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NRI Investment (Part One): Investment In Mutual Funds

If a person spends more than 182 days living outside India, their status changes to that of a non-residential Indian or NRI. If such individuals wish to invest in Mutual Funds (MF) in India, they first need to convert their savings/salary account to non-resident ordinary or NRO account. This step merely changes the status  of the account while the account continues to operate the same. An NRI will also be required to do a fresh MF KYC (know your customer). Pertinently, no special approval of RBI is required for NRI’s to be able to invest in MF’s in India. Investments can be done on a non-repatriation basis through an NRO account or Non Resident Rupee (NRE) account/Foreign Currency Non-Repatriable (FCNR) account whereas to be able to invest on a repatriable bases,  an NRE savings account or FCNR account is required.

All NRI investments in India are governed by Foreign Exchange Management Act, 1999 (FEMA) apart from being required to mandatorily comply with Securities and Exchange Board of India (SEBI) regulations and Foreign Direct Investment (FDI) policy. Presently, NRIs are allowed to invest both directly and indirectly through multiple routes whereas NRIs and persons of Indian origin (PIO) are allowed to invest in India Companies under portfolio investment schemes routes (PIS). NRI’s and PIO’s are also allowed to – purchase mutual funds; invest in private equity funds; use offshore FPI route; invest in debentures of Indian companies and government securities.

As of 2018, SEBI has eased norms for NRI’s based on Khan Panel’s recommendations and thereby they are now allowed to invest as FPI’s if a single holding is under 25% and a ground holding is under 50% in funds.  The committee had recommended that NRIs, OCIs and resident Indians should be permitted to hold non-controlling stakes in FPIs and there should be no restriction on them managing offshore funds. Notably, the panel has suggested more sweeping changes on account of which a high powered committee has been set up by SEBI to come up with suggestions that would facilitate in the merging of  NRI and PIS routes with that of FPI’s and to subsequently have one investment avenue for all NRI’s.

NRIs and mutual funds

Mutual Funds investment by NRI’s have to be in adherence to FEMA. Indian investment market comes with higher interest rates and hence, even the risk averse NRI’s can certainly befit out of it. NRI’s can start with equity funds, debt funds or hybrid funds.

  • Mutual fund regulations for NRI
  • KYC

There are two requirements for NRIs to start investing in MFs in India: PAN Card and rupee-designated NRO or NRE bank account. The documents needed to complete the one-time KYC process include: PAN card copy; passport copy (front and back page); foreign address proof, an Indian address proof (cancelled cheque or bank statement from NRE or NRO account); person of Indian origin or Overseas Citizen of India (OCI) certificate- needed for investors who are not Indian citizens.

  • FIRC (Remittance Certificate)

Foreign Inward Remittance Certificate needs to be annexed in case payment for MF has been made by a cheque or draft. In case the same is not possible, a letter from bank confirming the source is considered sufficient.

  • Redemption

After deducting taxes, the Asset Management Company (AMC) credits the corpus (investment + gains) one gets after fund redemption. The AMC may transfer the corpus via cheques as well. If an NRI wishes to and has hence opted for non-repatriable investment, some banks allow the redemption to be credited to NRO/NRE account.

  • Procedure for investment

As stated earlier, the first step for NRI’s to be able to invest in India is to open an NRO account, NRE Account or FCNR account with an Indian bank as the asset management companies in India cannot accept investments made by foreign currency.

Below are some of the methods of investment that can be opted from:

  • Self/Direct

NRIs can themselves undertake normal debiting and crediting transactions for ordinary banking channels. The application  containing the required KYC details must  indicate that the investment is on a repatriable or non-repatriable basis. In case the bank requires in-person verification, the same can be done by visiting an Indian embassy in the NRI’s resident country.

  • Through Power of Attorney

Another common and easy method that can be employed is to have someone else invest on behalf of an NRI. Mutual fund companies allow power of attorney (PoA) holders to invest on behalf of an NRI and to also take other decisions pertaining to their investments. Pertinently, signatures of both the NRI investor and PoA have to be mandatorily present on the KYC documents to make the investment.

  • Tax implications

The gains from equity mutual funds are tax-free for an investment of over 1 year. Tax is deducted at the source (by the bank) on the profits/capital gains earned on the invested amount for holdings exceeding one year. Currently, 10% LTCG tax is deducted. For a lesser period, 15% short term capital gain tax is deducted.

In case of debt funds, banks add the gains (made in less than 3 years) to the income of the investor. Holding the fund for more than a period of 3 years results in 20% tax on the gains with indexation benefit. If an investor has not opted for indexation, the tax will only be 10%.

Pertinently, India has signed double taxation avoidance treaties with multiple countries including the Unites States of America and Canada and hence, NRIs do not have to pay double tax when they invest in India.

  • Benefits of mutual fund (MF) investments –
  • Easily manageable online:

Investors can easily buy, redeem, switch, transfer or withdraw MF online from the comfort of their homes in their residence country. Investors also receive  periodic account statement (CAS) via email. Additionally, asset management companies post portfolio disclosures online to keep all investors informed.

  • Rupee appreciation increases the scope for profit:

Appreciation of INR value with respect to that of resident country’s currency leads to more profit for the foreign investor. For instance if an NRI invests 1000 units of a foreign currency at an exchange rate of Rs. 100 for 1 such unit. An investor can reap good benefits even if value of rupee depreciates. Furthermore, NRI’s and PIO’s can get similar benefits by investing in India-based MF in their residence country.

  • List of fund houses that accept investments from NRIs based in US and Canada
  • Birla Sun Life Mutual Fund
  • SBI Mutual Fund 
  • UTI Mutual Fund
  • ICICI Prudential Mutual Fund
  • DHFL Pramerica Mutual Fund
  • L&T Mutual Fund
  • PPFAS Mutual Fund
  • Sundaram Mutual Fund

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