As a non-resident, you may want to take exposure to Indian equity markets. Picking up stocks on their own is not everybody’s cup of team. Such non-resident investors may take exposure to equity markets through equity mutual funds.
In this post, I will discuss answer basic queries that an NRI investor may have about mutual fund investments in India. I will also discuss the procedure NRIs can follow to start investing in mutual funds in India.
Can NRIs invest in mutual funds in India?
Yes, NRIs can invest in mutual funds in India on both repatriable and non-repatriable basis.
No approval is required from RBI or any other body to invest in mutual funds in India.
You need to be KYC compliant
Before you invest in mutual funds, you will have to go through KYC (Know your customer) procedure i.e. you must be KYC compliant.
Do note you do NOT need to repeat KYC exercise with every AMC (mutual fund). You need to go through this procedure just once. Your KYC is automatically updated in the central repository. You can check your KYC status here. If you are KYC compliant, you can invest in any mutual fund in India.
I am a new investor. How do I get my KYC done?
You will need to submit the following documents to the AMC (mutual fund house) or R&T agent:
- Self-attested copy of PAN
- Self-attested copy of Passport
- Address proof (both Indian and overseas)
- Passport size photograph
- KYC Form
You can check the complete set of instructions in the KYC form.
Apart from submitting the above documents, you also need to get in-person verification (IPV) done. During IPV, an authorized official confirms your presence and verifies the copies of aforesaid documents with the originals.
If you are on a visit to India, you can simply visit any CAMS, Karvy, AMC branch or distributor office in your city with the aforesaid documents and complete the process. Documents verification and IPV will be done at the same time and you are good to go.
How do I get In-person verification (IPV) done if I am not in India?
You can approach authorized officials of overseas branches of Scheduled Commercial Banks registered in India, notary public, Court Magistrate, Judge, Indian Embassy/Consulate General in the country where you reside. Such individuals are permitted to do IPV along with verification of originals.
Once IPV (and document verification) is completed, you can send the KYC form along with the aforementioned documents to the fund house or R&T agents (CAMS, Karvy). Your KYC information will be updated in the system in a few weeks.
Any additional documents to send?
Along with KYC form and documents, you can send the purchase form (Common Application Form) along with a cheque for the purchase amount. Additionally, you must also send FATCA-CRS declaration form. Typically, a common application form will automatically have FATCA-CRS declaration form.
Which bank account to use? NRE or NRO?
If you want to invest on non-repatriable basis, you can invest from your NRO account.
Alternatively, if you want to invest on repatriable basis, the funds for purchase must come from your NRE account or FCNR account or inward remittance from abroad.
Separate mutual fund folios will be created for NRO and NRE accounts so that it is easier to keep track.
An NRI cannot make an investment in foreign currency.
Mutual Fund for NRIs: How to set up SIP?
To set up SIP, you can send the filled-in SIP registration form to the AMC or through the distributor. Alternatively, you can set up SIPs online too.
However, since SIP require auto-debit of your bank account, you will have to provide a one-time bank mandate (OTM) to the AMC/RTA/intermediary (so that they can debit your bank account).
Non-residents can provide such a mandate in a paper form. Not a difficult thing to do but involves a physical step.
How should I start my investments (once I am KYC compliant)?
There are many ways:
- Invest through an aggregator portal like FundsIndia, ICICIDirect or Scripbox.
- Invest through a Mutual Fund distributor.
The above two options will get you invested in the regular plan of MF schemes.
If you want to invest in direct plans of MF schemes
- Directly approach the AMC or the mutual fund house.
- Register on the AMC website and start investing.
- Invest from CAMS/Karvy websites
- Register with MFUtility (submit CAN and PayEezz registration form). You can register with MFU online.
- Open your account with one of the mutual fund direct plan websites and invest in direct plans subsequently.
If you are confused about the difference between regular and direct mutual funds and are sure about the impact on returns, read this post.
If you want to invest in direct plans of MF schemes but cannot select funds on your own, you can approach a SEBI registered Investment Adviser, seek advice and subsequently invest in direct plans to MF schemes.
The key lies in KYC compliance. Once you are KYC compliant, you can do almost everything online. You can purchase, redeem, start and cancel SIPs online.
How are capital gains/dividends taxed for NRIs?
The tax treatment is no different as compared to a resident investor.
Equity Funds: Short-term capital gains (holding period < 1 year) are taxed at 15%. Long-term capital gains (holding period > 1 year) are taxed at 10% (applicable from FY2019). LTCG to the extent of Rs 1 lac is exempt per financial year. Tax is applicable only on LTCG in excess of Rs 1 lac.
