Mutual Funds

How NRIs can invest in MF schemes

BL Research Bureau | Updated on August 20, 2011

NRIs can grant power of attorney to another to invest on their behalf.

It is mandatory for a non-resident Indian to maintain a bank account in India to be able to invest in mutual funds.

With actively managed mutual funds in India providing superior returns compared with funds available in developed nations such as the US, Indians living abroad may wish to invest in mutual funds in India.

Here are a set of frequently asked questions on non-resident Indians investing in Indian mutual funds. Investors are advised to visit the RBI's Web site for details relating to Foreign Exchange Management (transfer or issue of security by a person resident outside India) Regulations, 2000.

They would also do well to consult their tax advisors for individual implications although the broad tax issues are discussed below:

Can NRIs buy MFs?

Non-resident Indians (NRI) are allowed to invest in mutual funds in India — in both debt and equity schemes. No specific approval is needed as the RBI has given a general approval through foreign exchange regulations.

The individual can invest in funds on a repatriable or non-repatriable basis. The former implies taking back the principal and income abroad.

Non-repatriable does not permit taking back the principal amount out of the country where it is invested.

How to remit funds?

It is mandatory for an NRI to maintain a bank account in India to be able to invest in mutual funds. To invest on a repatriable basis, the individual should have an NRE or FCNR account in India.

Investments on a non-repatriable basis can be made either through the above route or by inward remittance to the NRO/NRNR/NRSR accounts of the investor.

An NRI cannot make investment in foreign currency and has to necessarily use any of the above means. Investor can also draw a rupee cheque from the above accounts in India.

Can investors have a Power of Attorney (POA)?

NRIs can authorise a POA holder to invest in mutual funds on his/her behalf.

The POA holder needs to submit the original POA or a notarised copy. It should contain signature of both the first holder and the POA holder. Only after the POA is registered with the fund house, would the holder be allowed to transact.

The POA holder can thereafter sign documents for initial as well as additional purchases and redemptions.

Can NRIs have joint holders and nominees?

Investors are allowed to invest jointly and can have a nominee. In fact an NRI can also act as a nominee for an account of a resident Indian.

How do I receive redemption proceeds?

Redemption proceeds as well as dividends will be paid by cheque or directly credited to the investor's bank account in India.

The proceeds will not be directly credited to any overseas account. NRIs however may choose to repatriate it.

What is the tax implication?

As is the case with domestic investors, NRIs will not suffer tax on dividends in their hands.

The rules on long-term capital gains and short term capital gains are also similar to the taxation laws for resident Indians. While long-term gains on equity funds would be exempt, short-term gains would be taxed at 15 per cent.

NRIs would also enjoy indexation benefits for long-term capital gains on debt funds, which would be taxed at 10 per cent without indexation or 20 per cent with indexation. The tax would be deducted at source (TDS).

A TDS certificate known as Form 16 A would be issued as proof of deduction. The same would be despatched to the registered address of the investor along with the redemption warrant.

Published on August 20, 2011

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