In our previous edition dated June 11, we explained to you the process of investing in mutual funds (MFs) by non-resident Indians (NRIs). One must understand that the process is different for NRIs based out of the US and Canada. NRIs from the US and Canada may encounter compliance issues while investing in Indian MFs. In this article, we will look at the procedure and rules that NRIs need to follow while investing in Indian MFs. We will also explain the taxation aspect for NRIs in general.

What is FATCA

Until FATCA (Foreign Account Tax Compliance Act) was passed in 2015, various Indian fund houses allowed US/Canada-based NRIs to invest into their MF schemes.

Under this Act, financial institutions (including fund houses) have to compulsorily share details of all transactions involving US citizens, including NRIs, with the US government. FATCA’s purpose is to make sure that there is no deliberate tax evasion on the income generated by US citizens overseas. Due to the processes and regulations involved, some fund houses do not take investments from NRIs based in the US.

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As per NRI-focused financial platform SBNRI, some of the fund houses which accept investments from the US and Canada are Sundaram, UTI, Aditya Birla Sun Life, Navi, PPFAS and SBI.

How US-, Canada-based NRIs can invest

The process for KYC completion and online investments for US-, Canada-based NRIs is different for different fund houses.

For instance, If you are a US-/Canada-based NRI wanting to invest in ABSL MF schemes, KYC, purchase and redemption can be done through the official digital assets, as per Aditya Birla Sun Life AMC. For fund houses such as Kotak and PPFAS, one may need to be physically present in India. Kotak MF allows redemption and other things like changes in contact addresses to be done online. In case of PPFAS, for all transactions — be it purchase and redemption along with KYC — one needs to be physically present in India and sign certain declarations. The documents required for the KYC for US-/Canada-based NRIs are the same as those for NRIs based out of other countries.

Taxation aspects

Taxation treatment on investments in Indian MFs by NRIs are similar to that of investments from Indian residents. The taxation rate is not different for NRIs and resident Indians. However, do note that tax is deducted at source (TDS) in case of NRIs during redemption of MF units and the remaining amount shall be sent to the NRI’s account. This is not the case for resident MF investors.

What if the country where the NRI resides also charges tax? To avoid double taxation, India has entered into Double Taxation Avoidance Agreement (DTAA) with more than 80 countries, including the US, Canada and the UK. This means that an NRI can seek exemption on the tax paid in India while filing the tax return in the country of residence. This will prevent them from paying tax twice.

For instance, you are an NRI residing in a country with DTAA with India. You are invested in an Indian equity MF for less than a year. If you redeem the investment now, 15 per cent tax will be levied and after deduction the post-tax proceeds will be credited to your bank account. Now let’s assume that the as per the law of the country of residence, the tax on short-term capital gains is levied at 30 per cent. As the country has DTAA with India, you will need to pay only 15 per cent — the differential tax on your short term-capital gains (30 per cent minus 15 per cent already paid in India).

Do note that the rules may vary country wise. It is, therefore, recommended to seek advice from a tax consultant for a specific understanding on this matter.

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