How NRIs are investing in Indian mutual funds in 3 easy steps

Non-resident Indians (NRIs) often seek investment opportunities in their home country, India, to capitalise on its growing economy. And investing in Indian mutual funds has thus become a sought-after option for those who are looking to diversify their investment portfolio.

Can NRIs invest in mutual funds?

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The very first question is—can NRIs invest in Indian Mutual Funds?

The answer is ‘yes’; an NRI can invest in mutual funds in India, both on full repatriation and non-repatriation basis. However, they must follow certain guidelines and be correctly defined as an NRI as specified under the Foreign Exchange Management Act (FEMA) while investing in Indian mutual funds.

How to invest in mutual funds in India for NRIs
You can start investing in mutual funds in three easy steps –

Step 1 – setting up the applicable NRI account

Asset management companies (AMCs) do not accept investments in foreign currency. Hence, to begin investing in Indian mutual funds, you must open an NRI savings account with an Indian bank.

Those like IDFC FIRST Bank offer NRI savings account interest rates of up to 7% p.a. and interest on fixed deposits of up to 7.5% p.a. helping you grow your savings while investing.

You can open these types –

Step 2 – making the investment

Once you open an NRI account, you can begin investing in Indian mutual funds through either of the following methods –

  • Self – You can start investing in Indian mutual funds directly through the banking channels. For direct investments, you need to provide your KYC details
  • Power of Attorney (PoA) – Alternatively, you can authorise a PoA to invest and make other decisions on your behalf. You, as well as the PoA holder, must sign the KYC documents to proceed with the mutual fund investment.

Step 3 – complete the KYC (Know your customer) process

Before investing in Indian mutual funds, you must ensure compliance with the KYC process. Currently, KYC documents include photographs and certified copies of PA, passport, and overseas residence proof.

How can NRIs redeem mutual funds in India?

Each fund house has different policies for the redemption of mutual funds. Typically, when you redeem your units, the amount (principal and gains) will be credited to your NRI account, or you may receive a cheque. However, while redeeming, the tax deduction happens at the source itself.

What about taxation considerations for NRIs investing in Indian mutual funds?

You have to pay taxes when you realise the gains while redeeming the mutual funds. Similarly, if you receive any dividends from mutual funds, a tax of 20% plus a surcharge would be applicable.

Equity Exposure Short Term Capital Gain Tax Rate Long Term Capital Gain Tax Rate Applicable to the following Categories
Up to 35% invested into Equity No Change.

Slab Rate Applicable

Change Proposed

LTCG and Indexation Benefit removed basis the Finance Bill 2023

– All Categories of Debt MFs
– International Funds- Gold Funds
– Hybrid Funds (with Upto 35% exposure to Equity i.e. Conservative, Asset Allocation Funds)
35-65% No Change.

Slab Rate Applicable

No Change. 

20% Tax with indexation (units held for more than 36 Months)

– Balanced Hybrid Funds
> 65% No Change. 

15% with No indexation (units held for 12 Months or less)

No Change.

10% with no indexation (units held for more than 12 Months)

– All Categories of Equity Funds
– Equity Savings Funds
– Arbitrage Funds
– Balanced Advantage Funds
– Aggressive Hybrid Funds

However, verify if India has signed a Double Taxation Avoidance Agreement (DTAA) with your country of residence to claim tax credits.

For example, India has signed DTAAs with more than 80 countries, including the USA, UK, Canada, Denmark, Singapore, Australia, and UAE.

How can NRIs benefit from investing in Indian mutual funds?

  • Geographical diversification 

Investing in Indian mutual funds enables you to diversify your investment portfolio geographically. You, thereby, reduce the risks associated with specific regions or countries.

  • Rupee appreciation 

You stand to gain from rupee appreciation against your resident country’s currency. A stronger rupee results in higher returns when converted back to foreign currency.

  • Convenience and flexibility 

With the option of investing online, you can effortlessly track your mutual fund investments. Online platforms allow purchasing, redeeming, and switching units of different mutual fund schemes.

Tips for responsible and safe investing in Indian mutual funds

  • Ensure all your KYC documents are up-to-date and submitted correctly to avoid any delays or issues
  • Check if your country of residence is part of the Common Reporting Standard (CRS) for combating tax evasion
  • Be aware of regulations under the Foreign Account Tax Compliance Act (FATCA), which require financial institutions to share information about financial transactions with US or Canadian residents
  • Diversify your investment across different mutual fund schemes and asset classes to reduce risks and maximise returns

The takeaway – why NRIs should invest in Indian mutual funds
Investing in India and its mutual funds enables you to participate in the country’s growth while benefiting from one of the world’s fastest-growing economies. With easy access to various investment options, favourable taxation policies, and the potential for higher returns, mutual funds are a safer avenue to grow your wealth.