NRI INVESTMENTS IN INDIA – PROCESS AND REGULATIONS?

Last Updated: 24 Aug 2023

Non-resident Indians or NRIs have special privileges to invest in India. For a long time, the NRIs have been only operating the special NRI bank accounts like NRE accounts, NRO accounts and FCNR accounts. In the last few years, NRIs have been active in investing in multiple asset classes like real estate, equity shares, mutual funds etc. Currently, NRIs are not yet allowed to invest in the sovereign gold bonds but mutual funds allow them to invest in a plethora of asset options like equity funds, debt funds, liquid funds, gold ETFs, index ETFs etc.

Indians are living in large numbers in places like the Middle East nations, the United States, the United Kingdom, Canada, Australia etc. All these Indians are a huge reserve of wealth and contribute substantially to investing in India. Indians migrate abroad in search of better job opportunities or bigger money. Most of these NRIs eventually harbour a dream of coming back to India someday. Many of these NRIs also have dependents in India and want to provide for them. Mutual fund investing is an important way to create wealth in India in an efficient and systematic manner.

ARE NRIS PERMITTED TO INVEST IN INDIAN EQUITIES AND MUTUAL FUNDS?

NRIs today are permitted to invest in mutual funds in India. However, these investments are subject to stringent compliance requirements prescribed by the RBI. As long as they are able to adhere to the rules and regulations pertaining to the of the Foreign Exchange Management Act (FEMA), they are absolutely free to invest in mutual funds. However, it must be mentioned here that many of the asset management companies (AMCs) do not accept mutual fund applications from NRIs in Canada and the USA, due to regulatory restrictions in these countries and that is a basic questions MFs would normally ask you.

NRIs get a wide choice of funds to invest in India including equity funds, debt funds, hybrid funds, value funds, growth funds, sector funds, thematic funds, index ETFs, gold ETFs etc. NRIs have the advantage of also doing the financial planning in India and then accordingly working their asset allocation and then executing through the mutual funds route. This largely is a function of the investment objectives and risk tolerance of the NRI.

HOW IS MUTUAL FUND INVESTING BENEFICIAL FOR NRIS?

NRIs get a number of benefits by investing in Indian mutual funds. Of course, there are benefits like creation of long term wealth, creating a corpus post retirement, making an India nest egg, pursue a business opportunity in India later etc. Here are some of the benefits that NRIs enjoy by investing in Indian mutual funds.

1. Thanks to the advances in technology and security, it is possible to manage funds online from anywhere in the world.

2. NRIs are offered the facility of investing online via the web or through the app. This also enables easy tracking of mutual funds with real time valuations.

3. It is not just about monitoring but also about transacting. NRIs can buy, redeem and switch units of mutual fund schemes and even opt for SIPs / SWPs / STPs online.

4. Payments are a lot simpler and efficient. There is no need to issue cheques, demand drafts or to submit physical forms and can be done from anywhere in the world.

5. NRIs also have the added advantage of getting a consolidated account statements (CAS) across through all their mutual fund holdings (mapped by PAN) through email.

6. It is a fantastic method of long term wealth creation as it has been observed and empirically proven that equity funds are the best long term wealth creators.

7. Apart from the normal appreciation in the asset values, the NRIs can get additional benefit from rupee appreciation in the process.

UNDERSTANDING THE PROCESS FLOW OF NRIS IINVESTING IN INDIAN MUTUAL FUNDS

Since the Indian mutual funds cannot accept foreign currencies, these funds have to be routed into Indian currency before investing. For instance, the first step to investing in Indian mutual funds is to open an NRO account, NRE account, or FCNR account with an authorized Indian bank. Once that is done there are 2 investment methods available.

• NRIs can invest on their own directly in mutual funds. First, the KYC has to be completed and we will see that in detail later. Once that is done, the NRI has to indicate whether the investment in mutual funds is going to be repatriable or non-repatriable. Some of the basic KYC documents that NRIs have to provide include latest photograph, attested copies of PAN card, passport, residence proof (outside India) and bank statement. In-person verification (IPV) for the bank purpose can be done by visiting the Indian Embassy in the country in which the NRI is residing. AMCs may insist on ratification of documents by the embassy officials.

• NRIs can also invest in mutual funds in India via power of attorney (POA). Here, the NRI can authorize another person to act as power of attorney and take investment decisions on their behalf. In this case, it is mandatory that the signatures of the NRI investor and the Power of Attorney holder must be present on the KYC documents. In the absence of that POA investments are not valid in mutual funds.

REGULATORY ASPECTS OF NRIS INVESTING IN MUTUAL FUNDS

Since NRI investments entail the inflow and outflow of foreign currency, it is essential that some additional procedural requirements be complied with. Here are some key regulatory compliances for NRIs investing in Indian mutual funds.

• The first and primary regulatory requirement is the KYC (Know your client) for NRIs. In order to complete the KYC process, NRIs have to submit a copy of passport, (relevant pages comprising of name, date of birth, photo and address). In addition, NRIs must also furnish the proof of current residential address abroad; irrespective of whether it is a permanent address or temporary address. Most funds nowadays also insist on in person verification through the Indian embassy located abroad.

• Don’t ever forget that for the payment to be valid, you must attach the FIRC (Foreign Inward Remittance Certificate). This has to be attached to the KYC for any payment made by cheque or DD by the NRI. Alternatively, the bank must issue a letter confirming the source of funds. This is part of the anti-money laundering provisions.

• Irrespective of the tax treatment of the redemption proceeds of the NRI, the fund will deduct tax at the extent rates (TDS) before paying the redemption proceeds to the designated bank account of the NRI.

• Some banks allow crediting of the redemption amount directly to the NRO/NRE account. If you have opted for non-repatriable investment, then they can credit the proceeds only to an NRO account. Else, it can be credited to the NRE Account of the investor.

MUTUAL FUND TAXATION FOR NRIS

The taxation of the gains on mutual funds as well as the taxation of dividends on mutual funds are exactly the same as for residents.

• Short term gains on equity mutual funds (held for up to 12 months) are taxed at the rate of 15%. However, Long-Term Gains on equity mutual funds (held for more than 12 months) is tax-exempt up to Rs.1 lakh in a year. Beyond that it is taxed at a flat rate of 10%, without any indexation benefits.

• Short term gains on debt mutual funds (held for up to 36 months) are taxed at applicable incremental rate of tax applicable to the investor i.e. 10% or 20% or 30%. However, Long-Term Gains on debt mutual funds (held for more than 36 months) is taxed at a concessional rate of 20% plus there is also indexation benefits.

However, there are 2 differences between the taxation of mutual funds in the case of residents and NRIs.

• Firstly, returns on mutual funds for NRI are subject to tax deduction at source, although that is not applicable to resident Indians. Such NRIs can subsequently claim refund in the event of excess tax paid.

• Secondly, NRIs wonder whether they have to pay double taxes in India and in their resident country? That would depend on whether there is a double taxation avoidance agreement (DTAA) signed between India and the resident country of the NRI. If the DTAA exists (as is the case with most countries with predominance of NRIs), then only single point taxation is levied.

To sum it up, NRI can invest in Indian mutual funds on repatriation and non-repatriation basis. However, residents of the US and Canada must first check with the AMC. This is currently restricted to just 8 fund houses, so if you reside in the US or Canada, your choice is limited to just 8 AMCs. For NRIs, the compliance requirements for investing in mutual funds are a lot more elaborate and also stringent.