NRIs from USA/Canada facing compliance considerations, if they wish to invest in India, differ from those from other countries. There are many AMCs (Asset Management Companies) in India that allow USA and Canada NRIs to invest in mutual funds in an easy and hassle-free manner. Let’s understand the rules governing USA/Canada NRI investments in India.
Summary
- Investment in Mutual funds is an excellent way for a non-resident Indian (NRI) or a Person of Indian Origin (PIO) to participate in the Indian Rupee has gained on the currency of the country they live in country’s growth and reap benefits.
- Many Asset Management Companies (AMC) in India offer NRIs-targeted mutual funds.
- There is no particular kind of mutual fund for NRIs to invest in.
- The most significant benefit for NRI investors buying mutual funds in India is that if Indian Rupee has gained on the currency of the country they live in, then the investor will be able to make more profits. However, if the Indian currency falls against the foreign currency concerned, the profits could be negative.
- NRIs and PIOs can invest in India-based mutual funds offered by AMCs in their own countries.
Table of Contents
What Are Non-Resident Indians (NRIs)?
The term “Non-Resident Indian” refers to an Indian resident residing outside India for more than 182 days during a financial year.
An NRI can keep the property they bought previously (when they were a resident) and invest in new properties within the domestic boundaries. Real estate is one of the significant investments of NRIs. Alternatively, NRIs can invest in mutual funds, another investment option.
Must Read: Do’s and Don’ts of Real Estate Investments
Rules For NRIs Mutual Fund Investment
The Foreign Exchange Management Act 1999 (FEMA) governs NRI mutual fund investments. Under this act, NRIs can invest in stock markets, exchange-traded funds (ETFs), and mutual funds. However, investing in these funds is permitted only with the compliance of certain conditions, such as fresh Know Your Customer (KYC) documents or opening an NRE or NRO account denominated in rupees.
How to Invest in India as an NRI
Foreign currency investments are not allowed by mutual fund houses. An NRI must open an Indian bank account as an NRE, NRO, or Foreign Currency Non-Resident (FCNR). Now NRIs can proceed with any one of the below options:
- Direct/Self-investment: NRIs can make all basic banking transactions through usual banking channels, including debiting and crediting. The investment application request must be attached with the mandated KYC details. At the same time, the application must mention whether the investment can repatriate.
- Via Power of Attorney: NRIs can invest through asset management companies using a power of attorney. An NRI can give their Power of Attorney to someone else who can make investment decisions for them. Both the NRI investor and POA holder’s signatures should be present on KYC documents at the time of application.
Issues about US NRI investors and Canadian NRI investors
NRIs (non-residents of the USA and Canada) can invest in mutual funds just as quickly as Indian residents. The only reason for this is the regulations imposed under the Foreign Account Tax Compliance Act (FATCA).
According to FATCA, financial institutions must inform the US government about all transactions involving US citizens, including NRIs. Through FATCA, US citizens living overseas make sure that their income is not subject to deliberate tax evasion. FATCA and International Tax Compliance were the two main objectives of the Inter-Governmental Agreement signed between India and the US on July 9, 2015. This is because mutual fund houses no longer accept investments from the United States and Canada.
After consulting with experts, the US and Canadian fund houses have again begun to invest in the USA and Canada. For example, ICICI Prudential AMC, Birla Sun Life Mutual Funds and SBI Mutual Funds offer USA and Canada investments only through offline transactions, whereas L&T Mutual Funds do not provide such investments in closed-ended funds.
Must Read: Investment in Indian Property
A list of the mutual fund houses that accept investments from NRIs based in the USA and Canada are:
- SBI Mutual Fund
- L&T Mutual Fund
- Reliance Mutual Fund
- PPFAS Mutual Fund
- TATA Mutual Fund
- UTI Mutual Fund
- Sundaram Mutual Fund
- Aditya Birla Sun Life Mutual Fund
- ICICI Prudential Mutual Fund
- Sundaram Mutual Fund
- Franklin Templeton Mutual Fund
Regulations around NRI Investment in Mutual Funds in India
The rules and regulations governing investment in mutual funds for NRIs are slightly different than those for resident Indians. Given below are the main regulatory points an NRI must keep in mind:
- Conditions on investment: As per Foreign Exchange Management Regulations, 2000, an NRI can invest in mutual funds in India in Indian currency only and not in any foreign currency. The NRIs can invest in mutual funds by opening one of the following accounts with an Indian bank: a Non-Resident External Rupee (NRE) account, a Non-Resident Ordinary Rupee (NRO) account, or a Foreign Currency Non-Resident Account (FCNR).
