Can NRIs invest in mutual funds in India?
Mutual funds are a popular investment option in India, and they can offer NRIs exposure to the fast-growing Indian economy.
In this article, we'll cover:
How can an NRI invest in mutual funds?
What is a mutual fund?
A mutual fund pools money from investors to buy assets on their behalf. So when you invest in a mutual fund, you get a share of all the assets it owns through units of the scheme.
Mutual funds are a simple way to invest. You can diversify your portfolio, manage your risk, and benefit from professional fund management expertise.
How can an NRI invest in mutual funds?
First, there are a few things to bear in mind about NRI investment in mutual funds.
According to Foreign Exchange Management Act (FEMA) rules, you can't invest in a mutual fund in India using foreign currency. You'll typically invest in Indian rupees (INR) via your non-resident account.
If you're a resident or citizen of the US or Canada, you may have restrictions on such investments. Please connect with your Relationship Manager or branch to check.
Once you become an NRI, you can't use a regular savings account in India. Based on your needs, you can open a:
Non-resident external (NRE) account
An NRE account is for foreign earnings. You can send money earned overseas to India, where it will be converted to rupees. You can also repatriate the money in the account back to your country of residence.
Non-resident ordinary (NRO) account
An NRO account is for income earned in India, like rent, dividends or a pension. You can deposit foreign currency into the account, but repatriation rules are different from an NRE account.
Find out more: What is an NRO account? Meaning, features and tax rules
Apply for an HSBC NRI bank account
Our products and services suit customers moving overseas or returning to India after being abroad.
What are the rules about NRI mutual fund taxation?
Are mutual funds taxable for NRIs? Yes, they are, so you'll need to factor that into your investment planning and consult a tax advisor if needed.
Rules are slightly different from those for resident Indians, especially on tax deducted at source (TDS).
When a resident sells mutual fund units, they pay tax later. For NRIs, tax is deducted at the time of redemption. This helps the government with tax compliance.
To redeem an investment, follow the fund's process. Once the request is approved, the tax will be deducted and your NRE or NRO account will be credited.
As an NRI, you should note the capital gains (CG) tax on mutual funds. This is a tax on the profit you earn from selling your mutual funds. There can be short-term or long-term gains, depending on how long you've held the funds.
Explore: Understanding NRI income tax rules
| Mutual fund | Holding period | CG tax |
|---|---|---|
| Equity funds | Less than 12 months | 20% |
| Equity funds | Over 12 months | 12.5% if over INR125,000 |
| Debt funds | Less than 12 months | At income tax slab rate |
| Debt funds | Over 12 months | 12.5% |
| Mutual fund | Equity funds | Equity funds |
|---|---|---|
| Holding period | Less than 12 months | Less than 12 months |
| CG tax | 20% | 20% |
| Mutual fund | Equity funds | Equity funds |
| Holding period | Over 12 months | Over 12 months |
| CG tax | 12.5% if over INR125,000 | 12.5% if over INR125,000 |
| Mutual fund | Debt funds | Debt funds |
| Holding period | Less than 12 months | Less than 12 months |
| CG tax | At income tax slab rate | At income tax slab rate |
| Mutual fund | Debt funds | Debt funds |
| Holding period | Over 12 months | Over 12 months |
| CG tax | 12.5% | 12.5% |
Note: These figures are effective from 23 July 2024 as part of the new IT Act and are subject to change. Consult a tax advisor for more information.
Things to consider
When it comes to investment in mutual funds for NRIs, there are some pros and cons to think about.
Mutual funds can offer strong growth potential, making it easier to diversify your portfolio. At the same time, there are tax implications and market and currency fluctuations to bear in mind.
By carefully evaluating these factors, you should be able to make an informed decision that matches your investment goals. Note that this information is for guidance only and shouldn't be treated as tax, legal, or investment advice. You should consult your own tax advisor for support tailored to your circumstances.
Key takeaways
-
NRIs can invest in mutual funds in India once they've completed KYC (Know Your Customer) requirements
-
You need to use an NRE or NRO account to fund the investment
-
Be aware of NRI capital gains tax on mutual funds and TDS
-
Taxation for NRI mutual funds varies depending on the type of fund and how long you hold it
Frequently asked questions
How do NRIs invest in mutual funds in India?
You can invest through an asset management company (AMC) directly or via a registered intermediary that supports NRI investors. You'll need a valid NRE or NRO account, completed KYC documentation, and a registered overseas address.
Can an NRI invest in mutual funds from an NRO account?
Yes, you can invest using an NRO account. However, these investments are typically made on a non-repatriable basis. This means the capital and profits are meant to stay in India.
What is the TDS for NRIs in mutual funds?
The TDS on mutual fund redemption for NRIs varies by asset class. It can be up to 20% for equity funds and up to 30% for debt funds. As rates can change, it's advisable to confirm the current applicable rates with a tax advisor or your Relationship Manager.
Do NRIs need to file a tax return in India for mutual fund income?
This depends on your total income in India and whether you're eligible for a lower tax rate under a Double Taxation Avoidance Agreement (DTAA) between India and your country of residence. Consult a tax advisor for guidance specific to your situation.
Did you find this article useful?
You might also be interested in
