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Tata Capital > Blog > How Can NRIs Invest in Mutual Funds in India? A Complete Guide 

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How Can NRIs Invest in Mutual Funds in India? A Complete Guide 

How Can NRIs Invest in Mutual Funds in India? A Complete Guide 

Summary: NRIs can make investments in Indian Mutual Funds as per the norms of FEMA through the use of NRE/NRO bank accounts and by undergoing mandatory KYC norms. While it is true that there is a vast array of investments and SIPs available, there are certain fund houses that impose some limitations on residents of the US and Canada. A proper analysis of the repatriation policies and tax withholding norms will help foreign investors handle their investments effectively.  

Analysing how NRI investment in India works requires an understanding of certain eligibility criteria, account set-ups, KYC process, SIP process, taxation rules, and repatriation rules. The Indian stock markets continue to be open to all the global players, as long as they comply with certain rules.

This article breaks down the process that governs the investment of NRIs in mutual funds, covering all the processes related to mutual funds NRI portfolios, including specific issues relating to whether NRIs can invest in mutual funds in India.

Can NRIs Invest in Mutual Funds in India?

Yes, NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) are allowed to invest in Indian mutual funds according to FEMA rules. Most domestic mutual funds are open to foreign investors.

However, an important regulatory restriction is applicable to NRIs who live in the US and Canada. Since there are tough compliance requirements under the Foreign Account Tax Compliance Act (FATCA) and the Securities and Exchange Commission (SEC), many Indian AMCs do not allow investments directly by US- and Canada-based residents, although there may be different policies at the fund level.

Requirements for NRI Mutual Fund Investment

Participation in Indian mutual funds from outside India needs certain paperwork and financial structuring. These are as follows:

  1. Bank Accounts: It is compulsory for a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account to be set up in India for capital transactions.
  2. KYC Documentation: Compliant KYC documentation along with a passport copy, proof of address for foreign residence, and recent pictures.
  3. Permanent Account Number (PAN): Compulsory tax registration document issued by the tax authorities of India.
  4. FATCA/CRS Declaration: A self-declaration form stating tax residency status according to international compliance agreements.

The choice of account determines the ability to repatriate funds for the NRE account, full repatriation of capital and gains is possible, while the NRO has limited provisions for repatriation.

How to Invest in Mutual Funds as an NRI (Step-by-Step)

The transactions involving NRI investment in mutual fund structures involve a systematic process, which includes the following steps:

  • Step 1: Open Account: Create an NRE or NRO bank account with an authorised dealer bank in India.
  • Step 2: KYC Verification Process: Fulfilment of the necessary documentation is needed. The in-person verification process can be done via the Indian embassy or consulate in other countries, or through the authorised online KRA (KYC Registration Agency) system.
  • Step 3: PAN and FATCA Self-Certification: Make sure your PAN card is active and file your mandatory FATCA self-certification form with the fund house or registrar.
  • Step 4: Selection of a Registered AMC, Distributor, or Platform: Select a registered AMC, authorised distributor, or financial advisory platform which accepts the documentation of NRIs.
  • Step 5: Make Investments: Send the funds through an authorised banking channel and deploy the money as per the individual investment plan.
  • Step 6: Systematic Investment Plan: Set up systematic investments through a standing instruction straightaway from an NRE or NRO bank account.

SIP Plans for NRIs

For setting up SIP plans for NRI investors, the mechanics approach is quite the same as that of resident investor plans. NRIs can set up automated plans for purchasing shares using auto-debit linked to their NRE/NRO bank accounts.

However, in case of logistical difficulties in managing the transaction from afar, an NRI may legally authorise a Power of Attorney (PoA) to a reliable person in India to manage their investments and sign documents for them, as per the verification policy of the AMC and the necessary notarisation.

Types of Mutual Funds NRIs Can Invest In

Foreign investors have the opportunity to assess several asset classes based on their investment portfolio strategies.

  • Equity Funds: Fund schemes that invest in domestic equities in large, mid, and multi-cap categories.
  • Debt Funds: Fixed-income fund schemes that invest in government securities, corporate bonds, and money market instruments. Usually, investors evaluate structural alternatives that are explained through a Debt Mutual Fund.
  • Hybrid Funds: Balanced fund schemes that are composed of equity and debt components.
  • Liquid Funds: Short-term investment fund schemes for high liquidity.
  • ELSS (Equity Linked Savings Scheme): Tax-saving instruments for equity with a lock-in period.

Some specific commodity or international asset schemes may impose different operational constraints. Portfolio management advisory services, including Tata Capital Wealth’s structured guidance system, help people determine their correct asset allocation.

NRI Mutual Fund Taxation in India

Taxation rules for foreign investments consist of special tax withholding techniques. Profits gained through equity-based schemes and debt instruments fall under domestic tax regulations and may be assessed under the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the investor. Tax Deducted at Source (TDS) is deducted automatically when an AMC redeems according to NRI tax categories.

