How can non-resident Indians (NRIs) invest in mutual funds in India?

India is one of the fastest growing countries in the world. While you may reside abroad, as an Indian by birth, you naturally have roots firmly planted in India. You might also want to benefit from your country’s growth. The most convenient way to cash in on India’s growth is through its capital markets. The valuations of securities in Indian capital markets will reflect the country’s growth. In other words, market prices of securities will increase based on the rate of growth. By investing in these securities, you will see your investments concurrently grow.

While you can invest in nearly every kind of security available in the country, the problem is selecting and monitoring the securities in which you invest; this requires time and skills. A better option is to invest in India through mutual funds. All your investment needs – asset allocation, diversification, investing, monitoring investments – are taken care of by the mutual fund.

Before we discuss the investment options, let’s take a step back to check whether you are a non-resident Indian (NRI); an NRI is an Indian citizen or a person of Indian origin who resides abroad. NRIs must follow specific rules when investing in India.

Repatriation:

As an NRI, you can invest on either a repatriation basis or a non-repatriation basis.

Repatriation implies that you can transfer your investment capital, dividends and returns out of India. Non-repatriation implies the opposite (i.e. your investment capital, dividends and returns cannot be transferred outside India).

You can have three kinds of bank accounts in India. You can open all these three accounts with any bank in India and the accounts can be used to make investments in India.

Non-Resident External Rupee account (NRE account): Funds from an NRE account can be repatriated abroad.

Fully Convertible Non-Resident account (FCNR account): The FCNR account involves a fixed deposit in a foreign currency. Funds from this account can be repatriated abroad. However, this account cannot be used for investing in a foreign currency.

Non-Residential Ordinary account (NRO account): Funds from an NRO account cannot be repatriated abroad.

Note: You can repatriate the income and redemption amounts from your mutual fund investment only if you continue being an NRI at the time of repatriation. Also note that you cannot invest in foreign currency; in other words, your investments in Indian mutual funds must be made in Indian rupees.

Permissions:

Some countries, such as the United States and Canada, have levied restrictions on their residents investing abroad. Luckily, some Indian mutual funds have obtained permission for United States (US) and Canadian residents to invest in their funds. You must find out whether the fund of your choice has obtained such permission.

How to invest:

Investing in mutual funds is easy and convenient. You can invest offline or online. In the case of offline investing, you fill in a common application form on which you state the name of the scheme in which you want to invest. Along with the form, you need to submit a cheque or bank draft for the investment amount; this should be made in the name of the fund in which you are investing. You can send this directly to the mutual fund company or its registrar or have your financial advisor/mutual fund distributor submit it on your behalf.

To invest online, you fill in the form online, which is available on the mutual fund company’s website, and make your payment electronically.

In both cases, offline and online investing, you must have completed your Know Your Customer (KYC) and Foreign Account Tax Compliance Act (FATCA) requirements.

KYC:

When you invest in a mutual fund or any other financial instrument, the manager and custodian of your investment needs to have basic information about your identity. Central Know Your Customer (CKYC) is a process through which authorized institutions obtain and maintain investors’ identity information.

To fulfil your KYC requirements, you must submit the following documents along with your CKYC application:

Proof of identity: You can submit your photo PAN card or driving license /passport copy / voter ID /bank photo pass book.

Proof of address: You can submit your latest landline/mobile telephone bill, latest electricity bill, passport copy, latest bank passbook/bank account statement, latest dematerialized (electronic, or demat) account statement, voter ID, driving license, ration card, rent agreement, or passport size photograph.

For NRIs, a passport and proof of an overseas address are mandatory documents for KYC compliance.

You will submit your documents to a KYC registration agency (KRA) such as CAMS, Karvy etc. In-person verification/document attestation can be accomplished by visiting an AMC branch. For NRIs, this can also be accomplished through distributors or authorized officials of overseas branches of scheduled commercial banks registered in India, a notary public, a court magistrate, a judge, or the Indian Embassy/ Consulate General in the country in which the client resides.

You must go through the KYC process only once; that is, if you plan to invest in a number of schemes across different mutual funds, you don’t need to complete the KYC process for every investment.

KYC was initiated by the government to prevent money laundering.

FATCA:

The FATCA law was initiated by the US and requires mutual funds to report financial transactions of US persons to the relevant tax authorities. FATCA applies to you if you are a tax resident of the US.

To comply with FATCA, you must provide information which includes country of tax residence, tax identification number from such country, country of birth and country of citizenship, among other details.

FATCA was initiated to prevent US persons from avoiding US taxation on their income and assets.

Direct or regular plan:

You will also need to decide whether you want to invest in the fund’s direct plan or regular plan.

You can invest in a scheme’s direct plan if you are investing by yourself, i.e. without a mutual funds distributor being involved. Since you don’t pay any commissions here, the expense ratio in this plan is generally lower. Note that you could also take expert financial advice from a Registered Investment Advisor (RIA) while still choosing to invest in the direct plan. In such a case, you may need to pay the RIA a fee, directly, for his advice.

If you invest through a mutual fund distributor, you will be investing in the scheme’s regular plan. The distributor will earn a commission in return for his advice, which will be charged to you indirectly, via a higher expense ratio in this plan. The commission will effectively be paid to the distributor by the mutual fund (even though it’ll be from your own investment amount itself). Therefore, your cost for the same investment will be higher in this case than in a direct plan, if you invest by yourself.

Dividends and redemptions:

All dividend payouts by the mutual fund and your redemption proceeds when you exit your mutual fund investment will be made in Indian rupees.

Redemption proceeds are usually credited to the investor’s bank account. The amount is paid to the first unit holder and will be credited to the bank account listed in the application. All currency losses are borne by the investors; similarly, all currency gains are also theirs to take. Note: The repatriation must be done by an authorized dealer or bank; the mutual fund is not responsible for repatriation.

Taxation:

Tax on dividends and capital gains is the same as that which applies to resident Indians. Here are the details:

In the case of equity funds

• Dividends are tax-free.
• Short-term capital gains (when you redeem your investment within a year) are taxed at 15%.^
• Long-term capital gains (when you redeem your investment after a year) are tax-free.

In the case of debt funds

• Dividends are tax-free; the mutual fund pays the dividend distribution tax (DDT) before paying out the dividends.
• Short-term capital gains (when you redeem your investment within three years) are taxed at the rate that applies to your total income.
• Long-term capital gains (when you redeem your investment after three years) are taxed at 20%^ with indexation. Indexation is based on the cost inflation index table published every year by the government. This helps inflate your investment cost based on the inflation rate. Since your cost is increased, this helps reduce capital gains tax.
  ^(surcharge and cess ignored. The tax rates are as of April 2017).

Note: The tax structure given above is as per current Income Tax laws and may change in the future