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Investing in Indian mutual funds presents a compelling opportunity for Non-Resident Indians (NRIs) to capitalise on the robust economic growth projected for India.
Offering a diverse array of investment options, attractive returns, and tax benefits under the Double Taxation Avoidance Agreement (DTAA), Indian mutual funds provide NRIs with a strategic means either to diversify their portfolios or to help them to build their retirement corpus if they wish to spend their retired life back home in India.
Furthermore, India’s well-regulated investment environment ensures security and stability, enhancing its appeal for NRIs. Whether the objective is long-term wealth accumulation or regular income generation, a thorough understanding of mutual fund investments in India can yield significant financial benefits for NRIs worldwide.
To begin with, it is essential to understand the classification of NRIs. According to the Reserve Bank of India’s Foreign Exchange Management Act (FEMA), 1999, an NRI is a person residing outside India who is either a citizen of India or a person of Indian origin. Under Section 6 of the Income Tax (IT) Act, an individual qualifies as an NRI if she/he has been in India for less than 182 days in the preceding financial year, or if she/he has been in India for less than 60 days during the previous year and 365 days or less during the past four years.
KYC norms
KYC compliance norms have recently come under the spotlight as the Securities and Exchange Board of India (SEBI) mandated that KYC Registration Agencies (KRAs) update the KYC records of all existing clients, including NRIs, whose KYC was based on an officially valid document (OVD) other than Aadhaar and verify the PAN-Aadhaar linkage by March 31, 2024.
Failure to comply with these requirements resulted in the KYC status being put on hold, restricting mutual fund transactions such as SIPs. Investors’ KYC statuses vary, based on the initial documents submitted and the validation of their email and mobile number by the KRA.
A “KYC validated” status indicated that KYC was based on Aadhaar with both the email ID and phone number verified, allowing transactions across all fund houses. In contrast, a “KYC Registered” status implied that KYC was based on other OVDs, with either the email or phone number needing verification. This status allows transactions only with existing fund houses but requires fresh KYC for new ones. If the status is on hold, it means KYC was based on non-OVD documents, restricting transactions until updated.
However, in a circular dated May 14, SEBI relaxed these requirements by exempting NRIs who do not possess Aadhaar from PAN-Aadhaar linkage, allowing them to use other documents such as passport for KYC validation.
According to Praveen Shankaran, Chief Operating Officer – Domestic Fund Services at KFintech, NRI investors with a “Registered” KYC status can continue to transact in mutual funds without resubmitting KYC documents for new AMCs until April 30, 2025. NRI investors can check their status on KRA websites such as CVL KRA, NDML KRA, Karvy KRA, and CAMS KRA. “KYC modification can be carried out through physical mode or online mode, with the geo-location in India,” says Praveen.
First-time investors or those seeking to modify their KYC can download the KYC form online from either the fund house’s website, Register & Transfer Agents (RTAs) such as KFintech, or KRAs such as CDSL Ventures. Typical KYC documents include attested copies of proof of identity and address, such as PAN, Aadhaar, passport, and residence proof (both correspondence and overseas address) such as driving licence. Additionally, a Person of Indian Origin (PIO) may need to submit a copy of the PIO Card or Overseas Citizenship of India (OCI) Card. If any documents are in a language other than English, they must be translated during submission.
Accounts required
Once NRIs have ensured KYC compliance, they will need to open an NRI bank account to manage their investments in Rupees, as foreign currency investments are not permitted. The primary types of bank accounts for investment purposes include the Non-Resident External (NRE) account, Foreign Currency Non-Resident (FCNR) account, and the Non-Resident Ordinary (NRO) account. NRE and FCNR accounts are ideal for NRIs who wish to repatriate funds freely and avoid Indian taxation on interest earned.
NRE accounts are suitable for holding savings in INR, while FCNR accounts are preferred for maintaining savings in foreign currency, thus avoiding exchange rate risk. However, FCNR accounts are strictly term deposit accounts, while NRE accounts can be savings, current, recurring, or fixed deposit accounts.
NRO accounts are best for NRIs with income sources in India, managing these funds domestically. However, they are subject to tax implications on accrued interest and allow limited repatriation of funds up to $1 million per financial year after tax deductions. When mutual fund units are purchased via cheque, demand draft, DD, NEFT, or RTGS, the investor may need to provide a Foreign Inward Remittance Certificate (FIRC) to confirm the source of funds. NRIs can also use regular online banking channels for mutual fund investments.
As an NRI, once you’ve decided whether to repatriate or maintain the funds, you can invest in two primary ways: direct/self-investing or through a Power of Attorney (PoA). Direct investing involves managing investments independently, completing KYC norms, and linking investments to NRE/NRO accounts for seamless transactions, including online mutual fund purchases and SIPs.