Taxation Scheme for NRIs’ Mutual Funds Investment

Asset Class / Holding PeriodTax Applicability / Indicative Rule
Equity Funds (Short-Term, <1 Year)Subject to STCG tax at 20% (plus applicable surcharge and cess)
Equity Funds (Long-Term, >1 Year)Taxed at 12.5% on gains exceeding ₹1.25 Lakhs per financial year
Debt Mutual FundsTaxed according to individual income slab rates per prevailing tax regulations
TDS MechanismDeducted at source by the fund house upon redemption

Note: Tax laws, slab rates, and changes to finance bills undergo regular revision. It is advisable to consult a qualified chartered accountant or tax expert specialised in international taxation.

Repatriation of NRI Mutual Fund Returns

The capacity to remit money back to your native country is contingent upon the initial source of funds that was used to make the NRI investment in India.

  • Investments from NRE Accounts: The profits and gains made from the investments made in the NRE accounts are wholly transferable out of India without any ceiling on the amount of money.
  • Investments from NRO Accounts: If the investments are made through NRO accounts, there will be certain repatriation limits, which generally would be up to USD 1 million per financial year. Such a provision is wholly dependent upon the fulfilment of the Indian tax liability and submission of a chartered accountant’s certificate (Form 15CA/15CB).

Account Selection for Your Investment: While deciding on your investment in a mutual fund for NRIs, you should be careful to select your account depending on the purpose of either transferring money abroad or keeping it in India.

Note: Since foreign exchange restrictions and FEMA regulations are subject to revisions from time to time, always check the latest limitations on transactions with your bank or financial institution.

Can US and Canada-Based NRIs Invest in Indian Mutual Funds?

The issue of geographic residence poses specific operational challenges when dealing with NRI investment in mutual funds. Indian AMCs (Asset Management Companies) do not take direct applications or investments from NRIs residing in the US and Canada due to the extremely difficult nature of FATCA and SEC compliance.

However, there is a certain percentage of AMCs that do have a structure in place for onboarding such North Americans, but the list of approved individuals and the terms differ according to each fund house. If you are looking at NRI investing in mutual funds in India from the USA or Canada, it is important to check the policies of individual AMCs or a financial distributor.

Note: As compliance requirements and AMC acceptance criteria may change, be sure to check for the most up-to-date onboarding information before publishing.

How to Invest in Foreign Mutual Funds (for NRIs)

NRIs can also invest in schemes that operate in the country where they reside or in schemes of foreign funds provided by Indian AMCs. Regulations, taxation, and account facilities are different in every country. As this page is dedicated to Indian mutual funds, those who want to invest in foreign funds or overseas funds should consult their local financial advisor.

Conclusion

Taking part in Indian mutual funds as a citizen of a foreign country is associated with complying with FEMA, opening NRE or NRO bank accounts, performing KYC procedures, and using equity, debt, or SIP investments depending on relevant TDS conditions and some AMC-related limitations for US and Canadian residents. Although there are a variety of opportunities related to portfolio structure, its complete compliance demands additional planning. In case you require assistance in structuring your investment portfolio, you may use advisory programs provided by Tata Capital Wealth Management Services or the Tata Capital App.

Disclaimer: Mutual funds are risky investments. Go through all scheme documents before investing. Rules and regulations, taxation rules, foreign exchange laws, and AMC policies may be revised from time to time. This document is purely informational. For more information about rules, always check the SEBI and AMFI websites and talk to a professional financial and tax expert.

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FAQs

Can NRIs invest in mutual funds in India?

Yes, Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) are allowed to make investments in mutual funds in India based on FEMA rules if they meet certain requirements.  

Which account do NRIs need to invest in Indian mutual funds?

Investments can be done only through a bank account, which can either be an NRE (Non-Resident External) or an NRO (Non-Resident Ordinary), with an authorised Indian Bank.

Can NRIs start a SIP in Indian mutual funds?

Yes. NRIs have the option to make SIP investments from their NRE/NRO account through an auto-debit system or even have someone in India acting under a Power of Attorney handle these contributions.  

Can US-based NRIs invest in Indian mutual funds?

Most AMCs in India do not allow investments from US or Canadian NRIs because of the high costs involved in complying with foreign regulations, although some AMCs accept applications under certain conditions.

How are NRI mutual fund returns taxed in India?

The taxation of returns depends upon the asset classification and holding period. Tax Deduction at Source (TDS) is deducted while redeeming the assets, and you can avail yourself of the Double Taxation Avoidance Agreement.

Can NRI mutual fund returns be repatriated abroad?

Yes. Returns generated by NRE accounts are totally repatriable outside India, whereas returns generated by NRO accounts have annual limits on repatriation, which require tax clearance.

What is the KYC process for NRI mutual fund investment?

KYC procedures involve providing copies of one's passport, proof of overseas address, and the PAN card. Verification can either be done online through official KRA websites or at an Indian embassy outside India.  
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