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Things NRIs should keep in mind while Investing in Mutual Funds​

While settling abroad as an NRI has its perks, the current investment scenario with well-performing economies such as India gives an opportunity to invest in mutual funds. As an NRI, you need to abide by certain limitations and rules for a safe and profitable investment.There are two primary advantages of mutual fund investments - forex gains and an easy online investment process anytime, anywhere. You can easily offset the losses on one currency with the gains on the other and that too from the comfort of your home.

This article will detail some important factors that NRIs may need to keep in mind while investing in mutual fund schemes in India.

Factors to be considered by NRIs investing in mutual funds

1. Determine if you conform to the definition of NRI as per FEMA notification, May 3, 2000

You will be classified as an NRI as per FEMA (Foreign Exchange Management Act) if you conform to the following criteria: -

● You are an Indian citizen residing abroad.

● You were physically present in India for less than 120 days in a financial year (April - March). This 120-day rule will apply only if your taxable income in India exceeds Rs 15 lakhs in a financial year.

● If your income in India is below Rs 15 lakhs, then your physical stay in India can extend to 181 days without affecting your NRI status for taxation purposes.

2. Follow the procedure for investing in mutual funds in India

Open an NRO/NRE account: You can invest in a mutual fund in India through an NRO (Non-Resident Ordinary) or NRE (Non-Resident External) account with an Indian bank. An NRO account helps you manage your income earned in India, whereas an NRE account helps you convert your foreign currency earnings to Indian currency. This is an essential step because asset management firms in India do not accept international currency investments.Do keep in mind that once you start investing in a mutual fund scheme via an NRE/NRO account, then you ought to stick to the same account type for that investment in that scheme. A mix of investment sources is not allowed.(Please Note: This restriction is at folio level.)

a. KYC Compliance: You have to fulfil KYC formalities before you start investing in India. You are required to submit your passport-sized photographs and self-attested copies of your passport (only relevant pages as specified by the fund house), address proof, and birth certificate. If the concerned fund house or bank insists on an in-person verification, then you may have to visit the Indian embassy in your resident country.

b. Qualifiers: Many mutual fund schemes in India are not open to NRIs from the USA and Canada due to cumbersome compliance procedures laid down under FATCA (Foreign Account Tax Compliance Act). The fund houses that accept NRI investments in these countries may insist on some additional documentation and eligibility criteria.

c. Investment mode: You can invest directly in a mutual fund online or through an appointed Power of Attorney (PoA) in India.

3. Understand tax implications

NRIs are often concerned that their investment gains in India will be subject to double taxation. However, India has signed Double Tax Avoidance Agreements (DTAA) with many countries worldwide to minimize tax liabilities for Indian citizens within and outside India. Thus, under the DTAA, you can claim tax credits in India on the mutual fund gains, provided India has signed such an agreement with your resident country.

Tax rules applicable to NRIs investing in mutual funds in India as of May 24, 2021, are tabulated below: -

Sr.NoMutual fund TypeShort-term investment durationLong-term investment durationShort-term Capital gains taxLong-term Capital gains tax
1.Equity Fund< 12 months>= 12 months15%10% without indexation
2.Hybrid Fund< 12 months>= 12 months15%10% without indexation
3.Debt Fund< 36 months>= 36 monthsAs per your income tax 20% post indexation

Final Words

Forex gains, easy online investment procedure, and tax efficiency from indexationare the major advantages of mutual funds. Thus, you can now invest in a mutual fund in your homeland while residing abroad and enjoy a wide range of other benefits too. Moreover, this way, they can also play an active role in the Indian economic growth story.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, affiliates or representatives (“entities & their affiliates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.

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