Can NRI Invest in Mutual Fund in India

As global incomes rise and financial aspirations expand, many Non-Resident Indians (NRIs) look toward India as a promising destination to grow their wealth and maintain a financial connection with their roots. While NRIs are permitted to invest directly in Indian equities, a common question arises: can NRIs invest in mutual funds in India?

The article will answer that question and provide all the essential insights into NRI investment in mutual funds, covering the step-by-step investment process, required documentation, tax implications, key benefits, and key points NRIs should be aware of before investing.

Are NRIs Allowed to Invest in Mutual Funds in India?

Yes, NRIs are permitted to invest in Indian mutual funds, subject to the guidelines laid out under the Foreign Exchange Management Act (FEMA), 2000. Furthermore, an individual's eligibility to invest is tied to their residential status, as defined by the Income Tax Act, 1961.

Under recent amendments, an individual is now considered a resident if they've been in India for at least 120 days within a financial year and 365 days or more over the past four financial years, provided their total Indian income exceeds ₹15 lakh in a financial year. Previously, this threshold was 182 days.

If an NRI's Indian-sourced income is less than ₹15 lakh, they continue to be treated as non-residents as long as their stay in India doesn’t exceed 181 days in the financial year.

It’s also important to note that due to compliance with international regulations like FATCA, certain mutual fund houses do not accept investments from NRIs based in the United States or Canada. Therefore, NRIs from these countries should verify with the Asset Management Company (AMC) before proceeding with their investments.

How Can NRIs Start Investing in Mutual Funds from Abroad?

Here’s a step-by-step guide on how to invest in mutual funds for NRIs.

Step 1: Open an NRE or NRO Bank Account:

Before starting your mutual fund investment journey in India, it’s essential to understand that Indian mutual fund companies do not accept foreign currency.

As per FEMA (Foreign Exchange Management Act) regulations, once you attain NRI status, you are no longer allowed to operate a regular resident savings account in India. Instead, you must open either an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account with an Indian bank.

It's essential to grasp the differences between these two accounts.

• NRE Account: Best suited for funds earned abroad; allows full repatriation.
• NRO Account: Used for income earned in India; repatriation is subject to limits and taxes.

Once your account is active, you can begin investing through one of the following methods:

1. Direct/Self-Investment: You can invest in mutual funds independently through online platforms or fund houses.
   
2. Power of Attorney (PoA): If you're outside India, you can appoint a trusted individual to manage your investments through a Power of Attorney (PoA). Most AMCs permit this arrangement, but both the NRI and PoA must sign the required KYC documents for validation.

Step 2: Complete the KYC Formalities:

KYC (Know Your Customer) compliance is a requirement for every investor in India, NRIs included. Before investing, you must submit the documents mentioned above.

Some fund houses may require in-person verification (IPV), while others accept video KYC or notarised/self-attested documents, depending on your country of residence.

Note: Due to FATCA regulations, many Indian mutual fund houses do not accept investments from NRIs residing in the United States or Canada. However, a few AMCs do allow such investments under certain conditions, often requiring additional documentation or offline submissions.

Step 3: Redeeming Your Mutual Fund Investment:

NRIs can redeem their mutual fund investments by following the respective Asset Management Company’s (AMC) redemption process. This can usually be done online or through a physical form submission, depending on the mode of investment.

Upon redemption, the proceeds (initial investment + gains) are transferred to your NRE or NRO bank account, after deducting applicable TDS (Tax Deducted at Source). Some AMCs may also issue cheques for redemption, especially in the case of offline investments.

Make sure to check the repatriation rules based on the account type used:

• NRE account: The full amount is repatriable to your foreign account.
• NRO account: Repatriation is allowed up to $1 million per financial year, subject to certain conditions and documentation.

List of Mutual Fund Houses that Accept Investments from NRIs

• HDFC Mutual Fund
• ICICI Prudential Mutual Fund
• SBI Mutual Fund
• Aditya Birla Sun Life Mutual Fund
• Kotak Mahindra Mutual Fund
• Franklin Templeton Mutual Fund
• DSP Mutual Fund
• Bandhan Mutual Fund
• Mirae Asset Mutual Fund
• Motilal Oswal Mutual Fund
• PPFAS Mutual Fund

Documentation Checklist for NRI Mutual Fund Investors

Before NRIs can begin investing in mutual funds in India, specific documents must be submitted as part of the KYC (Know Your Customer) and compliance process. Here is a checklist of documents that are often required:

1. Valid Passport:

Submit a copy of the passport pages displaying your photograph, personal details, and signature.

2. Completed KYC Form:

The KYC application must be accurately filled and signed.

