinary Resident (RNOR)?

If an individual satisfies any one basic condition for being a resident but does not satisfy the two additional conditions, they are said to be a Not-Ordinary Resident.

29. What is a Non-Resident Indian (NRI)?

If an individual does not satisfy any of the basic conditions to become a resident, they are considered a Non-Resident Indian.

Wrapping It Up

Mutual fund investments offer a promising opportunity for NRIs to engage with the Indian market and maximise their profit. However, several challenges can complicate the process, including regulatory complexity, KYC and compliance issues, minimal diversification, currency fluctuations, difficulties in property management, lack of market awareness, and complexities with taxation.

Understanding the nuances of investing in mutual funds as an NRI is crucial for maximising returns while ensuring compliance with regulations. This blog aims to clarify common queries and empower NRIs to make informed investment decisions in India.

If you need more details on the available fund options or would like to get a clear idea of the investment restrictions, feel free to contact our personalised financial advisors at Pentad who can help you make informed decisions.

FAQ About NRI Mutual Fund Investments - All your Questions Answered

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