For investment and taxation purposes, Indian citizens are classified based on their residential status as Resident Indians, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). Unlike other investment vehicles, mutual fund investments can be made by NRIs without any special approval from the Reserve Bank of India (RBI) or any other governing body. These investments made by NRIs can be repatriable or non-repatriable in nature.
When an Indian citizen or a Person of Indian origin residing in different country invests, the funds can be remitted from abroad or sourced from a local account. All mutual fund investments made through foreign sources, the redemption proceeds can be remitted to the originating account (NRE or FCNR) and may be repatriated. This kind of investments is referred to as repatriable investments.
On the other hand, investments made in mutual funds secured through the money sourced from an NRO account cannot be repatriated. Such investments are called non-repatriable investments.
A repatriable investment is one where the mutual fund investment is made by debiting the Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR) account of the NRI. By definition, an NRE account allows NRIs to park their overseas earnings in India (INR account). Also, NRIs can repatriate the funds from this account any time, along with returns without any tax liabilities.
FCNR account is a term deposit that can be maintained by an NRI in foreign currency. The balances in an FCNR account are freely repatriable too. NRIs wanting to invest in mutual funds in India, need to decide if they’re going to repatriate the earnings from such investment. If the answer is affirmative, then such mutual fund investments should be made through an NRE or FCNR account only. As balances in the accounts are freely repatriable, the funds can be remitted as per the investor’s choice.
However, if an NRI makes mutual fund investments through a Non-Resident Ordinary (NRO) account, then the earnings from such investment/s are not repatriable. On redemption, the proceeds are paid either through an INR cheque payable to the NRE account of the NRI or a USD draft drawn at the prevailing rates and RBI rules. These investments can be made through a systematic investment plan (SIP) too. Remember, NRIs are not allowed to gift mutual fund units to their relatives in India.
Repatriation of the earnings made on mutual funds in India by NRIs is possible provided the funds for investment are remitted from overseas. The net income or capital gains (post-tax) arising out of the investment can be repatriated. Even in the case of non-repatriable investments, the dividend arising out of such investment can be repatriated.