How Can NRIs Invest in Mutual Funds?

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Mutual funds are one of the sought after options for investments for most NRIs and yes they can invest in it but to know about the specifics, one must refer to the scheme information document (SID) of the mutual fund scheme he/she is interested in. In this article, we have covered the process of investing in mutual funds for NRI and other important details.

Can NRIs Invest in Mutual Funds in India?

The very first question is that, are NRIs even allowed to invest in the Indian mutual fund industry? Of course, an NRI can invest in mutual funds in India as long as he/she adheres to the Foreign Exchange Management Act (FEMA).

In terms of Regulation 2 of FEMA Notification No.13 dated May 3, 2000, Non-Resident Indian (NRI) means a person resident outside India who is a citizen of India.
According to Income-tax Act 1961, a resident is a person who has been in India for 120 days or more during a financial year or365 days or more during the preceding 4 financial years and at least 60 days in that year. Therefore, NRIs include those individuals who visited India for less than 120 days in a financial year.
This amendment was brought in the current financial year. Earlier the 120-day threshold was 182 days. However, there is a catch here. If the total Indian income, that is income accruing in India, during the financial year is more than Rs 15 lakh, only then the 120 days rule will apply. Visiting NRIs whose total taxable income in India is up to Rs 15 lakh during the financial year, will continue to remain NRIs only if their stay does not exceed 181 days, as was the case earlier.
The definition of NRI in FEMA decides where an NRI can invest and the definition of an NRI in the income tax act defines how these investments will be taxed.

What Is the Procedure?

Step 1: Set Up an Account

Mutual fund Asset Management Companies in India cannot accept investment in foreign currency.

According to Indian laws, specifically, Foreign Exchange Management Act (Fema), does not allow you to park your money in regular resident savings account in India once you have achieved the NRI status. This law makes it compulsory for an NRI to have the knowledge and know the NRE and NRO account difference and know which suits you more.

NRE: NRE Account is well suited for those who want to send the money they have earned overseas to India.

NRO: Money kept in NRO accounts also has to be in Indian rupee and money cannot be repatriated to a foreign currency easily. NRO Accounts can be used by NRIs to deposit their earnings in India. This is an important difference between NRE and NRO account.

Difference between NRE and NRO Account

Non Resident External (NRE) and Non-Resident Ordinary Rupee accounts are two kinds of bank accounts that concern NRIs or Non Resident Indians. They are extremely essential for you on a legal note in case you are an NRI.

Are you an NRI?

Before you answer your NRE vs NRO dilemma let’s first understand the definition of NRI. It becomes extremely important to know your NRI status before you even know if you need an NRE or NRO account or not because the definition of who is an NRI is different under Fema ACT and under Income Tax Act (ITA)

Who is an NRI under Fema:

NRI as per Fema is a person who is a resident outside India but is a citizen of India.

Who is an NRI under ITA:

Persons who have been in India for 120 days or less OR he/she is in India for a period of 60 days or less even after completing 365 days in the preceding four years.

Therefore, NRIs include those individuals who visited India for less than 120 days in a financial year.

This amendment was brought in the financial year (FY20-21). Earlier the 120-day threshold was 182 days. However, there is a catch here.

If the total Indian income, that is the income accruing in India, during the financial year is more than Rs 15 lakh, only then the 120 days rule will apply. Visiting NRIs whose total taxable income in India is up to Rs 15 lakh during the financial year, will continue to remain NRIs only if their stay does not exceed 181 days, as was the case earlier.

When can you open an NRE/NRO Account?

You can be classified as an NRI only under Fema to be able to open an NRE or NRO account. You need not be classified as an NRI under Income Tax Act.

How do you open NRO/NRE Accounts?

There are two ways:

1) you can convert your existing savings account to an NRE or NRO Account

2) Or you can open a new one from scratch in case you don’t have regular savings account under your name

One important similarity to note between the two is that both are rupee-denominated bank accounts. All major private and public sector banks offer NRE and NRO bank accounts for NRIs.

Let’s straight away dive into the NRE and NRO account difference:

NRE Account

NRE Account is well suited for those who want to send the money they have earned overseas to India.

This is basically for your foreign currency savings. Your NRE Account can be in the form of a savings bank account, a recurring deposit, or a fixed deposit. Your money is converted into Indian currency at the time of deposit.

The interest earned from an NRE account and also the principal amount are exempt from tax in India. It can be opened as a joint account with other NRIs or residents. The amount deposited can be free repatriated to other countries.

This is mainly used by NRIs to meet household expenses back in India. The tax exemption makes it a great investment opportunity. You can repatriate any amount of interest and principal without any restrictions. You can transfer funds from a foreign account to an NRE account as well.

NRO Accounts

Money kept in NRO accounts also has to be in the Indian rupee and money cannot be repatriated to a foreign currency easily. NRO Accounts can be used by NRIs to deposit their earnings in India. This is an important difference between NRE and NRO accounts. NRE Accounts are for overseas earnings. Interest earned on this account is taxed at 30% excluding surcharges and any other taxes as applicable under the Income Tax Act. Remittance up to $1 Million (the principal amount) is allowed in a financial year subject to taxes is allowed. While the interest earned on the principal is free repatriable.

The joint account rules remain the same: you can open it with a resident or another NRI. Here, ‘income’ in India can also include pension, rent, dividend, etc.

