Mutual fund investment for NRIs in India

Posted On: 23 January 2025

Non-Resident Indians (NRIs) around the world share a common goal: to grow and safeguard their hard-earned money. With India’s steady economic growth, investment in India for NRI has become increasingly appealing. While traditional options like fixed deposits and real estate remain popular, a mutual fund for NRI in India offers flexibility, diversification, and the potential for higher returns.

However, certain questions arise: Can NRIs invest directly in mutual funds? What is NRI mutual fund taxation like? Do they need special documents? By addressing these queries step-by-step, this guide aims to simplify mutual fund investment by NRI and help you understand the process and its benefits.

Table of contents

Can NRIs invest in mutual funds in India?
How can NRIs invest in mutual funds – The simple procedure
Documents required to complete the KYC process for NRI mutual fund investment
What about taxation for NRIs?
Benefits of investing in mutual funds in India for NRI
Important points to be noted for NRIs

Can NRIs invest in mutual funds in India?

The short answer is “yes”. NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) are all permitted to invest in Indian mutual funds. This can be done on a repatriation or non-repatriation basis, depending on the type of bank account you use.

Typically, an NRI invests through NRE (Non-Resident External) or NRO (Non-Resident Ordinary) accounts.

NRE account: Money in this account is fully repatriable (you can move the funds abroad), making it suitable if you wish to move the investment proceeds back to your country of residence.
NRO account: Funds in this account are not entirely repatriable (limited repatriation is allowed), and this account is typically used to manage income generated in India, such as rental income or dividends.

Given India’s regulations, NRI mutual fund investment follows guidelines from both the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Most Indian fund houses welcome NRI investments, but some restrictions apply if you live in countries like the U.S. or Canada, due to stringent compliance requirements.

Still, several Asset Management Companies (AMCs) have simplified investment-related processes even for U.S. and Canada-based NRIs, albeit with certain additional paperwork.

How can NRIs invest in mutual funds – The simple procedure

1. Open a bank account – NRE or NRO account: Choose one based on whether you want full repatriation of your profits or plan to keep funds in India.

2. Complete KYC (know your customer): KYC verification is mandatory for mutual fund for NRI in India. Your KYC status must reflect your non-resident status.

3. Choose an investment method

Online: Most fund houses allow NRIs to invest online if their KYC and bank accounts are in place.
Offline: Alternatively, you can fill out physical forms, attach required documents, and submit them through an authorised distributor or directly to the AMC.

Fund transfer: Transfer funds from your NRE or NRO account to invest in the mutual fund. Ensure compliance with Foreign Exchange Management Act, 1999 (FEMA) regulations.

Allotment of units: Upon successful application and fund transfer, mutual fund units are allotted at the applicable Net Asset Value (NAV). You can track your portfolio through online portals or fund house statements.

Once you follow these steps, you’re officially part of the NRI SIP or lump sum investment ecosystem, depending on your chosen mode. SIP investment for NRI is popular as it allows systematic monthly contributions, reducing market-timing risks and fostering disciplined investing habits.

Documents required to complete the KYC process for NRI mutual fund investment

Valid passport: The primary identification document confirming nationality.
Overseas address proof: Utility bills or rental agreements from your country of residence.
Indian address proof (if available): Electricity bills, Aadhaar card, or any recognised proof of an Indian address.
PAN (Permanent Account Number): Mandatory for any tax-related transaction in India.
Signature verification: Some fund houses may require a banker’s attestation or signature verification form.

If you’re investing from the U.S. or Canada, additional FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) declarations may be necessary. Once your KYC is done, you’ll receive a KYC acknowledgment, allowing you to proceed with NRI mutual fund investment.

What about taxation for NRIs?

NRI mutual fund taxation often looks complex, but a few key points simplify it:

Capital gains tax
- Equity Funds (long-term): If you hold for more than 12 months, gains over Rs. 1.25 lakh per financial year are taxed at 12.5%.
- Equity funds (short-term): Gains for a holding period under 12 months are taxed at 20%.
- Debt Funds’ gains are treated short-term regardless of the holding period and added to your taxable income; these are taxed as per your slab rate.
TDS (tax deducted at source)
- Fund houses are required to deduct TDS on capital gains for NRIs.
- For long-term holdings, the TDS deducted is 12.5% and for short-term, it is 20%. The deducted amount may vary depending on whether it’s an equity fund or debt fund, and the holding period.

