NRI Investment in Mutual Funds in India: Process, Regulations and More

Many Indians migrate abroad in search of better opportunities in terms of job growth, lifestyle. Unsurprisingly, they having a dream of coming back home in India one day. They invest in Indian mutual funds to benefit from the growing Indian economy by compiling with the Foreign Exchange Management Act (FEMA). Most of these Non-Resident Indians have dependents in India, in such a scenario, making investments in India seems a smart option for them. 

Can NRIs invest in mutual funds in India?

Obviously Yes, as per the terms of regulation 2 of Foreign Exchange Management Act 2000, NRIs have been allowed to invest mutual funds in India if they adhere to meet the certain criteria’s of the income tax act 1961, as a person should be stayed in India for minimum of 120 days or more during a financial year or 365 days or above during the preceding 4 financial years, and at least 60 days in that financial year However, This amendment was brought in the previous financial year. 

Earlier, the 120-day threshold was 182 days. now if the total Indian income, that accruing in India during the financial year, is more than Rs 15 lakh, then only the 120 days rule will be applied. Visiting NRIs whose total taxable income in India is up to Rs 15 lakh during the financial year will be continued to be remain NRIs only if their stay shouldn’t exceed 181 days. some AMCs do not accept mutual fund applications from NRIs in Canada and the USA.

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 growing economy. The following are some of the benefits that NRIs can enjoy by investing in Indian mutual funds.

Manage Virtually anywhere: The benefit of Mutual Fund investments for NRIs is the ability to manage it remotely. You can invest, monitor and redeem your Mutual Fund investments online by sitting anywhere in the world. This convenience eliminates geographical barriers, physical presence, ensuring that you have entire control over your investments.

Wide Range of investment options: Mutual Funds industry offers a wide range of options to cater the diverse investment goals and risk profiles for NRIs. From equity onwards debt funds, hybrid and solution-oriented schemes, there's an AMC offering Mutual Funds for every NRI investor. This doesn't just fit different goals but also gives a brief info to pick how you want to invest upon how much risk you're comfortable with your financial condition.

Portfolio diversification: Mutual Funds offer an excellent avenue for NRIs to diversify their investment portfolio upon their risk appetite. By putting funds in various asset classes, it mitigates risk and enhances potential for the higher returns. Diversification over the sectors and funds bolsters the concentration risk against the market volatility, providing a smoother investment journey for the investors.

Well regulated: Mutual funds are being regulated by the Securities and Exchange Board of India (SEBI) and Association of Mutual Funds of India (AMFI) which ensures the motive to uphold transparency and safeguards the investors interests.

Scope for more profits from rupee appreciation

If the 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 1,000 pounds in a mutual fund in India at an exchange rate of Rs 100 to 1 pound, 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.

How NRI’s can invest in Indian mutual funds?

Asset Management Companies in India doesn’t allow investments in other foreign currency as per Foreign Exchange Management Act (FEMA), NRI’s are not allowed to keep their funds parked in ordinary account once they acquire the NRI status in India. This law makes it compulsory for an NRI to have the knowledge and know the NRE and NRO account differences and know which suits them.

NRE: NRE Account is a type of account used by the NRI’s who want to transfer their money which have earned overseas to India.

NRO: Funds in NRO accounts must be held in Indian Rupees, and repatriating funds to a foreign currency is a complex process. NRO accounts are primarily intended for Non-Resident Indians (NRIs) to deposit income earned in India.

What is the investment procedure for NRIs in India

Asset management companies(AMC’s) in India are not allowed to accept investments in foreign currencies hence, the first step for NRI’s to invest 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 by using the above accounts.

Self/Direct mode of investing

Your mutual fund application with the required KYC details must indicate that the investment is on a repatriable or non-repatriable basis. KYC documents include the latest photograph, self-attested copies of PAN card, passport, residence proof (overseas identity proof), and bank statement. The bank may require an in-person verification, which you can comply with by visiting the Indian Embassy in your resident country.

Investing via Power of Attorney

Another popular method is letting someone else is investing on your behalf. AMCs allow the power of attorney (PoA) holders to invest on your behalf and also can make changes in investment decisions. However, signatures of both the NRI investor and PoA holder must be present on the KYC documents if you seek to invest or redeem mutual funds in India.  

Mutual fund regulations for NRIs

KYC for NRIs

To complete the KYC process, you must submit a copy of your passport – relevant pages with name, date of birth, photo, and address. Providing the current residential proof is a must, whether temporary or permanent. Some fund houses may insist on in-person verification and some of the Asset Management Companies won’t allow NRIs residing from the USA and Canada to invest in their schemes because of the heavy compliance requirements under the Foreign Account Tax Compliance Act (FATCA).

FIRC (Remittance Certificate)

If you are planning to buy mutual fund units by paying the funds 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 by the AMC’s. This process confirms the identity and the source of funds from the Nri’s.

Redemption

The AMC will credit the funds (investment + gains) when you redeem your mutual fund units directly to registered bank account after deducting applicable charges. Some banks allow crediting of the redemption amount directly to the NRO/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 as shown below

1. Equity-Oriented Mutual Funds (Equity Allocation ≥ 65%)

2. Debt-Oriented Mutual Funds (Equity Allocation < 65% but > 35%) (Sold before April 1, 2025)

3. Debt-Oriented Mutual Funds (Equity Allocation < 65% but > 35%) (Sold after April 1, 2025)

4. Specified Mutual Funds (Purchased on or after April 1, 2023, Equity Allocation < 35%)

5. Specified Mutual Funds (Purchased on or after April 1, 2023, Debt Allocation > 65%)

Points to remember when investing in India

• 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 United States of America 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/her home country. The process may have some initial hassles. However, in the long run, the return on investment would be worth it.
• Currently, only eight fund houses accept mutual fund investment from NRIs residing in the US and Canada. So, there is certainly no reason for you to be left out of investing in one of the fastest-growing economies.