How NRIs, PIOs can invest in mutual funds

If you are a Non-Resident Indian (NRI), you can make mutual fund investments in India on a fully repatriable basis. Here are the details.

Kavya Balaji   /   January 6, 2021
NRI

India is one of the most attractive investment destinations in the world. Even though interest rates in the country have fallen, they are still much higher than that of several countries. That’s the reason why those living abroad love to make Indian investments. The number of foreign institutional investors (FIIs) have increased over the years. Way back in 2009, FII investments were about Rs. 75,000 crores a month. Today, FIIs invest more than Rs. 1.5 lakh crores a month in the Indian markets.

While FIIs invest in Indian stock markets, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) can invest directly in Indian mutual fund schemes. Even though PIOs are foreign citizens, if they invest in India, they will be treated at par with NRIs. These categories of investors who make investments in India will need to follow the guidelines provided by the Foreign Exchange Management Act (FEMA). Those who have tax residency in any country other than India have to also comply with the provisions of Foreign Account Tax Compliance Act (FATCA). NRIs and PIOs can invest in the Indian mutual fund schemes on a full repatriable as well as non-repatriable basis.

Benefits of NRIs, PIOs investing in India

NRIs, PIOs can enjoy most of the benefits and conveniences that are provided to resident Indian investors if they make Indian investments. NRIs and PIOs can invest using the Systematic Investment Plans (SIP), make switches between mutual fund schemes, choose from growth and dividend options and repatriate their investments once they redeem them. They can choose from the thousands of mutual fund schemes in India that provide long term returns that are much more than 14% a year. However, not all fund houses allow NRIs, PIOs to invest in their mutual fund schemes. Before applying for investments, NRIs, PIOs should ask the fund house or their wealth manager about the schemes in which they are eligible to invest.

How NRIs, PIOs can invest in India

NRIs, PIOs need to comply with all regulatory requirements in the country. This will include completion of Know Your Customer (KYC) norms before investing. They will need to have a bank account in India. 

Open a bank account

As mutual fund houses in India don’t accept investments in foreign currency, NRIs, PIOs will need to open a bank account in Indian rupees for investing in mutual funds. This can either be a Non-Resident Ordinary rupee (NRO) account or a Non-Resident External rupee (NRE) account. While NRE accounts have tax benefits, NRIs, PIOs can deposit only income from India in their NRO accounts.  The NRE account can be used to park foreign earnings while there are restrictions to transferring account balance or money from NRO accounts to foreign accounts. Note that balances in NRE accounts can be transferred freely to foreign accounts.

The interest earned on balances in NRO accounts are taxable. So, NRIs, PIOs have to be clear about their investment goals and then open an NRO or NRE account based on their needs.

Making the investments

Once the bank account has been opened by NRIs, PIOs, they can make mutual fund investments along with KYC details. They will need to provide documents such as their latest photograph, bank statement, PIO card, attested copies of passport, address proof (outside India), etc. The attested documents can be attested by authorised officials working for overseas branches of scheduled commercial banks that have been registered in India. They can get documents attested by public notaries or the Indian embassy/consulate general in their country of residence. NRIs, PIOs must indicate in the KYC form whether they want to make the mutual fund investment on a repatriable or non-repatriable basis.

Investments using POA

A PIO/NRI may give Power of Attorney (POA) to any Indian resident for making mutual fund investments. For investments made using POA, signatures of both the investor and the PoA should be there on the KYC documents.

Taxation

Tax deducted at source (TDS) is applicable on short-term and long-term capital gains that NRIs, PIOs get at the time of redemption mutual fund schemes.

Tax on equity-oriented mutual funds

The long-term capital gain (LTCG) for equity funds that are held for more than one year will be taxed at 10%. The tax on short-term capital gain (STCG) for mutual funds sold within a year of purchase will be 15%.

Tax on schemes other than equity

LTCG for non-equity schemes that are sold after 36 months will be taxed at 20% with indexation benefit. The tax on STCG for non-equity mutual funds will be the marginal income tax rate. 

Note that surcharge and cess will be applicable for all the taxes that need to be paid.

Looking to invest in Indian mutual fund schemes? Click here to explore the funds or get in touch with experts at Wealthzi.com by writing to [email protected].  

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