NRIs and mutual funds: What are the taxation and other pitfalls one should steer clear of?

Dubai: A majority of Non-Resident Indians (NRIs) have dependents in India, in which case, making investments in India are often recommended to be a financially prudent option.

For NRI investors, the Indian stock market is an opportunity waiting to be tapped. They can invest in stocks directly if they have the expertise and the time. However, investing through mutual funds is always a more cost effective solution.

All mutual funds allow NRIs to invest in their schemes, though some don’t accept applications from NRIs based in the US and Canada because of the tedious paperwork required under the Foreign Account Tax Compliance Act (FATCA).

Here are some other things that you need to know about investing in mutual funds in India.

Can NRIs invest in mutual funds in India?

NRIs are allowed to invest in mutual funds in India – as long as they adhere to the rules of the Indian Foreign Exchange Management Act (FEMA). However, like mentioned above, some asset managers do not accept mutual fund applications from NRIs in Canada and the US.

You may start with equity funds, debt funds, or hybrid funds (mix of both) depending on your investment objectives and risk tolerance. Moreover, you have a plethora of options and you may choose the right mutual funds depending on your investment horizon.

How can NRIs benefit from mutual fund investments?

As one of the main emerging economies of the world, India attracts several thousand foreign investors who invest in its economy. NRIs enjoy several perks by investing in Indian mutual funds.

With the option of investing online, it is much easier to track and manage your mutual funds. Investors can buy, redeem, and switch units of different mutual fund schemes as well as opt for systematic (periodic) transfer or withdrawals online.

There is no need for issuing cheques, demand drafts, submitting physical forms, or even be in the country. You will receive regular consolidated account statements through emails.

Asset management companies (AMCs or mutual fund operators in this case) also disclose portfolio holdings online to keep their investors informed.

NRIs have scope for more profits from rupee appreciation

If the Indian rupee value appreciates against the resident country’s currency, then it results in more profits for investors.

For instance, if an NRI from the UK invests GBP1,000 in a mutual fund in India at an exchange rate of INR100 to GBP1, the investor can reap good returns if the rupee appreciates against the pound. NRIs also get the same benefits by investing in India-based mutual funds in their country of residence.

What is the investment procedure for NRIs in India?

India-based asset management companies (AMCs or mutual fund operators in this case) in India are not allowed to accept investments in foreign currencies.

Hence, the first step to investing in the Indian mutual funds is to open an NRO account, NRE account, or a Foreign Currency Non-Resident (FCNR) account with an Indian bank. You can invest by any of the below methods.

• Self or Direct

Your mutual fund application with the required unique customer identification (KYC) details must indicate that the investment is on a repatriable or non-repatriable basis.

• Power of Attorney

Another popular method is to have someone else invest on your behalf. AMCs allow the power of attorney (PoA) holders to invest on your behalf and also make investment decisions.

However, regulations state that signatures of both the NRI investor and PoA holder must be present on the KYC documents if you seek to invest in mutual funds in India.

Mutual fund regulations for NRIs

Do I require a FIRC (Foreign Inward Remittance Certificate) when investing in mutual funds?

If you have made the payment via a cheque or a demand draft, then you must attach a Foreign Inward Remittance Certificate (FIRC). In case that is not possible, then a letter from the bank would also be accepted. This is for the purpose of confirming the source of funds.

What norms do I keep in mind when it comes to redemption of mutual fund profits?

The AMC will credit the corpus (investment and the gains you made on your investment) you get when you redeem your mutual fund units to your bank account after deducting applicable taxes, if any.

Some banks allow crediting the redemption amount directly to the NRO or NRE account. If you have opted for non-repatriable investment, then they can credit the proceeds only to an NRO account.

How are NRI mutual fund investors taxed?

NRI investors often worry that they will have to pay double tax when they invest in India. Well, that is certainly not the case if India has signed the Double Taxation Avoidance Treaty (DTAA) with the country of your residence.

The gains from equity mutual funds are taxable based on the holding period. Short-term capital gains (STCG, which is the tax applied to assets held for less than a year or two) on equity-oriented funds attract tax at the rate of 15 per cent.

However, Long-Term Capital Gains (LTCG, which is the tax applied to assets held for more than a year or two), exceeding INR100,000 per year, are taxable at the rate of 10 per cent without the indexation benefit (explained below).

In the case of debt-oriented funds, short-term capital gains are taxable as per your income tax bracket. Holding the fund for more than three years will result in a 20 per cent tax on the long term capital gains with indexation benefit. You have LTCG on un-listed mutual funds taxed at the rate of 10 per cent without the indexation benefit.

Checklist: Points to remember when investing in Indian mutual funds

• Your investment carries the right of repatriation of the amount invested and amount earned, only until you remain an NRI.

• Submitting proof of residence in the current country is mandatory. Hence, you must also attach an attested proof along with the application.

• The compliance requirement in the US 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 US person with the US government.

• Are you a resident of any of the 90 countries that have signed the Common Reporting Standard? CRS is a global reporting system to combat tax evasion.

In short, NRIs can choose to invest in his or her home country. The process may have some initial hassles, however, experts reiterate that in the long run, the return on investment would be worth it.