Alternatively, you can delegate investment decisions to a trusted person in India through a notarised PoA document. The PoA holder manages the NRI’s mutual fund portfolio, including buying and redeeming units, following the PoA mandates. During each transaction, the PoA holder must submit either the original PoA or a notarised copy, signed by both the NRI investor and the PoA holder.
Options available
The next decision for NRIs to face is whether to choose regular or direct mutual fund plans. Regular plans involve intermediaries such as Mutual Fund Distributors (MFDs), who assist with KYC compliance, documentation submission to RTAs, and ongoing service management. These intermediaries receive commissions, which are included in the fund’s expense ratio, thereby impacting the Net Asset Value (NAV) and potentially reducing returns. Traditional brokerage houses such as ICICI Securities and some NRI-focused financial platforms include iNRI and SB NRI typically offer regular plans.
On the other hand, direct plans bypass intermediaries, allowing NRIs to invest directly through the mutual fund company or online platforms. This generally results in lower expense ratios and higher NAVs, potentially leading to better returns over the long term. NRIs opting for direct plans should be comfortable managing their investments independently and ensuring compliance with regulatory requirements. Financial institutions providing direct plans include discount brokers such as Upstox and 5paisa, execution-only platforms such as Kuvera, and NRI-focused platforms such as Vance.
However, some Asset Management Companies (AMCs) do not accept mutual fund applications from NRIs based in the US or Canada due to the paperwork and compliance issues stemming from the Foreign Account Tax Compliance Act (FATCA). FATCA mandates financial institutions to share transaction details involving US citizens, including NRIs, with the US government to prevent tax evasion on overseas income. Furthermore, Indian AMCs need to register with US and Canadian regulators to market their funds in these countries.
Due to these regulations, only a few fund houses accept digital mutual fund investments from NRIs residing in the US and Canada. These include Aditya Birla Sun Life, ITI, Navi, Nippon India, Quant, Samco, Sundaram, UTI, and WhiteOak Capital as per the mutual fund aggregator portal - MFUtilities. SBI Mutual Fund requires the first transaction to be physical but allows subsequent transactions online. Many other fund houses accept investments only through physical mode along with a declaration form indicating the investor’s residential status. For a complete list of AMCs that allow US- and Canada-based NRIs to invest, visit this MFUtilities site (updated as on March 28, 2024).
Taxation
Taxation for NRIs investing in Indian mutual funds mirrors that of resident Indians, with no difference in tax rates. However, AMCs are required to deduct Tax Deducted at Source (TDS) on the capital gains earned by NRIs. This TDS is deducted at the time of redemption of mutual fund units, with the rate depending on the type of mutual fund and the duration of the investment. For equity-oriented funds, the TDS rate is 10 per cent for long-term capital gains (LTCG, holding for more than a year) exceeding ₹1 lakh, and 15 per cent for short-term capital gains (STCG, holding for less than a year).
NRIs investing in hybrid funds — which include balanced, multi-asset, and dynamic asset allocation funds with equity holdings ranging between 35 and 65 per cent— can avail themselves of indexation benefits. Indexation allows investors to adjust the purchase price of their investment to reflect the impact of inflation, thereby reducing LTCG and lowering tax liabilities.
While debt, gold and international funds were previously eligible for this benefit, the Finance Bill 2023 amendment now limits it to only hybrid funds. STCG on hybrid funds is taxed according to the individual’s income tax slab rate, which can be as high as 30 per cent for those in the highest tax bracket. For investments held for three years or more, LTCG is taxed at 20 per cent with indexation benefit.
To avail of lower TDS rates, NRIs can provide a Tax Residency Certificate (TRC) from their residence country, which can help them claim tax benefits under the DTAA between India and their country of residence. This allows NRIs to seek exemption on the tax paid in India when filing tax returns in their country of residence, preventing double taxation. India has signed DTAA with more than 80 countries, including the US, Canada and the Middle Eastern countries. Additionally, NRIs can avail themselves of tax benefits under Section 80C of the Income Tax Act, 1961, by investing in Equity Linked Savings Schemes (ELSS).
Kaushik Ramachandran of Dyota Solutions, a Registered Investment Advisory Firm specialising in retirement solutions for NRIs, highlights the benefits for NRIs in the Middle East to invest in India. Unlike US-based NRIs who often settle there, NRIs in the Middle East are more likely to return to India for retirement due to the low chances of obtaining citizenship through naturalisation in Middle Eastern countries. Therefore, he advises that building a retirement corpus in India via mutual funds is prudent.
Furthermore, under Article 13(5) of the India-UAE DTAA, UAE-based NRIs are exempted from paying capital gains tax on their mutual fund investments in India. However, the DTAA does not cover capital gains from shares, which remain taxable in India, making mutual funds a more tax-efficient investment option for these NRIs.
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