The taxation of mutual funds for NRIs in India is covered with a number of other topics, including tax rules, investment possibilities, legal requirements, and documentation needs. We attempt to answer frequently asked questions about NRI mutual fund investments and provide a thorough understanding of mutual fund investing for NRIs in India. Mutual investments are very popular among investment plans in India and here is all you need to know!
Mutual funds are an investment option where investors pool their money to buy a variety of stocks, bonds, and other securities. Professional fund managers oversee mutual funds. Investing in a variety of securities to meet the fund’s investment goals. Investors buy multiple shares of the mutual fund instead of just one. Mutual funds can invest in bonds and other assets, not just shares. Mutual funds are priced using the term Net Asset Value Per Share (NAVPS) because they have different prices. Mutual fund pricing is set at the end of the trading day and does not change when the market is open. Learn more about Mutual Funds Taxation.
Difference Between an Indian’s Investment and NRI’s Investment on Mutual Funds
- When it comes to investing in mutual funds, NRIs are subject to different tax laws than Indian citizens.
- Under certain restrictions, NRIs may invest in mutual funds in India through repatriable and non-repatriable ways. This means the transfer of assets from one country to another.
- NRIs who invest in mutual funds must adhere to a number of FEMA (Foreign Exchange Management Act) laws.
- Based on a number of variables, including the type of fund, holding duration, and tax residency status, the tax on mutual funds for NRIs in India varies.
- NRIs must submit different documentation than Indian citizens must in order to invest in mutual funds in India.
Tax on Mutual Funds
- NRIs’ mutual funds taxes in India depend on the type of fund, holding period, and resident status.
- Short-term capital gains (STCG) are taxed at a higher rate than long-term capital gains (LTCG
- Mutual fund dividend income is taxed differently from capital gains.
Mutual Funds for the NRI
NRIs seeking to invest in India often find mutual funds attractive. These offer diversification, professional management, and potential rupee appreciation, all accessible remotely. Choose from equity, debt, hybrid, and international funds based on your risk tolerance and goals. Popular options include large-cap, multi-cap, balanced, and debt funds.
However, careful planning is crucial. Understand investment horizons, risk tolerance, costs, tax implications, and choose a reputable platform. Consulting a financial advisor is highly recommended for personalized guidance. Remember, mutual funds are not risk-free, but with research and informed decisions, they can be a powerful tool for NRIs seeking to build their wealth in India.
Benefits of Mutual Funds for NRIs
- Diversification: It can provide range of securities, reducing risk and volatility.
- Professional Management: Experienced fund managers manage mutual funds. And invest in securities that align with the fund’s objectives.
- Flexibility: NRIs can invest in mutual funds according to their financial goals and risk appetite.
- Tax Efficiency: Mutual funds are tax-efficient investment options with benefits such as indexation and long-term capital gains tax exemptions.
- Convenience: NRIs can invest and redeem units online, from anywhere in the world, using various payment modes.
How Can the NRIs Invest in Mutual Funds?
Non-resident Indians (NRIs) have the option to invest in mutual funds in India, subject to certain regulations set by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Here’s how NRIs can invest in mutual funds:
- Choose the Right Mutual Fund: NRIs can select mutual funds based on their investment objectives, risk appetite, and financial goals. There are various types of mutual funds available, including equity funds, debt funds, hybrid funds, and more.
- Open an NRE/NRO Bank Account: NRIs need to have a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account in India to invest in mutual funds. They can remit funds from their foreign bank account to their NRE/NRO account in Indian rupees.
- Obtain PAN Card: NRIs must have a Permanent Account Number (PAN) card issued by the Indian Income Tax Department. This is a mandatory requirement for investing in mutual funds and other financial instruments in India.
- KYC Compliance: NRIs need to complete the Know Your Customer (KYC) process by submitting relevant documents such as passport, overseas address proof, and photographs to the mutual fund company or its authorized intermediaries.
- Choose Investment Mode: NRIs can invest in mutual funds either on a repatriable or non-repatriable basis, depending on the source of funds. Repatriable investments allow the investor to repatriate the funds along with the returns abroad, while non-repatriable investments do not permit the repatriation of funds.
- Submit Required Documents: NRIs need to submit additional documents such as a Foreign Inward Remittance Certificate (FIRC), Overseas Citizen of India (OCI) card (if applicable), and declaration under the Foreign Exchange Management Act (FEMA) for repatriable investments.
- Select Investment Method: NRIs can invest in mutual funds through various channels, including online platforms, mutual fund distributors, or directly through the mutual fund company’s website.
- Monitor Investments: Once invested, NRIs should regularly monitor their mutual fund investments and review their portfolio to ensure alignment with their financial goals and risk tolerance.
