Mutual funds in India have gained huge attraction in recent years. Investing in a mutual fund seems attractive to investors as they earn potential returns over investments of small amounts at regular intervals. Moreover, the risk is diversified due to the availability of different assets in the pool. The growth of Assets Under Management (AUM) in the last five years is a classic example of its popularity.
Non-resident Indians are usually looking to invest in India, which can provide potential for their funds.
In India, Non-resident Indians (NRIs) are allowed and welcome to invest in mutual funds. Let’s explore who are termed as NRIs, the benefits of mutual funds, how NRIs can invest in mutual funds, and some intricacies.
Who is a Non-Resident Indian (NRI)?
As per FEMA (Foreign Exchange Management Act):
An NRI is an Indian citizen who resides outside India for employment, education, business, or any other reason. Source: FEMA
As per the Income Tax Act, 1961:
You’re an NRI if:
- You’ve stayed in India for less than 182 days in the previous financial year
OR - You’ve stayed in India for less than 60 days in the previous year and for less than 365 days in the last 4 years combined
Examples:
- Mr Kashi, working in London, spent ~150 days in India last year. He’s an NRI.
- Ms Sneha, residing in Paris for 10 years and only visiting for 2 months annually, is also an NRI.
Some features of Mutual Funds to NRIs
- Diversification
Mutual funds collect money from several investors to form a large pool and invest it in sector-specific, instrument-specific, or theme-specific units. Moreover, diversification is crucial for investors seeking to earn potential returns from the market with direct or indirect risk exposure.
Further, NRIs would greatly benefit from this diversification. For example:
During FY 2021-22, the world was experiencing a pandemic crisis, the Russia- Ukraine war, etc. The annualised volatility of NIFTY 50 during this time was 18.4%, while that of others like NIKKEI 225 (Japan) was 27.5%, Hang Sang (Hong Kong) was 51.2%, and NASDAQ COMPOSITE (USA) was 31.8%. In such situations, equity-focused mutual funds in India would give potential returns to NRIs.
- Diversified risk
Due to their diversification, mutual funds are less exposed to market risk. Diversification can curb risk and spread it across different investments in the pool.
- Affordability
Mutual funds in India offer various facilities. Systematic investment plan (SIP) for small regular investments. The systematic transfer plan(STP) to transfer from one scheme to another. The systematic withdrawal plan (SWP) is to withdraw in small amounts. It aims to generate wealth over a period of time and induces savings behaviour in investors. For example,
SIPs start at a minimum amount of ₹500, ₹1000, etc, and could be later increased with the step-up plans.
- Professional management
The funds pooled from investors are managed by experienced fund managers, who make investment decisions according to the market conditions. Moreover, they have appropriate knowledge of market movements, strategies, instruments, etc.
An added advantage is that investors do not need to actively manage their funds or evaluate market conditions every time, as professionals, i.e., fund managers, help them with this.
- Tax benefit
Specific mutual funds provide taxation benefits to the portfolio. Investors can get a deduction under Section 80C of the Income Tax Act, 1961, with the Equity-linked Savings Schemes (ELSS). These tax-saving category funds have generated potential returns of 35.25% in a year. These schemes may be feasible for investors seeking potential returns with tax benefits.
How can NRIs invest in Mutual Funds in India?
Step 1: Open an NRE/NRO/FCNR Account
NRIs can’t invest using foreign bank accounts. Instead, use:
| Account Type | Repatriation | Use Case |
|---|---|---|
| NRE | Yes | Investment with full repatriability |
| NRO | No | Use India-sourced income |
| FCNR | Yes | Deposit in foreign currency |
💡 Repatriable = Funds can be transferred back overseas.
Step 2: Complete KYC
KYC is mandatory. You’ll need:
- PAN card
- Valid passport
- Overseas address proof
- Indian mobile number
- Recent photographs
Step 3: Choose Investment Route
Option 1: Direct Investment
NRIs can invest directly via AMC websites or fintech platforms. Choose between a repatriable or non-repatriable basis.
Option 2: Power of Attorney (PoA)
Designate a trusted person in India to manage your investments. Both NRI and PoA holders must complete KYC.
How can NRIs redeem their investment?
Different fund houses have different redemption processes. NRIs should check this process before investing as it affects their liquidity. Also, the total amount (investment and gains) will be provided to the investors during redemption (if not opting for plans like SWP).
The funds would be redeemed to the investor’s selected account (whether NRE or NRO). However, as given below, these funds will be redeemed after the required tax is deducted.
