Investing in Indian mutual funds is an attractive opportunity for Non-Resident Indians (NRIs) to participate in India's economic growth. However, as an NRI, you must consider specific rules, documentation, and tax implications—especially after the changes introduced in the Union Budget 2024. This guide will walk you through everything you need to know about investing in Indian mutual funds as an NRI, including the updated tax regulations.

Key Considerations for NRIs Before Investing in Mutual Funds

1. What is the NRI Status for Mutual Fund Investment?

As per the updated Foreign Exchange Management Act (FEMA) guidelines, you must be classified as an NRI to invest in Indian mutual funds. Ensure your residency status is updated to NRI to remain compliant with Indian regulations.

2. Do NRIs Need a Special Bank Account for Mutual Fund Investments?

NRIs are required to have either an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) rupee-denominated account for investments in mutual funds. Investments cannot be made in foreign currencies.

3. Is KYC Compliance Necessary for NRIs?

Once your status changes to NRI, completing fresh KYC is mandatory. You can submit the necessary KYC documents either through a mutual fund intermediary or directly with an Asset Management Company (AMC). The KYC process is essential to verify your identity, and your information will be centrally stored by SEBI-registered KYC Registration Agencies (KRAs).

4. What Mutual Fund Investment Options Are Available for NRIs?

NRIs have access to equity, debt, and hybrid mutual fund options. Investments can be made online or through an appointed Power of Attorney (PoA).

Continuing Existing Mutual Fund SIPs as an NRI

5. Can NRIs Continue with Their Existing Systematic Investment Plans (SIPs)?

Yes, NRIs can continue with their SIPs initiated as residents. However, you will need to update your NRO account details with your AMC or broker. If you redeem your SIP investments, Tax Deducted at Source (TDS) will be applicable.

6. Are There Restrictions on NRIs from the US and Canada?

NRIs from the US and Canada may face restrictions due to FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standards) regulations. Some AMCs do not allow investments from NRIs in these countries through their digital platforms.

Documentation Requirements for NRIs

7. What Documents Are Required for NRIs to Invest in Mutual Funds?

You will need the following documents:

• Passport
• Filled KYC form
• Proof of NRI status (Visa/Work Permit/Residence Permit)
• Address proof (Driving License, Passport, Voter ID, etc.)
• FATCA/CRS declaration for NRIs in the US, UK, Canada, or other CRS countries
• Self-certification of documents is mandatory, and in some cases, in-person verification may be required.

Repatriation and Taxation of Mutual Fund Investments for NRIs

8. Are the Investment Proceeds Fully Repatriable?

If you invest using an NRE account, your proceeds are fully repatriable. Investments made through an NRO account have a repatriation limit of USD 1 million per financial year.

9. What Are the Tax Implications for NRIs Investing in Mutual Funds Post Union Budget 2024?

The Union Budget 2024 has introduced certain changes in tax slabs, TDS, and capital gains taxes. Here’s an updated breakdown:

Equity Mutual Funds:

Short-Term Capital Gains (Holding period: <12 months): 20% tax
Long-Term Capital Gains (Holding period: >=12 months): 12.50% tax on gains exceeding ₹1.25 lakhs
 

Debt-Oriented Mutual Funds (Budget 2024 Update):

Short-Term Capital Gains: Taxed as per income tax slab rates (unchanged)
Long-Term Capital Gains: Taxed as per income tax slab rates (unchanged)

For NRIs, mutual fund redemptions will incur TDS based on the type of fund and the length of the holding period.

10. How is TDS Applied to Mutual Fund Investments Post Union Budget 2024?

Post the Union Budget 2024, the following TDS rules apply:

Equity Mutual Funds:

Short-Term Capital Gains: 20% TDS
Long-Term Capital Gains: 12.5% TDS on gains exceeding ₹1.25 lakh
 

Debt-Oriented Mutual Funds:

Short-Term Gains: Taxed as per your income tax slab, with 30% TDS deducted
Long-Term Gains: Taxed as per your income tax slab, with 30% TDS deducted

AMCs will deduct TDS at the time of redemption of mutual fund units.

11. Are There Tax Implications in Other Countries?

If you are based in the US or another country with different taxation policies for foreign investments, you might face tax liabilities both in India and your resident country. However, under the Double Taxation Avoidance Agreement (DTAA), you can claim Foreign Tax Credit (FTC) for the taxes paid in India. Consult a tax expert for advice on how to utilize DTAA and minimize your tax liability.

Conclusion

NRIs can invest in Indian mutual funds by updating their residency status, completing KYC formalities, and opening an NRE or NRO account. The Union Budget 2024 hasn't significantly altered taxation for mutual funds, but it’s essential to remain compliant with tax laws in both India and your resident country. NRIs from the US and Canada should be aware of FATCA/CRS restrictions. As always, seek guidance from financial and tax professionals to optimize your investments and ensure compliance.

This blog provides general information and should not be considered as legal or tax advice. For personal assistance, contact Dinesh Aarjav & Associates.