It’s essential for NRIs to understand the tax implications of their mutual fund investments in India, both in India and in their country of residence. So, consultation with our Vakilsearch expert can help you.
Legal Regulations
- RBI regulates NRI investments in India, including mutual funds.
- NRIs can invest in mutual funds in India via repatriable and non-repatriable routes, with conditions.
- NRIs must follow FEMA regulations while investing in mutual funds in India.
- Taxation on mutual fund investments
The taxation of mutual funds in India varies depending on the type of mutual fund and the holding period. Investors should be aware of the tax implications before investing in mutual funds.
Tax Implications
Understanding these implications is crucial to avoid surprises and maximize your returns. Here’s a quick overview:
Taxation depends on:
- Account type: NRO or NRE account (NRE offers tax benefits on maturity/redemption)
- Fund type: Equity, debt, hybrid (each attracts different tax rates)
- Investment period: Short-term (less than 1 year) vs. long-term (over 1 year)
Key Points:
Equity funds:
- Short-term: 15% tax on capital gains.
- Long-term: 10% tax on gains exceeding Rs. 1 lakh per year.
Debt funds:
- Short-term: Taxed at your income tax slab rate.
- Long-term: 20% with indexation benefit (or 10% without).
Hybrid funds: Taxed as per their equity/debt composition.
- NRE accounts: Exempt from taxes on maturity/redemption proceeds.
- NRO accounts: Taxed as per applicable rates, but TDS might be deducted initially.
- Dividend income: Taxed at 20% (excluding cess and surcharge).
Understanding Tax on Mutual Funds in India
Mutual funds in India are subject to taxation as per SEBI guidelines. The returns from mutual funds can be in the form of dividends or capital gains. Dividends are the profits shared by companies with investors when they have surplus funds. Previously, dividends were tax-free, but after the Union Budget 2020, they are added to an individual’s taxable income and taxed as per their income tax slab rate.
Capital gains, on the other hand, occur when the selling price of the mutual fund is higher than the purchase price. The taxation of capital gains depends on the holding period and the type of mutual fund. Equity Funds and Hybrid Equity-Oriented Funds are considered short-term if held for less than 12 months and long-term if held for 12 months or more. For short-term capital gains, the tax rate is 15%, while long-term gains are taxed at 10% without indexation benefit.
Debt Funds and Hybrid Debt-Oriented Funds are classified as short-term if held for less than 36 months and long-term if held for 36 months or longer. The tax rate for long-term gains in these funds is 20% with indexation benefit, while short-term gains are taxed as per the individual’s income tax slab rate.
In summary, the taxation of mutual funds in India varies depending on the type of mutual fund and the holding period. Investors should be aware of the tax implications before investing in mutual funds.
How Can the NRIs Invest in Mutual Fund?
Mutual funds in India are subject to taxation as per SEBI guidelines. The returns from mutual funds can be in the form of dividends or capital gains. Dividends are the profits shared by companies with investors when they have surplus funds. Previously, dividends were tax-free, but after the Union Budget 2020, they are added to an individual’s taxable income and taxed as per their income tax slab rate.
Capital gains, on the other hand, occur when the selling price of the mutual fund is higher than the purchase price. The taxation of capital gains depends on the holding period and the type of mutual fund. Equity Funds and Hybrid Equity-Oriented Funds are considered short-term if held for less than 12 months and long-term if held for 12 months or more. For short-term capital gains, the tax rate is 15%, while long-term gains are taxed at 10% without indexation benefit.
Debt Funds and Hybrid Debt-Oriented Funds are classified as short-term if held for less than 36 months and long-term if held for 36 months or longer. The tax rate for long-term gains in these funds is 20% with indexation benefit, while short-term gains are taxed as per the individual’s income tax slab rate.
NRI Mutual Fund Tax in India
NRI investors often have concerns about facing double taxation when investing in India. However, if India has signed a Double Taxation Avoidance Treaty (DTAA) with the country of their residence, they can avoid this issue.
Regarding gains from equity mutual funds, the tax treatment depends on the holding period. Short-term capital gains on equity-oriented funds are taxed at a rate of 15%. On the other hand, Long-Term Capital Gains (LTCG) exceeding Rs 1 lakh in a year are taxable at a rate of 10% without indexation benefit.
For debt-oriented funds, the tax on short-term capital gains is based on the investor’s income tax bracket. If the fund is held for more than three years, long-term capital gains are taxed at a rate of 20% with indexation benefit. Unlisted mutual funds also have LTCG taxed at a rate of 10% without the indexation benefit.