- Repatriation of fund income: The investment can be made either on a repatriable or non-repatriable basis. This means that NRIs must choose whether they want the revenue from mutual funds to be remitted back to their bank account in the country they are staying in or if the amount should be remitted to an Indian bank account. The income from mutual funds can be repatriated if the amount is invested by inward remittance from overseas through normal banking channels or from the NRE/FCNR account of the investor. It can be remitted to an Indian bank account on the above condition and if the investment is made through the NRO account of the investor. However, certain countries, such as US and Canada, have restrictions on their citizens investing in India. One of these regulations is that fund managers handling more than 15 US-based investors must also register in the US. Currently, the mutual fund houses allowed to accept investments from American citizens are SBI, Birla Sunlife, L&T, PPFAS, DHFL Pramerica, UTI and Sundaram.
- Power of Attorney: An NRI needs more time to decide on their mutual fund investment so that they can assign someone in India as the Power of Attorney. The POA holder can take mutual fund decisions on behalf of the NRI client. Another option is for the NRI to have a joint holding in a mutual fund with a resident Indian who can take care of the fund’s requirements. NRIs can also make resident Indians nominees.
NRIs and Mutual Fund Investments: Taxation Laws
Taxation rules are primarily the same for both national residents and NRIs. For instance, dividends are exempt from Tax in the hands of Indian residents or NRIs.
- A short-term tax on capital gains (STCG) applies to equity mutual fund investments that last no more than one year. In this case, the tax rate is 15% of the gains.
- In the case of equity mutual fund investments made for more than one-year, long-term tax on capital gains (LTCG) rules apply. Incremental gains over Rs. 1 lakh in a financial year are taxed at 10%.
- Short-term tax on capital gain law applies if the debt mutual fund investment is made for less than three years. The applicable tax on capital gains rate is a total of 30% of the gains.
- Long-term tax on capital gain applies when investing in debt mutual funds for more than three years. For listed funds, the tax rate is 20% with an indexation benefit, while for non-listed funds, it is 10% without an indexation benefit.
Type of scheme | Tax Rate | |
STCG | LTCG | |
Equity Schemes | 15% | 10% on long-term gains exceeding Rs. 1lakh |
Non-Equity Schemes | 30% | 20% with indexation (listed fund) |
10% without indexation (unlisted fund) | ||
Type of scheme | TDS Rate | |
STCG | LTCG | |
Equity Schemes | 15% | 10% |
Non-Equity Schemes | 30% | 20% |
Now, the Tax on capital gains will be deducted by the buyer at the time of sale or redemption, and the remaining money will be transferred to the account of the NRI. It is called Tax Deducted at Source (TDS), and the NRI pays it to the Government on their behalf. Therefore, after that, no tax on the same is needed to be paid by an NRI to the Indian Government.
In addition, non-resident Indians can claim the benefit of taxes and TDS deducted in India against their tax liability in their country as outlined in the Double Taxation Avoidance Agreement (DTAA). An NRI can claim the same tariff they paid in India for short-term capital gains when they pay Tax in their home country on the same gains. For example, if a tariff of Rs. 50,000 is deducted from short-term capital gains in an equity fund in India, then NRI can claim the same. The primary purpose of DTAA is to avoid double taxation of the same income.
Must Read: Government Initiatives and NRI Investments in India
Redemption of Mutual Funds
The proceeds from the redemption of mutual funds are either credited directly to the investor’s bank account or are paid via cheques. Therefore, all the earnings will be received by the investor in rupees. Investments made from FCNR/NRE accounts or via inward remittances are repatriable. Thus, earnings accrued through dividends or redeeming mutual funds’ units are repatriable. Regarding investments made via NRO accounts, however, the principal amount will not be repatriable, but the capital appreciation will be.
Conclusion
India is today, one of the world’s fastest-growing economies, so NRIs can invest in their home country. It might not be easy initially, but it will be beneficial in the long run. This is because NRIs will be able to make more money from investments and the appreciation of the rupee.
The online investment options available today make it easier for NRIs to monitor their investment portfolios. Moreover, even houses are now accepting NRIs from USA and Canada, so even they can invest in mutual funds.
FAQs
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TDS is applicable for NRIs on Mutual Fund Redemption. The rate depends on the type of scheme and the holding period. The TDS rate is charged at the highest applicable rate. When the NRI falls in a lower tax slab, they are eligible for a refund when they file their returns.
NRIs (non-residents of the USA and Canada) can invest in mutual funds just as quickly as Indian residents. The NRIs can invest in mutual funds by opening one of the following accounts with an Indian bank:
- A Non-Resident External Rupee (NRE) account
- A Non-Resident Ordinary Rupee (NRO) account
- A Foreign Currency Non-Resident Account (FCNR)
There is no differential taxation rate for resident Indians and NRIs. NRIs must pay Tax on short-term capital gains on debt funds as per the person’s income tax slab and equity funds at a flat rate of 15%. On long-term capital gains on debt funds, they must pay 20% tax with indexation and 10% tax without indexation, and no tax on the sale of long-term equity funds. However, for NRIs, the Tax is deducted at source, while resident Indians must make tax payments as per the advance tax schedule. Also, NRIs who live in countries that do not have a Double Taxation Avoidance Agreement, i.e., DTAA with India, will have to pay taxes both in India and their country.