3. Proof of NRI Status:

• For Indian passport holders: a copy of a valid visa, work permit, or residence permit.
• For foreign passport holders: an OCI card or any document that establishes a legitimate connection to India.

4. Proof of Current Residential Address:

Acceptable documents include:

• Passport
• Driving license
• Voter ID (issued by the Election Commission of India)
• Aadhaar card
• NREGA-issued job card
• Letter issued by the National Population Register

5. FATCA/CRS Declaration:

• NRIs based in the United States must provide a Foreign Account Tax Compliance Act (FATCA) declaration.
• Those residing in the UK, Canada, or any of the 100+ countries that follow the Common Reporting Standard (CRS) must submit the respective CRS declaration.

Taxation Guidelines for NRIs Investing in Mutual Funds

Income earned by NRIs from mutual fund investments in India is subject to taxation, just as it is for resident Indian investors. The taxes that apply differ depending on the type of mutual fund and the investment's holding period. Importantly, Asset Management Companies (AMCs) are required to deduct Tax Deducted at Source (TDS) at the time of redemption or on dividend payouts.

Below is a breakdown of how mutual fund gains are taxed, based on recent changes and upcoming regulations:

Disclaimer: The tax rules mentioned above are based on the current provisions of the Indian Income Tax Act and recent updates from the Finance Act, 2024. However, tax laws are subject to change, and the actual tax liability may vary based on your individual residential status, income level, and the country you reside in. It is strongly recommended to consult a qualified tax advisor or financial consultant to ensure compliance with both Indian and foreign tax regulations before making any investment decisions.

What Advantages Do NRIs Gain from Investing in Mutual Funds in India?

Here are the main benefits for NRIs investing in Indian mutual funds:

1. Global Access: NRIs can invest, track, and redeem mutual funds online from anywhere, eliminating the need for physical presence.

• 2. Wide Fund Variety: Choose from equity mutual funds, debt, hybrid, and goal-based investing to match different financial goals and risk levels.

3. Diversification: Mutual funds spread investments across sectors and asset classes, reducing risk and enhancing return potential.

4. Regulated & Safe: Governed by SEBI and AMFI, Indian mutual funds follow strict regulations ensuring transparency and investor protection.

Important Considerations for NRIs Investing in India

• Repatriation Rights Are Conditional: Your right to repatriate the invested capital and returns is valid only while you maintain NRI status.
  
• Mandatory Proof of Overseas Residence: You must provide valid, attested proof of your current foreign address along with your investment application.
  
• Stringent Compliance for US and Canadian Residents: Due to FATCA, financial institutions in India are required to report investment activity of U.S. citizens to the U.S. government. Similar reporting obligations apply under CRS for over 90 countries.
  
• CRS Declaration May Be Required: If you reside in a country that follows the Common Reporting Standard (CRS), be prepared to disclose additional tax-related information.
  
• Limited AMC Options for U.S./Canada-Based NRIs: Currently, only a few Indian mutual fund companies accept investments from NRIs living in the USA and Canada due to regulatory complexities.
  
• Long-Term Benefits Outweigh Initial Efforts: Though the setup process may involve documentation and compliance checks, investing in India can deliver attractive returns over time.

Final Thoughts

Now that we’ve answered the question - “Can an NRI invest in mutual funds in India?”- it’s clear that mutual funds present a smart and accessible way for NRIs to diversify their global portfolio while staying financially connected to India’s rapidly growing economy. With simple onboarding, robust regulations, and digital access, NRI investment in mutual funds offers a blend of convenience and potential returns.

However, it’s crucial to stay updated with tax regulations, choose the right mutual fund schemes aligned with your risk profile, and consult with a tax advisor or certified financial planner when needed.

Frequently Asked Questions (FAQs)

Is joint mutual fund investment in India possible for an NRI and a resident Indian?

Yes, but the first holder should be the NRI, and investments must follow FEMA regulations.

Are mutual fund investments by NRIs repatriable?

Yes, NRIs can utilize NRE accounts for their mutual fund investments, enabling them to fully repatriate their funds. Conversely, if the investment is channeled through an NRO account, fund repatriation will be restricted and fall under specific limits.

Are all categories of mutual funds in India accessible to NRIs for investment?

Typically, NRIs can invest in most mutual fund schemes in India, but certain Asset Management Companies (AMCs) may limit participation for individuals residing in the US or Canada due to FATCA compliance requirements.

Are NRIs eligible to participate in Systematic Investment Plans (SIPs) in India?

Yes, NRIs are fully eligible to invest in Systematic Investment Plans (SIPs) using their NRE or NRO bank accounts. The process is similar to how resident Indians invest, offering NRIs a convenient and disciplined way to build wealth over time.