It’s crucial to note that you might be eligible for benefits under the Double Taxation Avoidance Agreement (DTAA) between India and your country of residence. Always check with a tax consultant to navigate these rules effectively and optimise your investment in India for NRI.

Benefits of investing in mutual funds in India for NRI

Exposure to India’s growth: India’s diversified economy can offer growth potential, especially in equity markets. By investing in mutual funds for NRI, you’re essentially participating in the Indian growth story.
Professional management: Expert fund managers handle stock and bond selections, saving you the hassle of direct market analysis.
Diversification: With a range of fund categories (equity, debt, hybrid), you can tailor your portfolio across multiple market segments.
Flexibility: SIPs allow you to start small and increase contributions over time, whereas lump sum investments suit those with surplus funds.
Convenient access: Thanks to digital platforms, mutual fund investment by NRI can be done with relative ease, from anywhere around the world.

Important points to be noted for NRIs

Country-specific restrictions: Some AMCs restrict or require extra paperwork from U.S./Canada-based NRIs. Verify with the chosen fund house.
Repatriation: Investments made through an NRE account are fully repatriable, whereas those via NRO accounts may face limitations.
KYC updates: If you change your address or passport, update your KYC promptly.
Investment options for NRI in India: Beyond mutual funds, consider alternative routes like direct stocks, real estate, or portfolio management services (PMS) if you need specialised solutions.
Regular monitoring: Keep an eye on your investments via online statements and update your email/phone details to receive periodic fund updates.

Conclusion

By understanding the right documentation, NRI mutual fund taxation, and compliance processes, you can seamlessly participate in NRI mutual fund investment. Whether you’re eyeing short-term gains or long-term wealth creation, India’s mutual fund ecosystem has a space for every strategy—ranging from NRI SIP to lump sum equity investments.

Remember, while the process may seem technical, professional support from financial advisors or tax consultants can simplify your investment journey. Ultimately, staying informed, maintaining compliance, and aligning investments with your financial goals remain the key pillars of successful investment options for NRI in India.

FAQs:

Are there any restrictions or lock-in periods for NRIs investing in mutual funds in India?

Generally, there are no specific lock-in periods solely because you’re an NRI. However, some scheme-specific lock-ins may apply uniformly to all investors (residents or NRIs).

Can NRIs invest directly in mutual funds?

Yes, NRIs can invest directly in mutual funds if they have NRE/NRO accounts and complete KYC. Some AMCs may require additional documentation if you reside in the U.S. or Canada.

Are the dividends earned on mutual funds tax-free for NRIs?

Under the current system, dividends are taxable in the hands of the investor and NRIs face TDS on dividends at 20%, and the final tax liability depends on the applicable Double Taxation Avoidance Agreement.

Can an NRI invest in mutual fund tax savings schemes like ELSS?

Yes, NRIs can invest in ELSS (Equity-Linked Savings Schemes). These have a 3-year lock-in period. Gains are treated similarly to other equity funds for tax purposes.

Does a TRC play a role in reducing TDS for NRIs investing in mutual funds in India?

A Tax Residency Certificate (TRC) can help you claim benefits under the relevant DTAA, potentially reducing TDS rates on income from your mutual fund investments.

Can a TRC help NRIs investing in Indian mutual funds avoid paying capital gains tax in India?

A TRC alone doesn’t outright exempt you from capital gains tax. However, it can help you avail favourable tax rates as per the DTAA with your country of residence.

Do Indian tax authorities issue a TRC to help avoid double taxation in their country of residence?

No, Indian tax authorities do not issue TRCs. You must obtain the TRC from the tax authorities in your country of residence to claim DTAA benefits.

Can an NRI invest in Portfolio Management Services (PMS)?

Yes, many PMS providers welcome NRI investments. However, the minimum investment threshold and documentation may differ from mutual funds.

When is a certificate of TDS issued to NRIs?

Banks or AMCs issue TDS certificates (Form 16A) periodically, typically on a quarterly basis. This document helps NRIs claim a refund or adjust their tax liability against any TDS deducted on mutual fund earnings.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.