How can NRIs benefit from mutual fund investments
NRIs can enjoy several benefits by investing in Indian mutual funds, making it a lucrative option for them. Here are some of the advantages:
- Convenient Online Management: With the option to invest online, NRIs can easily manage their mutual funds from anywhere in the world. They can buy, redeem, and switch units of different schemes, as well as opt for systematic transfers or withdrawals online. This eliminates the need for physical forms, cheques, or being present in India. Regular consolidated account statements are sent through emails, and portfolio holdings are disclosed online by asset management companies (AMCs).
- Profit Potential from Rupee Appreciation: When the Indian rupee appreciates against the currency of the NRI’s resident country, it can lead to higher profits for the investor. For example, if an NRI invests in an Indian mutual fund when the exchange rate is favourable, they can benefit from the appreciation of the Indian rupee against their home currency. This potential for higher returns adds to the attractiveness of investing in India-based mutual funds.
In essence, NRIs can find investing in Indian mutual funds advantageous due to the ease of online management and the potential for increased profits from currency appreciation. It provides them with an opportunity to participate in India’s growing economy and potentially achieve favourable investment outcomes.
Mutual fund regulations for NRIs
KYC for NRIs:
To complete the KYC process as an NRI, you need to provide a copy of your passport containing relevant details such as your name, date of birth, photo, and address. It is also essential to submit proof of your current residential address, whether it is temporary or permanent. Some fund houses may require in-person verification as part of the KYC process.
FIRC (Foreign Inward Remittance Certificate):
If you made the payment for your investments using a cheque or demand draft, you must attach a Foreign Inward Remittance Certificate (FIRC) as proof of the source of funds. If obtaining an FIRC is not possible, a letter from the bank confirming the remittance will be accepted.
Redemption:
When you redeem your mutual fund units, the Asset Management Company (AMC) will credit the redemption amount (investment + gains) to your bank account after deducting applicable taxes, if any. Some banks offer the option to credit the redemption amount directly to your NRO/NRE account. If you have opted for a non-repatriable investment, the proceeds can be credited only to an NRO account.
Taxation on Mutual Fund Investments
Investing in Indian mutual funds can be a great way for NRIs to grow their wealth, but understanding the tax implications is crucial to avoid surprises and maximize your returns. Here’s a breakdown of key points to consider:
Double Taxation Worries?
Firstly, let’s address the common concern of double taxation. If your country of residence has a Double Taxation Avoidance Agreement (DTAA) with India, you can avoid paying tax on the same income twice. Check with your tax advisor for specific details regarding your situation.
Understanding Capital Gains:
Taxation on your mutual fund gains depends on the holding period (short-term or long-term) and the type of fund (equity, debt, hybrid):
- Equity Mutual Funds:
- Short-term (less than 1 year): Taxed at a flat rate of 15%.
- Long-term (over 1 year): LTCG exceeding ₹1 lakh per year are taxed at 10% without indexation benefit.
- Debt Mutual Funds:
- Short-term (less than 3 years): Taxed according to your income tax slab rate in India.
- Long-term (over 3 years): LTCG are taxed at 20% with indexation benefit, or 10% without indexation benefit.
- Hybrid Mutual Funds:
Taxation depends on the equity/debt composition of the fund. Generally, follows the rules of the dominant asset class (equity or debt).
NRE vs. NRO Accounts:
- NRE Accounts: Exempt from tax on maturity/redemption proceeds and capital gains. A great option for long-term investments.
- NRO Accounts: Taxed as per applicable rates in India, but TDS might be deducted initially. You may need to file a tax return to claim exemptions or refunds.
Dividend Income:
Taxed at 20% (excluding cess and surcharge) for all NRIs, regardless of the account type.
Similar to Indian residents, Non-Resident Indians (NRIs) are obligated to pay taxes on capital gains and dividends earned from their investments in mutual funds. Nonetheless, the taxation regulations may differ based on the mutual fund type and the duration of ownership. For instance, the taxation guidelines for NRIs concerning equity and debt funds vary.
NRIs and Mutual Fund Investments: Taxation Laws
The taxation rules for both Indian residents and NRIs are mostly similar, with some variations based on the type and duration of investments. For instance, dividends from mutual funds are tax-exempt for both Indian residents and NRIs.
For equity mutual funds held for less than one year, short-term capital gains tax (STCG) applies at a rate of 15%. For investments held for more than one year, long-term capital gains tax (LTCG) applies at 10% on gains exceeding Rs. 1 lakh in a financial year.
In the case of debt mutual funds, short-term capital gains tax applies to investments held for less than three years, with a total tax rate of 30%. For investments held for more than three years, long-term capital gains tax is 20% with indexation benefit for listed funds and 10% without indexation benefit for non-listed funds.
Tax on capital gains is deducted at the time of sale or redemption by the buyer, and the remaining amount is transferred to the NRI’s account. This deduction is known as Tax Deducted at Source (TDS), and the NRI pays it to the Indian Government on their behalf, eliminating the need for further tax payment by the NRI.