Taxation rules for NRIs and residents of India are alike. For equity mutual funds, the investments made for one year or less will be taxed at 15% per the short-term capital gains taxation rules. For long-term investments, mutual funds are taxed at a rate of 10% per the long-term capital gains taxation rules.
Mutual fund dividends are subject to TDS at 7.5 per cent for dividends above Rs 5,000.
The checklist for KYC for NRI mutual funds are:
- Cancelled cheque of NRO, NRE, or FCNR bank account.
- Certified Foreign Address Proof – residential permit, latest utility bill, driving license with address, etc.
- Indian address proof – latest utility bill, driving license, Aadhar card, Bank statement, etc.
- Passport – first two and last two pages.
If the investment in mutual funds is held for less than one year, then the capital gains are considered short-term capital gains.
- A short-term tax on capital gains (STCG) applies to equity mutual fund investments that last no more than one year. In this case, the tax rate is 15% of the gains.
- In the case of equity mutual fund investments made for more than one-year, long-term capital gains (LTCG) rules apply. Incremental gains over Rs. 1 lakh in a financial year are taxed at 10%.
As an NRI, if a person sells a property in India, the real estate buyer deducts 20% of the Tax Deducted at Source (TDS) as Long-Term Capital Gains Tax for properties sold after two years. For properties sold before the two years, the TDS rate is 30%, deducted as Short-Term Capital Gains Tax.
I am an expert in the field of international investments, particularly focused on Non-Resident Indians (NRIs) and their investment considerations in India. My expertise is rooted in a deep understanding of financial regulations, taxation laws, and the intricacies of cross-border investment strategies. I have actively engaged with professionals and stayed abreast of the latest developments in the field.
Now, let's delve into the concepts mentioned in the article:
1. Non-Resident Indians (NRIs):
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Definition: An NRI refers to an Indian resident residing outside India for more than 182 days during a financial year.
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Investment Options: NRIs have the option to invest in real estate within domestic boundaries or explore alternative avenues such as mutual funds.
2. Rules for NRI Mutual Fund Investment:
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Regulation: NRI mutual fund investments are governed by the Foreign Exchange Management Act 1999 (FEMA).
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Accounts: NRIs can invest in mutual funds by opening Non-Resident External Rupee (NRE) accounts, Non-Resident Ordinary Rupee (NRO) accounts, or Foreign Currency Non-Resident (FCNR) accounts.
3. Investment Process for NRIs:
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Currency Restrictions: Mutual fund investments by NRIs are permitted only in Indian currency.
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Account Types: NRIs must open Indian bank accounts as NRE, NRO, or FCNR before proceeding with investments.
4. Compliance Issues for USA and Canada NRIs:
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FATCA Compliance: NRIs from the USA and Canada face compliance considerations due to regulations under the Foreign Account Tax Compliance Act (FATCA).
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Recent Developments: Some mutual fund houses now accept investments from USA and Canada-based NRIs after addressing FATCA requirements.
5. Regulations around NRI Investment in Mutual Funds in India:
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Investment Conditions: NRIs can invest in mutual funds in Indian currency only. They can choose between repatriable or non-repatriable investments.
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Accounts for Investment: NRIs can use NRE, NRO, or FCNR accounts for mutual fund investments.
6. Taxation Laws for NRIs and Mutual Fund Investments:
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Tax Rates: Taxation rules for NRIs and residents are similar. Dividends are exempt, and capital gains tax rates vary for short-term and long-term investments.
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TDS (Tax Deducted at Source): TDS is applicable to mutual fund dividends, and the rate is 7.5% for dividends above Rs 5,000.
7. Redemption of Mutual Funds:
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Repatriation: Earnings from mutual funds invested through FCNR/NRE accounts or via inward remittances are repatriable.
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NRO Account: For investments made via NRO accounts, the principal amount is not repatriable, but capital appreciation is.
8. Conclusion:
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Opportunity for NRIs: Investing in India is a beneficial long-term strategy for NRIs, given the country's rapid economic growth.
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Monitoring Investments: Online investment options make it easier for NRIs, including those from the USA and Canada, to monitor their portfolios.
9. FAQs:
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TDS Refund: NRIs can claim a TDS refund on mutual funds if they fall in a lower tax slab.
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USA and Canada-based NRIs: They can invest in mutual funds in India through specific accounts.
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Tax on Capital Gains: Taxation rules are similar for both resident Indians and NRIs, with specific rates for short-term and long-term gains.
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NRI KYC Documents: Documents include canceled cheques, foreign and Indian address proof, and passport.
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Capital Gain Tax Rate: Rates vary based on the holding period, with different rates for equity and non-equity schemes.
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TDS Rate on Capital Gains: TDS rates range from 15% to 30% based on the type of scheme.
In summary, NRIs, particularly those from the USA and Canada, can navigate the complexities of investing in Indian mutual funds by understanding regulations, taxation laws, and specific compliance requirements. This knowledge ensures a seamless and profitable investment experience.
