NRI Mutual Funds

Mutual funds are a topic that is widely recognized but people are oblivious to their significance and details. Investing in mutual funds has its fair share of risk, and if invested right, it gives great returns. Before investing in any mutual fund, it is essential to understand what a mutual fund is.

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7.7 Crore

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

What is a Mutual Fund?

A mutual fund is a collection of money that is collected from various investors and invested in several bonds, stocks, assets, and other money market instruments. The person investing in the market is a professional money manager who distributes the funds into various markets and/or securities and attempts to get capital gains.

When a person invest in mutual fund, the investment is not in a single share but several shares. Investments aren’t necessarily shares; they could be bonds and other securities. As all mutual funds have varying prices, they’re referred to as Net Asset Value Per Share (NAVPS). The prices of mutual funds don’t fluctuate when the market is open but it settles at the end of the trading day.

Understanding Tax on Mutual Funds in India

Before getting into the details of NRI mutual funds, let us begin with understanding the tax on mutual funds in India.

Mutual funds in India are taxed as per the guidelines of the Securities and Exchange Board of India (SEBI).

The returns on mutual funds are in the following two forms:

Dividend

When companies have a surplus of money, they may share the profits with their investors, and these shared profits are known as dividends.
Capital Gains

When the selling price of the mutual fund is greater than that of its purchase price, it is termed as the capital gain.

Both these returns are subjected to mutual fund taxation in India.

Moreover, the taxes on dividends of mutual funds are added to the individual’s taxable income. It is taxed as per the individual’s income tax slab rate. Before the Union Budget 2020, dividends were void of taxes. The companies used to pay the Dividend Distribution Tax (DDT) before sharing the profits. DDT used to be applied on dividends in an excess of Rs 10 lakh per financial year.

The capital gains are taxed differently based on the holding period and type of the mutual fund. The types of mutual funds are as follows:
- Hybrid Debt-Oriented Funds
- Hybrid Equity-Oriented Funds
- Equity Funds
- Debt Funds
Each mutual fund can be classified as a short-term or a long-term mutual fund as per the fund’s holding period. For the Equity Fund to be classified as short-term when held for less than 12 months and long-term when held for 12 months or longer. The same is applicable for Hybrid Equity-Oriented Funds.

Debt Fund and Hybrid Debt-Oriented Fund is classified as short-term when held for less than 36 months and long-term when held for 36 months or longer.

Income tax on mutual funds in India varies on the type of mutual fund you invest in. Hybrid-Equity Oriented Funds are taxed at 10% without indexation benefit for a capital gain when held for more than 12 months. The above tax is for long-term holding of the mutual term. Short-term capital gains are taxed at a rate of 15%.

Mutual Funds for the NRI

Often, NRIs have a question; can NRI invest in a mutual fund?

Well, the answer is yes, NRI can invest in a mutual fund. For an NRI to make investments in mutual funds in India, the person needs to open an NRE (Non-Resident External) account or an NRO (Non-Resident Ordinary) account, or an FCNR (Foreign Currency Non-Resident) account.

The reason being, under FEMA (Foreign Exchange Management Act) an NRI cannot invest with regular savings account in a bank. NRIs can’t invest in foreign currency as well; they have to invest in Indian Rupees.

NRIs investing in mutual funds in India but living in the US and Canada sometimes get their applications rejected as they have to undergo tedious paperwork under FATCA (Foreign Account Tax Compliance Act).

The best mutual funds for NRI, along with their returns, are listed below:

SBI Equity Fund
ICICI Prudential Credit Risk Fund
Parag Parikh Long Term Equity Fund

The above are some of the mutual funds for NRI in India. Other examples of mutual funds wherein the NRIs can invest are as follows:

Aditya Birla Sun Life Liquid Fund
Aditya Birla Sun Life Corporate Bond Fund
L&T Arbitrage Opportunities Fund
L&T Banking and PSU Debt Fund
SBI Magnum Medium Duration Fund
SBI Equity Hybrid Fund
UTI Liquid Cash Plan
UTI Flexi Cap Fund

Besides these funds, several other Indian Fund Houses allow NRIs to invest. NRI investors are recommended to exercise personal discretion before choosing a particular fund for investment.