NRIs can also benefit from the Double Taxation Avoidance Agreement (DTAA), as they can claim the taxes and TDS deducted in India against their tax liability in their home country. This ensures that the same income is not taxed twice, providing relief to NRIs from potential double taxation.
Key Terms to Remember About Mutual Funds Taxation for NRIs
Taxation on Short-Term Capital Gains (STCG):
If an NRI holds equity mutual funds for a period less than 12 months, any returns generated are classified as Short Term Capital Gains (STCG). These gains incur a tax at a flat rate of 15% without the benefit of indexation. Similarly, if an NRI holds debt mutual funds for a duration less than 36 months, the returns are considered as STCG. In such instances, the returns are amalgamated with the investor’s yearly taxable income and taxed according to the prevailing income tax slab rate.
Taxation on Long-Term Capital Gains (LTCG):
When investments in equity mutual funds are held for over 12 months, the earnings from them are deemed Long Term Capital Gains (LTCG). LTCG up to ₹1 lakh in a financial year remains exempt from taxation. However, if the gains exceed ₹1 lakh, they are subject to a tax rate of 10% without the benefit of indexation. For debt mutual funds, returns from investments held for more than 36 months are classified as LTCG and are taxed at a rate of 20% with the benefit of indexation.
Taxation on Dividends for NRIs:
Until 2020, dividends received from mutual funds in India were not subject to taxation in the hands of investors. However, the Union Budget 2020 proposed to treat dividends as part of investors’ annual income and subjected them to income tax regulations. Consequently, the total dividends received within a financial year are added to the investor’s annual taxable income and taxed based on the applicable income tax slab rate.
Mutual Fund TDS for NRIs:
NRIs are subject to Tax Deduction at Source (TDS) upon the redemption of their mutual fund investments. However, TDS is deducted at the highest applicable rate. The Asset Management Company (AMC) deducts the TDS amount before crediting the dividend to the NRI investor’s bank account. NRIs can claim a refund of the TDS while filing their income tax returns.
Conclusion
Mutual fund investing is a practical and adaptable investment choice for NRIs in India.
While investing in mutual funds, NRIs must be mindful of :
- tax restrictions
- legal constraints, and documentation
Making wise investment choices and maximising profits can be facilitated for NRIs by having a thorough understanding of the numerous NRI mutual fund taxation-related issues in India. To clear all your queries and have a clear understanding, contact our experts at Vakilsearch!
FAQ
What is the best investment option for an NRI?
NRIs can choose their investment strategy based on their financial goals, risk tolerance, and aspirations. Mutual funds are a flexible and practical investment option that NRIs can consider while investing in India.
Is there any fixed percentage of tax for NRI on mutual funds?
No, the tax on mutual funds for NRIs in India varies based on several factors such as the type of fund, holding period, and tax residency status.
Is there any documentation required for investing in NRI mutual funds?
Yes, NRIs are required to submit various documents, such as a PAN card, passport, and KYC documents, while investing in mutual funds in India.
Do NRI have to pay tax on mutual funds in India?
Yes, even NRIs have to pay tax on mutual funds they have purchased from India.
Is SIP tax free for NRI?
No, mutual fund SIPs are taxable in India.
What happens to mutual funds when you become NRI?
There is no restriction on NRIs investing in Indian mutual fund schemes. However, you will need to change your residency status by completing KYC.
How much NRI is tax free in India?
Based on the new regime or the old regime INR 2.5 lakhs and INR 3 lakhs is tax free for non-senior NRIs.
What are the rules for mutual funds in NRI?
NRIs need to complete the KYC process to invest in mutual funds in India. This involves providing necessary identification and address proof documents.
How much TDS is deducted on mutual funds for NRI?
For NRIs investing in mutual funds, Tax Deduction at Source (TDS) is deducted at the highest applicable rate, typically ranging from 15% to 20% for capital gains, depending on factors like the type of fund and how long it's held.
Which income of NRI is taxable in India?
Income earned or received in India by NRIs is taxable here. This includes income from sources like salary, property, capital gains, business, or other sources located in India. However, income earned outside India is usually not taxed in India, except in specific cases.
Why can't NRI invest in mutual funds?
NRIs can invest in mutual funds in India, but there might be some restrictions or specific regulations to follow, depending on their residential status and the type of mutual fund. However, generally, NRIs are allowed to invest in mutual funds in India.
How much income tax on NRI investment in mutual funds?
The income tax on NRI investment in mutual funds depends on factors like the type of mutual fund (equity or debt) and how long it's held. For example, short-term capital gains on equity mutual funds are taxed at 15%, while long-term gains are taxed at 10% if they exceed ₹1 lakh. Similarly, for debt mutual funds, the tax rate varies based on the type and duration of the investment.