Debt Funds: Short-term capital gains (holding period < 3 years) are taxed as per your income tax slab. Long-term capital gains (holding period > 3 years) are taxed at 20% less indexation.
Surcharge and cess are extra.
Dividends are tax-free in the hands of the investor. However, AMC pays(deducts) Dividend distribution tax (DDT) before paying you the dividend. In case of equity funds, the DDT is 10% in the case of equity funds. Since DDT is charged on grossed up basis, the effective tax liability will be 11.46% (including cess and surcharge).
In the case of debt mutual funds, DDT is 25%. Therefore, the tax hit on dividends will be 27.97% (including cess and surcharge).
Here is the latest on capital gains tax on mutual funds for NRI.
For more on NRI mutual fund taxation and TDS on redemption, refer to this post.
Is TDS deducted at the time of sale of mutual funds?
Yes, this can be a point of pain for many NRIs.
For NRIs, if there is a prospect of tax liability, the tax is deducted at the highest income tax rate.
TDS on short-term capital gains (STCG) on equity funds is 15%.
TDS on LTCG on equity funds will be 10%. Do note, even though LTCG on equity/equity funds is exempt to the extent of Rs 1 lac per year, AMC will still deduct TDS on the entire LTCG. This is because the AMC does not know about your other gains.
TDS on STCG on debt funds will be 30% (irrespective of your income tax slab).
TDS on LTCG on debt funds will be 20% (no indexation benefit).
If any excess tax has been deducted, you can claim it back at the time of filing income tax returns.
Dividends are not taxed in the hands of the investors. Hence, TDS is not applicable.
Must Read: Income Tax and TDS rates for NRIs
Where are the redemption proceeds credited?
Redemption proceeds can be directly credited to your bank account (NRO or NRE). You can also choose to receive redemption proceeds by cheque.
I am a US based NRI. Can I invest in mutual funds in India?
If you are an NRI based in US or Canada, following mutual fund houses have now started accepting investing in
- Birla Sun Life Mutual Fund
- UTI Mutual Fund
- SBI Mutual Fund
- Sundaram Mutual Fund
- L&T Mutual Fund
- DHFL Pramerica
- PPFAS mutual fund
- ICICI Prudential Mutual Fund
Hence, a decent choice is now available to even US-based NRIs. However, not all the AMCs are accepting online investments. You are advised to check with respective AMC about how to proceed. But yes, be prepared to slug it out. Setting up the investment account for US and Canada based NRIs may not be hassle-free.
US NRIs face an additional tax issue since MF investments in India qualify as PFIC (passive foreign investment company). Investing in Indian mutual funds will create additional tax and compliance problem for such investors.
Additional operational hassle because of FIRC
FIRC stands for Foreign Inward Remittance Certificate. It is a proof of making inward remittance to your NRE/NRO bank account.
Some AMCs insist on FIRC for purchase transactions. The idea is that only those sales proceeds get credited to NRE accounts where the purchase was made through NRE account.
If you don’t provide FIRC, you face problems at the time of redemption. Instead of crediting your NRE account online, the bank sends a cheque to your correspondence address. So, you will have to first track the cheque and then deposit that in your NRE account. Getting a cheque credited to your NRE account is one big hassle.
Frankly, I have never been able to understand the utility of FIRC in MF transactions.
Since the investments are being made in Indian Rupees from NRE/NRO account, there can’t possibly be FIRC for a corresponding purchase transaction in rupees. FIRC can only be for crediting money to NRE or NRO account (inward remittance).
Moreover, there are separate folios for NRE and NRO investments. Therefore, if you are redeeming from an NRE mutual fund folio, the money for purchase should have come from NRE bank account. And you can always expect the bank (where the NRE account is held) to have checks that only eligible credits are made to NRE accounts. Therefore, for me, it makes little sense why an AMC should ask for FIRC at the time of redemption.
However, since I am not a FEMA expert, there may be greater issues than those I am aware of.
FIRC don’t come for free. You have to pay for these certificates. The charges will vary across banks.
The good part is that the AMCs are fine with bank statements that show corresponding purchase transactions. You don’t really have to submit FIRC to AMCs. Bank statements will suffice.
Risk you must be aware of
India may present a great opportunity in terms of returns but you must also consider exchange rate risk.
Though you expect to earn better returns in India, be mindful of the risk of rupee depreciation too. For instance, you invest USD 100,000 in India at exchange rate INR 65/USD. Total investment is Rs 65 lacs. You corpus grows at 10% per annum to 1.05 crores in 5 years. Let’s assume rupee depreciates from INR 65/USD to INR 85/USD. So, Rs 1.05 crores is equivalent to USD 123,539. A return of 4.3% p.a. in dollar terms.
This post was first published in June 2016 and has been updated since.