How Can the NRIs Invest in Mutual Fund?

A common question could be can the NRIs invest in mutual funds online?

An NRI can certainly invest online through various channels. As mentioned earlier, to invest in mutual funds, whether online or offline, one needs to have an NRO, NRE or FCNR account.

Once the account is open, the person can start investing with any of the following two methods:

Self or Direct Method

With this method, one can start investing directly in mutual funds without having to consult any third-party agent or investor. If the person deems himself fit to invest, the person will have a hassle-free experience and need not pay any brokerage fees. Before investing, the person needs his KYC done. KYC includes documents such as the latest passport size photograph, proof of residence, passport, bank statement, attested copies of PAN card. Sometimes, the person needs to get verified in person. For NRIs, verification can be completed by visiting the Indian Embassy in the country of residence. While a person gets the KYC done, they need to specify whether their account is repatriable or not.
Power of Attorney Method

This is the method in, which a professional investor invests the person’s money in mutual funds. These investors mostly work for companies and the responsibility of investing the person’s money lies entirely in the hands of the investor, but they’re not liable to pay any damages in the event of losses. In the power of attorney method, the signatures of both the NRI investor and PoA holders must be present on the KYC documents.

Though a person can invest online, not all fund houses allow investing online. Aditya Birla Sun Life Mutual Fund, ICICI Prudential Mutual Fund, and SBI Mutual Fund allow Canada and US-based NRIs to transact only through the offline medium. Investing with a cheque or a draft requires the person to attach a Foreign Inward Remittance Certificate (FIRC) to verify the source of funds.

Understanding the NRI Mutual Funds Taxation

Taxation rules for NRIs and residents of India are alike. For equity mutual funds, the investments made for 1 year or less will be taxed at 15% as per the short-term capital gains taxation rules. For long-term investments, the mutual funds are taxed at a rate of 10% as per the long-term capital gains taxation rules.

For equity schemes, short-term capital gains are taxed at a rate of 15% and long-term capital gains at a rate of 10% if the gains exceed Rs 1 lakh. For non-equity schemes, short-term capital gains are taxed at a rate of 30% and long-term capital gains at a rate of 20% with indexation.

If the country of NRI’s residence has not signed the DTAA (Double Tax Avoidance Agreement) then the NRI is liable to pay the tax in both the countries, the country of residence and in India. India has signed the DTAA with the USA and this helps to avoid double taxes on mutual funds for NRI in India.

Regulations to Invest in Mutual Funds for NRIs

To invest in any bond, security, or to open an account in a bank, one has to go through the mandatory Know-Your-Customer (KYC) norms and other formalities. While investing in mutual funds, residents of India and NRI, both have to go through the same. The following are some regulations and steps that an NRI has to abide by before investing in mutual funds:

KYC

To complete the verification, an NRI has to submit a copy of their passport along with the pages that have the person’s name, address, age, photo, and other relevant information printed on them. Along with the passport, the residential proof is also required. At times, fund houses do not accept e-KYC and people are requested to go through the verification process in person.
Remittance Certificate

When payment is done to the fund house via a cheque or a draft, Foreign Inward Remittance Certificate (FIRC) needs to be attached. In the absence of the FIRC, a letter from the bank can also be considered. FIRC is sought to confirm the source of funds.
Redemption

After redemption of the corpus, investments and gains, the Asset Management Company will credit it in the account after deductions of any applicable taxes. They can also write a cheque to the person. Directly crediting the corpus in the NRO/NRE account is also available through some AMCs. If the NRI opts for a non-repatriable investment, the corpus or the redeemed amount can only be credited to the NRO account.

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).