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Mutual Funds have gained popularity due to their flexibility, diversification, and potential for substantial returns.
But what about NRIs—can they invest in Indian mutual funds? The answer is yes, but they must follow specific rules and tax regulations. Here's a guide for NRIs looking to invest in Mutual Funds in India.
Investing in Indian mutual funds allows NRIs to tap into India's Economic Growth. With a wide array of schemes—equity, debt, and hybrid—NRIs can choose funds based on their risk appetite. Some of the top-performing mutual funds for NRIs in 2024 offer robust returns, making it a solid option for diversifying investments.
NRIs need to comply with the Foreign Exchange Management Act (FEMA) regulations when investing in Indian mutual funds. FEMA rules ensure that NRI investments are legal and compliant with Indian laws. Understanding these rules is critical to avoid any regulatory issues.
NRIs cannot invest in Indian mutual funds using foreign currency, so they must open specific Indian Bank accounts. There are two main options:
The choice between an NRE and NRO account depends on whether you want the ability to repatriate funds. Once the account is set up, NRIs can invest in mutual funds either through:
Self or Direct Investments: NRIs can invest directly via Indian banking channels, with the application specifying whether the investment is repatriable or non-repatriable. Documents needed include:
Additionally, an in-person verification may be required, which can be done at an Indian Embassy.
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NRIs must complete the Know Your Customer (KYC) process before investing. The following documents are required:
Note: Due to the Foreign Account Tax Compliance Act (FATCA), some Indian Mutual Fund Houses restrict investments from NRIs residing in the USA and Canada. However, many funds allow these investments with additional documentation.
When NRIs redeem their mutual fund investments, the corpus (investment + gains) is credited to their NRE or NRO account after deducting applicable Taxes. Alternatively, some fund houses may issue a cheque for the redemption amount. Since redemption processes can vary between fund houses, it’s essential to check specific procedures beforehand to ensure a smooth transaction.
NRIs have various options to choose from when investing in mutual funds. Some common schemes include:
NRIs can invest in these funds online or through a Power of Attorney (PoA) in India.
If you’ve already initiated a Systematic Investment plan (SIP) as a resident Indian, you can continue it even after becoming an NRI. However, you must update your bank details with the AMC (Asset Management Company) or broker to reflect your NRO account.
Should you decide to redeem your mutual fund investments (including SIPs) made as a resident, the redemption amount will be credited to your NRO account after deducting Tax Deducted at Source (TDS).
Fund NAV Net Assets (Cr) Min SIP Investment 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 5 YR (%) 2023 (%) Motilal Oswal Midcap 30 Fund Growth ₹103.39
↑ 0.50 ₹18,604 500 3.6 24.5 63.1 32 31.6 41.7 Kotak Small Cap Fund Growth ₹278.101
↑ 1.34 ₹18,287 1,000 4.9 19.1 42.8 18.9 31.3 34.8 L&T Emerging Businesses Fund Growth ₹87.0107
↑ 0.31 ₹17,306 500 5.4 14.7 41.1 25.1 30.7 46.1 ICICI Prudential Infrastructure Fund Growth ₹190.61
↑ 0.98 ₹6,424 100 -3 8.2 52.5 31.8 30.3 44.6 DSP BlackRock Small Cap Fund Growth ₹198.128
↑ 1.15 ₹16,705 500 0.9 16.6 38.4 21.9 30.1 41.2 BOI AXA Manufacturing and Infrastructure Fund Growth ₹56.3
↑ 0.37 ₹529 1,000 0.2 9.9 46.9 25.4 29.9 44.7 Invesco India Infrastructure Fund Growth ₹64.23
↑ 0.17 ₹1,666 500 -6 9.3 55.7 26.5 29.7 51.1 IDFC Infrastructure Fund Growth ₹52.227
↑ 0.26 ₹1,906 100 -8.2 11.1 62.5 27.5 29.6 50.3 Nippon India Power and Infra Fund Growth ₹349.835
↑ 1.14 ₹7,863 100 -6.5 7 51.5 29.7 29.5 58 Edelweiss Mid Cap Fund Growth ₹97.342
↑ 0.20 ₹7,755 500 2.8 19 53.7 23.5 29.4 38.4 SBI Healthcare Opportunities Fund Growth ₹424.943
↑ 1.11 ₹3,346 500 10.8 22.5 56 23.8 29.4 38.2 Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 5 Nov 24 200 Crore
in Equity Category of mutual funds ordered based on 5 year calendar year returns.
To invest or continue investing in mutual funds as an NRI, you’ll need to provide the following documents:
All documents must be self-certified. Additionally, in-person verification may be required, which can be done physically or through a PoA.
NRIs can choose to invest on a repatriable or non-repatriable Basis:
Compounding is a powerful force that can significantly enhance your returns over time. By reinvesting Earnings, your investments generate returns on both the initial amount and the accumulated interest, leading to exponential growth.
Here’s an example to illustrate the potential of compounding. Let’s say you invest ₹10,000 monthly in an SIP with an average annual return of 12%:
To fully harness the Power of Compounding, follow these strategies:
By understanding and leveraging the power of compounding, NRIs can maximize their investment growth and achieve their Financial goals over time.
To fully harness the power of compounding, follow these strategies:
By understanding and leveraging the power of compounding, NRIs can maximize their investment growth and achieve their financial goals over time.
Understanding the taxation rules for NRI investments in mutual funds is essential for optimizing your returns. Tax-saving mutual funds offer a way to grow wealth while minimizing tax liabilities. Below is a comprehensive guide to NRI Mutual Fund Taxation, covering Capital gains, TDS, and how to navigate the rules to make the most of your investments.
Short-Term Capital Gains (STCG): If you sell equity mutual fund units within 1 year, the gains are taxed at a flat rate of 15%.
Long-Term Capital Gains (LTCG): For holding periods of 1 year or more, LTCG exceeding ₹1 lakh within a financial year is taxed at 10% without indexation benefits.
Short-Term Capital Gains (STCG): Gains from units held for less than 3 years are taxed according to your applicable income tax slab.
Long-Term Capital Gains (LTCG): Gains from units held for 3 years or more are taxed at 20% with indexation benefits.
Equity Mutual Funds: A DDT of 10% applies to dividend income, and the dividend is tax-free in the hands of the investor.
Debt Mutual Funds: DDT is 25% (plus surcharge and cess), and the dividend remains tax-free for the investor.
For NRIs, TDS applies to capital gains:
For debt funds, TDS is based on your income tax slab rates. Ensure that your AMC or broker deducts TDS correctly when you redeem investments.
India has signed DTAAs with various countries to prevent double taxation. As an NRI, you can claim tax relief or credit in your home country for taxes paid in India, according to the provisions of the DTAA. This helps you avoid paying taxes twice on the same income.
Each SIP installment is treated as a separate investment, and the holding period of each installment determines the applicable tax on capital gains:
Similar to SIPs, withdrawals under SWPs are taxed based on capital gains tax rules applicable at the time of redemption, which depend on the mutual fund type and the holding period.
Investing in mutual funds provides NRIs with an excellent opportunity to benefit from India’s growing Economy while managing investments efficiently from abroad. Understanding the taxation rules, such as capital gains, TDS, and DDT, ensures you can make informed decisions. By following the right strategies and complying with the necessary regulations, NRIs can optimize their portfolio for long-term wealth creation in India. Always consult a tax professional to stay updated on tax laws and make the most of your mutual fund investments as an NRI.