The non-resident Indians, the citizens of India or those possessing PIO cards (person of Indian origin) that stay out of India for work or business often seek guidance on investing in India.
- Are they allowed to invest on mutual funds in India?
- Do they get tax benefits like those live in India?
- What are the best ways for NRIs to invest on mutual funds in India?
- Is there a facility for nomination available on NRI mutual funds?
- Can I use a power of attorney here?
If you need answers for these questions and more, read on further.
Before moving on understanding the procedures involved in NRI mutual funds, you must understand couple of terms related to bank accounts involving NRIs.
NRE, NRO, FCNR bank accounts: What do these terms mean?
is the short form of non-resident external account where NRIs use these accounts to remit their earnings from abroad in India in Indian rupees.
You have a flexibility to convert the currency in any form (Ex: Rupees to Dollars, Euro, Yen etc.,) The principal and interest don’t incur any tax. Funds can be transferred from NRE to NRO accounts.
is the short form of non-resident ordinary account where NRIs can remit their earnings from India. For example, if the NRI has a property in India he can remit the rent earned from that property in NRO account.
Unlike NRE account, NRO account has a limitation up to $1 million to convert in any other currency from Indian rupees. Funds cannot be transferred from NRO to NRE accounts.
is the foreign currency non-resident fixed term deposit account where NRIs can remit their earnings in one of the six currencies such as US$, Canadian $, Euro, Yen, AU$ and Pound. The principal and interest don’t accrue any tax. Funds can be transferred from other FCNR or NRE accounts.
Are NRIs allowed to invest on mutual funds in India?
Yes. The RBI, by issuing schedule 5 of Foreign Exchange Management Act in 2000, allows NRIs and PIO card holders to invest on mutual funds. There is no special approval or sign off required by any authority and like a resident, the non residents as well can invest on mutual funds in India.
NRI mutual fund can be invested on two modes familiarly known as repatriable or non-repatriable basis.
How does NRI mutual fund work on repatriable basis?
NRI who is having NRE or FCNR account can invest on mutual funds by sending money through inward remittance. They must use the transparent banking channels where the money invested on NRI mutual fund is debited from the investor’s NRE/FCNR account.
The type of mutual fund they choose to invest on must comply with the terms and conditions set by the Securities and Exchange Board of India (SEBI). The dividends and redemption amount will be credited to the NRE/FCNR accounts of the investors.
How does NRI mutual fund work on non-repatriable basis?
Apart from NRE and FCNR accounts, the non-repatriable basis allows NRIs to use their NRO accounts as well to invest on mutual funds.
Please note that the dividends, maturity and interest can be credited only in Indian rupees when you choose to invest in mutual funds on non-repatriable basis.
What is the procedure to invest on NRI mutual fund?
The procedure is similar to the residents investing on mutual funds in India.
- Step 1: Complete the KYC procedure by giving your overseas address proof and other documents.
- Step 2: Fill in the application form. Carefully fill in the info about the bank details in India to credit the earnings.
- Step 3: Draw a cheque or draft for the amount you wish to invest on NRI mutual fund. Please note that you can invest only in Indian rupees.
- Step 4: submit the above documents to the investor service centers. You may also choose the online application channel.
How does the redemption process work?
Depending on the NRI investor’s bank account, the dividends, matured amount and the interest are credited directly or through cheques(to the account number provided by the investor in the application form).
The non-repatriable model mutual funds are credited only to the NRO account. Be it any mode of investment, the dividends are completely repatriable.
How does the taxation work on NRI mutual funds?
The income earned (except the dividends) through NRI mutual funds are considered as capital gains and treated under capital gain tax models. The mutual fund held for more than a year is considered as the long term capital gain and less is considered as the short term capital gain.
For the year 2013-14, the long term capital gain from equity is exempt from tax and the short term capital gain from equity fund is taxed at 15%. The short term capital gain from debt fund will be treated as income from other sources and tax to be paid as per the income tax slab in which the investor falls. The long term capital gain from debt is taxed 10% without indexation or 20% with indexation benefit.
Even though the individual do not need any special approval from RBI to invest on NRI mutual funds, the foreign corporate and FIIs must seek special approvals from authorities before investing.
As an NRI, better learn the terms, details related to various bank accounts prior initiating the process and plan your investments appropriately.
Hope the above points could have given you a right perspective about investing in mutual funds. To get right perspective about your complete personal finance, you need to have a healthy financial plan. If you want to understand our 360 degree financial planning process, we offer