How Can NRIs Invest in Mutual Funds in India?

Published On: 17-Apr-2021

In common parlance, a Non-Resident Indian (NRI) is an Indian citizen who is staying abroad for employment, business purpose, or currently living in a foreign land. Like the resident individuals, NRIs are also eligible to invest in mutual funds in India subject to compliance with the FEMA (Foreign Exchange Management Act) provisions. 

Investing in mutual funds allows the NRIs to build a diversified portfolio of equity and debt within their home country, India. While there is growth potential from investing in equities, there is also a potential of better returns by investing in debt securities, as the interest rates in India are relatively higher, but has benign rate environment as compared to many developed economies. 

While the NRI investment in mutual funds may be subject to fluctuation in currency rates, investing in the home country comes in handy if the investors want to utilize the amounts within India itself. Further, one may also benefit from gains from forex, if the INR appreciates against the foreign currency as it would lead to higher amount of foreign currency per rupee.  

Procedure for investing in Mutual Funds for NRIs

The procedure for NRIs to invest in mutual funds is broadly similar of resident individual. However, there are some specific compliances to be undertaken before initiating investment transactions. The primary requirement for NRIs to invest in mutual funds is to undertake KYC compliance.

In addition to the common KYC document applicable to resident individual vis, attested copies of identity proof and address proof within India, NRIs must provide some additional documents such as attested copies of passport, overseas citizen of India proof, if settled abroad, residential proof outside India etc. An in-person verification (IPV) may also be required for the investors residing outside India. Please refer to www.utimf.com for more information on KYC requirement.

If the investor is investing through Power of Attorney (POA), one may require to undertake KYC for themselves and POA holder. Further, NRIs investors must have an INR bank account (NRE or NRO account) to invest as foreign currency is not accepted for investment.

How are Mutual Fund Returns taxed for NRIs?

NRIs are liable for Indian tax laws only for incomes accruing or received within India. Any returns from mutual funds in India are deemed to be accrued within India, and accordingly, NRIs are liable to pay tax on such returns. However, there may be Double Tax Avoidance Agreement (DTAA) provisions that apply to income from such investments. Such DTAAs may help the investors to avoid dual tax liabilities in India and the country of residence. For instance, interest earned on NRI bank deposits attract TDS of 30%. However, under the DTAAs that India has signed with other countries, tax is deducted at 10-15%. However, one must check the relevant DTAA provisions to check the actual tax incidence.

Mutual funds are categorized as equity-oriented mutual funds if at least 65% of that scheme's net assets are invested in equity shares and equity-related securities. All other funds are categorised into the residual category of funds. The tax rates as applicable for different types of mutual fund schemes are summarised as under:

Tax on Dividend Income

Equity/ Other than equity oriented schemes

(Tax on dividend received)

As per slab rates

Tax deduction at source (TDS)

20%&

Dividend distribution tax (DDT):

(Payable by the mutual fund scheme)

Nil

 &Tax to be deducted at source as per Section 196A of the Act, plus applicable surcharge (refer table on surcharge rates), if any. Also health and education cess at the rate of 4% on income tax and surcharge.

Capital Gain Tax

Tax on Short Term Capital Gains (STCG)

Equity oriented schemes**

(units held for 12 months or less)

15% + 4% Cess

Other than equity oriented schemes

(units held for 36 months or less)

30%^ + 4% Cess

Tax on Long Term Capital Gains (LTCG)

Equity oriented schemes**

(units held for more than 12 months)

10% + 4% Cess

Other than equity oriented schemes

(units held for more than 36 months)

20% + 4% Cess (Listed)

10% + 4% Cess (Unlisted%)

Applicable tax (along with applicable Surcharge and Health & Education Cess) will be deducted at source at the time of redemption/ switch of units in case of NRI investors.

^Assuming the investor falls into highest tax bracket

After providing for indexation

% without foreign currency fluctuation and indexation benefit

Note: The tax provisions, as mentioned in the article, are for illustrative purposes only and are updated as per the Finance Act 2021. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment. Investors should not treat the contents as any advice relating to legal, taxation, investment or any other matter and also In view of the individual nature of the implications, are strongly advised to consult their tax/legal consultant with respect to the tax implications arising out of their participation in the Schemes or otherwise. UTI MF/UTI AMC will not be responsible for any information given herein for any reason whatsoever. Investors are also advised to read and understand the concerned Scheme Information Document, Statement of Additional Information and other relevant documents, as modified from time to time, prior to making any transaction.

Disclaimer:

UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.

Mutual Fund investments are subject to market risk, read all scheme related documents carefully

This material is part of Investor Education and awareness initiative of UTI Mutual Fund.

The information herein should not be considered as 'investment advice'. Reader is requested to make informed investment decisions and consult their Mutual fund distributor or financial advisors to determine the financial implications with respect to investing in Mutual Funds