NRE vs NRO Account

Sr. No.		NRE	NRO
1.	Definition	Non-Resident External (NRE) Accounts are to deposit for overseas earnings	Non-Resident Ordinary Rupee (NRO) Accounts are for depositing income earned in India
2.	Denomination	Indian Rupee. This means your foreign currency savings are converted both during deposit and withdrawal.	Indian Rupee
3.	Foreign Currency Risk	Yes	No
4.	Tax	Exempt. Both principal and interest.	Interest paid to an NRI will be taxed at 30% excluding surcharges.
5.	Minimum Balance	Up to Rs 10,000	Up to Rs 10,000
6.	Joint Account	With residents or NRIs	With residents or NRIs
7.	Repatriability	Funds are completely and freely repatriable	Here repatriability is subject to taxes and only $1 Million in a single financial year is allowed
8.	Deposit Rules	Indian income cannot be deposited here	Overseas income cannot be deposited
9.	Deposit and Withdrawal Currency	Can deposit in foreign currency and withdraw in Rupee	Both to be in Indian rupee denomination

NRE vs NRO: What should you go for?

If you are an NRI, NRE vs NRO account does not remain a question anymore but a regulatory necessity. However, you may have to pick between the two accounts depending on your needs. Since there are rules regarding income earned in India and abroad, the decision to pick between the two is not a matter of choice anymore but a matter of technicality and it is pretty simple. If you have income earned overseas you have to open an NRE Account while for your income earned in India you have to keep it in an NRO account.

Why not an ordinary savings account? This doubt may come across your mind and it is legit to have such confusion. By law, as we have mentioned before as well, being an NRI you cannot have ordinary resident savings, fixed deposits or recurring deposits accounts in banks. You necessarily need to have an NRO or NRE account or both, depending on the needs.

You may have to research a bit on which bank to use. All Indian private and public sector banks offer the option of opening NRO and NRE accounts to all NRIs. The laws and rules regarding these banks are almost the same. The difference will come in the quality of service and customer support which will definitely differ from bank to bank so keep your research up to date.

Once the account is activated, an NRI can invest by any of the below methods.

A. Self or Direct

An NRI can carry out transactions, debiting or crediting through normal banking channels.
Their application with the required KYC details must indicate that the investment is on a repatriable or non-repatriable basis.
KYC documents consist of a recent photograph, certified copies of PAN card, passport copy, residence proof of outside India, and a bank statement. The bank may require an in-person verification which an NRI can comply with, by visiting the Indian Embassy in their resident country.

B. Through the Power of Attorney (PoA)

Another common method is to have someone else invest on behalf of an NRI.

In India, Mutual fund companies allow holders to invest on their behalf and take other decisions pertaining to their investments. However, signatures of both the NRI investor and PoA should be present on the KYC documents to make such types of investment.

Step 2: Get Your KYC done

An NRI must complete the KYC process before starting investment in Indian mutual funds.

For that, they need to submit a copy of your passport (only relevant pages with name), date of birth, photo and address. The current residential proof too is a must, whether temporary or permanent resident in that country. Some fund houses may also insist on an in-person verification too.

Many mutual fund houses in India don’t allow NRIs from the USA and Canada to invest in their schemes because of the cumbersome compliance requirements under the Foreign Account Tax Compliance Act (FATCA). On the other hand, there are some fund houses that have certain conditions on which they allow investors based in the USA and Canada to put money in their schemes.

So if you an NRI from the USA or Canada, then look into the additional document requirement also.

Step 3: How to Redeem?

For NRIs, mutual fund investments can be redeemed by following the redemption procedure mentioned by the fund houses. Different fund houses in India follow different procedures for redemption by NRIs.

The AMC will credit the corpus (investment + gains) you get after fund redemption to your account after deducting taxes and shall be credited to the respective NRE or NRO bank account of the investor. They can also write a cheque for the same.

What About Taxation for NRIs?

Many NRI investors often fear that they will have to pay double tax when they invest in India, especially in mutual fund schemes. But certainly, that’s not the case if India has signed the Double Taxation Avoidance Treaty (DTAA) with the respective country.

For Example,

India has signed a DTAA treaty with the US. Hence, an NRI can claim tax relief in the US, if he/she has already paid taxes in India. The gains from equity-oriented mutual funds are taxable based on the holding period.

These are the holding periods defined for different types of mutual funds:

Type	Short-term holding	Long-term holding
Equity mutual funds	Less than 12 months	12 months and more
Balanced mutual funds	Less than 12 months	12 months and more
Debt mutual funds	Less than 36 months	36 months and more

The below table summarizes the tax on the capital gain from mutual funds:

Capital Gain taxation on different types of mutual funds
Type	Short-term capital gains (STCG) tax	Long-term capital gains (LTCG) tax
Equity-oriented mutual funds	15%	10% without Indexation
Balanced mutual funds	15%	10% without indexation
Debt-oriented mutual funds	As per tax slab	20% after Indexation

Important Points to be Noted for NRIs

If details of a foreign bank account are provided, the application of the NRI will be rejected.
On redemption of mutual fund units, the tax will be deducted at the source on the capital gains made on the investment.
Your investment into mutual fund schemes carry the right of repatriation of the amount invested and amount earned, only until you remain an NRI.
The compliance requirement in the USA and Canada are more stringent as compared to other nations. According to FATCA guidelines, all financial institutions must share the details of financial transactions involving a person from the USA working with the US Government.
You must check if you are a resident of any of the 90 countries that have signed the Common Reporting Standard (CRS)? CRS is a global reporting system to combat tax evasion around the globe.

The Bottom Line

NRIs can easily choose to invest in the Indian mutual fund industry although the process may have some initial hassles. However, in the longer term, the return on investment would be worth it and there is certainly no reason for you to be left out of investing in one of the fastest-growing economies of the world.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due
diligence before investing. Investment in securities market are subject to market risks, read all the related
documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in
Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As
investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the
investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past
performance of securities/instruments is not indicative of their future performance.

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