What NRIs Should Know About Investing in Mutual Funds in India
Even while the world struggled with a pandemic, investors in the stock market had a lot to cheer. While US tech stocks grabbed the limelight, hitting new record highs over 30 times in 2020, the Indian stock market also had its share of glory. The Sensex climbed 12% and the Nifty jumped 11.74% in the year.
If you are among the 18 million Indian expats working and earning abroad, you have more reasons now than ever before to remit money to India and make your money work harder for you.
Did you miss all the excitement last year? Investing can be a highly rewarding and fun way to grow money and secure the financial future of your loved ones. But creating a well diversified portfolio does take a lot of effort. What if you don’t have the time or knowledge to craft the most compelling investment strategies? This is where mutual funds can be a great option for you.
If you are among the 18 million Indian expats working and earning abroad, you have more reasons now than ever before to remit money to India and make your money work harder for you. You can begin with hybrid funds, debt funds, or equity funds according to your risk appetite and investment goals. But, as an NRI, there are some regulations you need to be aware of. So, here’s a simple, yet detailed guide:
Mutual Fund Regulations for NRIs
Documents for KYC
NRIs are required to have these documents attested by a regulated entity. That can be an authorised official of a cross-border branch of an RBI-approved commercial bank.
FIRC (Foreign Inward Remittance Certificate)
For a payment made through a demand draft or cheque, you must attach this certificate. If not possible, a letter from the specific bank may also be accepted. This lends credibility to the source of funds.
Once you redeem the mutual fund units to your bank account followed by the deduction of any applicable taxes, the AMC (Annual Maintenance Contract) will credit your gains plus investment.
How to Invest in Mutual Funds?
For Direct/Self Investments
You can directly remit money to India through mutual fund investments using your NRO or NRE account. Then you can visit the websites of mutual fund houses to download copies of the KYC forms. You can carry out in-person verification at the Indian Embassy of the country you reside in.
PoA (Power of Attorney)
Indian mutual fund houses let you appoint a person through a PoA, to invest on your behalf. The person, however, must undergo the procedures for KYC. Signatures of both the PoA and NRI are required on the documents that the respective mutual fund company receives.
NRI Mutual Fund Taxation
Capital Gains Tax
Like resident investors, NRIs also must pay income tax on the mutual fund gains. Short-term capital gains are taxed at 15% if you redeem fund units within a year. If the gains cross ₹1 lakh, 10% taxation devoid of indexation benefits is applicable for gains on equity funds held for more than a year. On debt and other kinds of funds redeemed after three years, long-term gains are taxed at 20% along with indexation benefits. If you belong to the highest income tax slab, taxation of 30% applies for redemption before three years.
Relief from Double Taxation
If the country you’re currently living in is covered by the Double Taxation Avoidance Agreement (DTAA) of India, you’re can pay tax either here or in India.
TDS (Tax Deducted at Source)
Unlike resident investors of India, TDS deduction applies to your mutual fund investments. A 10% deduction from your long-term capital gains is applicable for equity fund investments. Investment in non-equity funds like debt funds is subject to a 20% TDS.
Ensure to always consult market experts to make an informed decision regarding mutual fund investments before you remit money to India through them. Compare the expense ratio (cost for managing your mutual fund) of various funds, to pick a suitable fund. As long as you’re an NRI, your investment has repatriation rights, of the amounts earned and invested.