NRI Guide To MF Investing In India

NRI Guide To MF Investing In India 526 0

The process of investing in mutual funds in India for a NRI may look intimidating. Nevertheless, it is worth taking the pain. The returns and diversification offered by investing in the Indian market can help your overall portfolio to perform better 

The last one year has been exceptional for equity returns around the world. Barring a few indices, all the equity indices have generated returns in double digits. Nevertheless, the index that has stolen the show is Nifty 50, representing the Indian equity index. Nifty 50 was up by more than 50 per cent year-till-date as of October 11, 2021. Compare this with some other global equity indices that are up by anywhere between 3-33 per cent. The graph below shows the performance of Nifty 50 against some of the major global equity indices.

Even if we compare the returns since the start of year 2020, Nifty 50 has outperformed all the indices by a huge margin expect for tech-heavy NASDAQ. The table shows the perfor-mance of Nifty 50 against the other global equity indices since the start of 2020.

World Indices Risk Return Stats Between Jan 2, 2020 and Oct 11, 2021

Looking at the performance and resilience of the Indian equity market, it presents a huge opportunity for every investor to join the bandwagon. Many NRI investors also want to be part of this party. Yes, they can also invest directly in stocks; however, it requires expertise as well as time to find the right opportunity.This may not be feasible for everyone and hence investing through mutual funds is a more convenient way of making the most of this opportunity. Now the question is about how a NRI can start investing in India through mutual funds. There are some steps towards the same which we will be explaining in the following paragraphs. So before getting into investing, it is very important to understand a few legalities.

Get an Appropriate Bank Account

Mutual funds in India cannot accept investment in foreign currency. Moreover, NRIs cannot have a regular savings bank account in India as per the Foreign Exchange Management Act. They have to open a rupee-denominated account either as a non-resident external (NRE) or non-resident ordinary (NRO) or a foreign currency non-resident (FCNR) account in a bank. An NRE account suits those who wish to repatriate the earnings from India back to their place of residence.

Money kept in NRO accounts cannot be repatriated. NRO accounts can be used by NRIs to deposit their earnings in India. And if you wish to hold funds in a foreign currency then you should open an FCNR account. In addition to one of such accounts, NRIs also need to fill out the Foreign Account Tax Compliance Act (FATCA) form. Once this process is complet-ed, you will need to furnish the tax identification number of the country of your residence to get started with investing in mutual funds.

Get Your KYC Done

Once you have opened an appropriate account for investment the next step is get your KYC done. An NRI must complete the KYC process before starting to invest in Indian mutual funds. In order to get a NRI KYC-compliant certificate, the NRI must submit a recent photograph, certified copies of PAN card, passport copy, proof of residence outside India and a bank statement. He or she may even have to visit the Indian embassy in the country of residence for ‘in person’ verification. The KYC form will also ask whether the funds will be repatriated or not. Many mutual fund houses in India don’t allow NRIs from the US and Canada to invest in their schemes directly online because of the complicated compliance requirements under the FATCA.

On the other hand, there are some fund houses that have certain conditions or additional requirement for documents following which they allow investors based in the US and Cana-da to park money in their schemes. For example, ICICI Prudential AMC, Birla Sun Life Mutual Fund and SBI Mutual Fund allow investments only through an offline transaction with an additional declaration signed by the client.

Investment Procedure

There are two ways through which NRIs can invest in Indian mutual funds. First, the investment amount can be directly transacted from the NRE or NRO account. Second, you as an NRI need to give a rupee cheque or draft from your NRE or NRO account or can also send a rupee cheque or draft issued by an exchange house abroad which is drawn on its correspondent bank in India.

 Who is a NRI?

NRI is defined differently as per FEMA and IT Act. FEMA decides where you can invest. For instance, you can open NRE or NRO accounts if you qualify as your resident status as per the Income Tax Act. It does not matter when it comes to deciding whether you can make a particular investment in India. The Income Tax Act decides how the income from various investments will be taxed. For instance, the provisions of the Income Tax Act will decide how income from NRE and NRO deposits will be taxed.

You are a resident outside India (NRI) if you are in India for 182 days or less dur-ing the preceding financial year. There are a few exceptions. The above definition does not apply:

• If you come to (or stay in) India for taking up employment.
• If you come to (or stay in) India to carry on a business or vocation.
• If you come to (or stay in) India for any purpose that indicates your intention to stay in India for an uncertain period.

In such cases, you will be considered resident in India even if you have stayed in India for less than 182 days during the preceding financial year. If you are settled abroad and have come to India for a purpose other than employment or business and have no intention to stay in India permanently, you will continue to be considered resident outside India (NRI) irrespective of your duration of stay in India.

Remember, if investment is made through cheque or draft, then you must attach FIRC (Foreign Inward Remittance Certificate), which is proof that the payment is received by the individual from outside the country in foreign currency or a letter issued by a bank confirming the source of funds along with the application form.

The second way a NRI can make investment in Indian mutual funds is through another person. A NRI can give power of attorney (PoA) which allows him or her to give certain rights to someone that can be trusted, maybe a friend or relative or even a financial planner to take decisions on his or her behalf. Mutual funds do allow PoAs. The one who is going to take decisions on your behalf i.e. the PoA holder needs to submit the attested copy of the PoA to the fund houses. The PoA must contain signatures of both the NRI and the PoA holder.


When it comes to redemptions, all the redeemed amounts are payable in rupees only. The mutual fund will credit the corpus, which includes the initial investment and gain, if any, to your account after deducting taxes. The final amount will be credited to the respective NRE or NRO bank account of the investor. The payment is either made through cheques or even can be directly credited to the NRI’s bank account. As explained earlier, investments along with their appreciation and dividend earnings can be repatriated in full only in case of NRE and FCNR accounts. In case of NRO accounts only the appreciation on investments can be repatriated and not the principal amount. The key difference while redemption in case of NRI and resident Indian is TDS.

Taxation of NRIs for MF Investment

Taxation is same for both residents and NRIs. For example, dividends received by investors are added to their taxable income and taxed at their respective income tax slab rates. Short-term capital gain (STCG) rules apply for equity mutual fund investments made for one year or less. The applicable tax rate is 15 per cent of the gains. Long-term capital gain (LTCG) rules apply for equity mutual fund investments made for more than one year. The applicable tax rate is 10 per cent at the gains made in excess of Rs1 lakh for a financial year.

Now, in a case when a NRI is making redemption, the tax calculated as per the existing tax laws will be deducted by the mutual fund house and the remaining money will be transferred to the NRI. This is known as tax deducted at source (TDS) and it is then paid to the government on behalf of the NRI. Thus, after that, no tax on the same is required to be paid by the NRI to the Indian government. So is there any double taxation in case of you as a NRI investor? It completely depends on the country you reside and whether India has ADTT (Avoidance of Double Taxation Treaty) with your country of residence. For instance, India has ADTT with the US. So if an NRI who is based in the US pays short-term capital gain tax of 15 per cent in India, the rate of such being 30 per cent in the US, the NRI has to only pay the differential amount of 15 per cent.


The Indian economy is likely to be one of the fastest growing major economies in the world. This will definitely help the stock mark here. The above process may look intimidating for many NRI investors. Nevertheless, it is worth taking the pain. The returns and diversification offered by investing in the Indian market can help your overall portfolio to perform better.

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