Can NRIs Invest in Indian Mutual Funds?

Can NRIs Invest in Indian Mutual Funds?

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Key Takeaways

Here's a guide for all the mutual fund investment queries that the discerning NRI may have. From the application process to taxation rules, in this article, we attempt to address all your doubts about investment in mutual funds in India.

Introduction

When you talk of investment, you think of earnings in the form of dividend, returns or an increase in value. Where there is any income or earning, more often than not, there is a tax to be paid.

Many Indians who are settled overseas wish to diversify their investment portfolio by adding Indian investments to it. The first question that comes to your mind then is, "can a non-resident Indian (NRI) even invest in Indian mutual funds"? The answer is yes, provided they do so within the ambit of the Foreign Exchange Management Act (FEMA).

But who is an NRI under FEMA? Under the Act, an NRI is defined as a person residing outside India who is necessarily a citizen of India.

How can an NRI begin investment in India?

To begin investment in Indian mutual funds, one must start with opening an NRI account- a non-resident external (NRE) account, a foreign currency non-resident (FCNR) account or a non-resident ordinary (NRO) account[1]. While the first two (NRE and FCNR) come with benefits of full repatriation of earnings and amount in the account, the latter is a non-repatriable account option.

You also need to make sure that your ‘know your customer’ (KYC) formalities are completed, for which you need to fill up a form and submit necessary documents. To complete your KYC process, you need to submit a recent passport size photograph, attested copies of your PAN card, passport and residence proof at your country of residence along with your bank statement. In some cases, an in-person verification may be required. This can be done by visiting the local Indian Embassy in your country of residence.

The next step is filling in a standard mutual fund application form, with necessary declarations completed. Once you are through with the formalities of account opening and your mutual fund application, you can start investing in Indian mutual funds of your choosing.

There are two easy ways to do this - either on your own (self) or via a power of attorney (must also comply with KYC norms). All payments must be made in Indian rupees, which can be done via a cheque drawn against your NRI account.

Once you complete all these steps, you are good-to-go and can start enjoying the benefits of investing in mutual funds.

Additionally, US citizens will be required to fill out the Foreign Account Tax Compliance Act (FATCA) form and then furnish a tax identification number to get started. Having an NRI account in India can help speed up the investment process, while also providing access to relationship managers who can help answer doubts you may have about your investments.

Open an NRI account remotely from the comfort of your home. Get started here.

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Taxation rules surrounding NRI investments

The mutual fund investment earnings in an NRI account are subject to taxation at the time of redemption. The capital gains tax rules applicable in the case of resident Indians are also valid for NRIs. The tax is deducted at source (TDS) on both short-term and long-term capital gains on NRI mutual fund investments.

When talking about debt fund investments, those held for 3 years or more are subject to long-term capital gains (LTCG) tax rates, while if you sell the mutual fund units within 3 years, your earnings are subject to short-term capital gains (STCG) tax rates.

For equity funds, units sold and redeemed within a year of purchase attract STCG tax, while those held for over a year and sold later are subject to LTCG tax.

The tax rates in both cases vary with the amount, tax bracket, and period of holding. Also, since mutual funds are financial assets, they are not subject to wealth tax.

While resident Indians are not subject to any tax deducted at source (TDS) on the mutual fund earnings, NRIs have to pay TDS on redemption of mutual fund units at the highest tax rates. This allows the government to account for tax at the outset, and helps prevent money laundering. Every quarter, a digitally-signed TDS certificate in the investor's name with details of the transaction and tax deductions is sent to you by the fund house. You need not worry about double taxation if you are a resident in any of the countries that India has a Double Taxation Avoidance Agreement (DTAA) with.

Final Note

If you an investor looking to invest in Indian mutual funds, there are over 200 schemes for you to pick from. While the initial paperwork might seem cumbersome, the track record of Indian mutual funds has always been strong, making them a great option for growth of your investment.

DBS Treasures offers a comprehensive suite of investment products for NRIs to invest in India. Know more.

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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.

The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.

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