Taxation norms
Previously, NRIs had to pay taxes on their investments in India and their country of residence. However, the Double Taxation Avoidance Agreement (DTAA) changed the landscape. Now, investors only have to pay tax in the source country (Investing in India, then paying tax in India).
In India, the taxation norms for the transfer of units after July 23, 2024 are categorised as follows:
| Equity focused fundsThe tax on long-term capital gains (held more than 12 months) would be 12.5%, while the short-term capital gains tax (paid by investors) would be levied at 20.0%.The lower of 20% withholding tax rate, or the rate mentioned as per DTAA, is applicable to the dividend income distributed by the fund. For more detail, investors can check the DTAA. |
| Debt focused funds (more than 65% assets in debt or related investments)The short-term capital gains and long-term capital gains will be taxed as per the investor’s tax slab rate. However, withholding tax will be charged on the short-term capital gain (held for less than 24 months) at 30%. The lower of 20% withholding tax rate, or the rate mentioned as per DTAA, is applicable to the dividend income distributed by the fund. For more details, investors can check the DTAA. |
| Other The withholding tax on short-term capital gain (held for less than 24 months) is charged at 30% by the AMC, while short-term capital gain tax (paid by investors) is levied as per the investor’s tax slab rate in the regime. The withholding tax on long-term capital gain(held for more than 24 months) is charged at 12.5% by the AMC, while long-term capital gain tax (paid by investors) is levied at 12.5%. The lower of 20% withholding tax rate, or the rate mentioned as per DTAA, is applicable to the dividend income distributed by the fund. For more details, investors can check the DTAA. |
Source: AMFI
Things NRIs Must Check Before Investing
- Choose AMCs that accept NRI investments from your current country
- Read the Scheme Information Document (SID) carefully
- Understand exit loads, lock-in periods, and liquidity
- Repatriation rules based on the account used (NRE/NRO)
- Use step-up SIPs and SWPs for better cash flow management
Conclusion
NRIs in India are allowed to invest in mutual funds. Mutual funds offer the unique benefits of diversification, less risk, affordability, and professional management.
NRIs willing to invest in mutual funds should properly open their bank accounts in India, make the necessary KYC arrangements, select the method of direct investment or PoA, and invest in the desired fund. Moreover, one should most crucially check their investment growth and value (according to their earning in foreign currency) while investing in mutual funds in India. NRIs should also read the scheme information document and consult their financial advisor before making an investment decision.
Book an expert call with Dezerv to explore PMS for NRI.
Frequently Asked Questions
Can NRIs invest in all Indian mutual funds?
Not all AMCs accept investments from NRIs in the US/Canada due to FATCA. Check eligibility on the fund house website.
Do NRIs have to pay tax on investments in mutual funds?
NRI investors are liable to pay tax on their mutual fund investment at the rates prescribed by the regulator or at the tax slab rate of the investor’s total taxable income. Tax is levied on short-term and long-term capital gains. Moreover, tax is also deducted at the source (TDS).
Can I start SIP as NRI?
Yes. NRIs willing to invest in mutual funds can start gradually with a systematic investment plan (SIP). This would help investors make disciplined regular investments and induce saving behaviour. Moreover, these SIPs can be increased with step-up plans for better returns in the long term.
What investments can NRIs do in India?
Today, India is considered an attractive market worldwide. Non-resident Indians (NRIs) can invest their funds in assets like gold, stock market instruments, debt instruments, and bank instruments like fixed deposits. Moreover, they can also take advantage of multiple assets in an investment, like mutual funds and alternative investment funds (AIFs). Investors should know the recent regulations before investing in the above securities.
Is mutual fund income taxable in both countries?
Thanks to DTAA, you typically pay tax only in India. However, consult a tax expert for your country’s rules.
Should I use an NRE or NRO account for mutual funds?
NRIs can invest in mutual funds using a Non-Resident (External) Rupee account and a Non-Resident Ordinary Rupee account. The former deals with the transfer of income earned abroad, while the latter deals with income earned in India. Both accounts help them transact in Indian rupees. NRE account funds are repatriable, but NRO accounts are not. Suitability and compliance should be checked before investing.
Can overseas citizens of India invest in mutual funds?
Yes! Overseas citizens can invest in mutual funds and many more assets in India. Mutual funds would give them the benefits of fund diversification, affordability, low risk, tax benefits, professional fund management, etc.
The necessary regulations of account opening and KYC should be followed for investing. Also, the ‘repatriable’ feature should be taken into consideration. Moreover, Persons of India Origin (PIO) and Non-Resident Indians (NRIs) can also invest in mutual funds in India. Investors should check with their tax consultants before investing.