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NRI CORNER

To better understand NRI mutual funds, it's important to first understand how taxes on mutual funds work in India In India, mutual funds are subject to taxation according to the Securities and Exchange Board of India (SEBI) guidelines. The returns on mutual funds come in two forms

1.Dividend

When companies have a surplus of money, they may share the profits with their investors, and these shared profits are known as dividends.

2.Capital Gains

The capital gains tax rate varies depending on the type of mutual fund and holding period. Mutual funds are classified as either short-term or long-term based on the holding period. 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 longer. Debt funds and Hybrid Debt-Oriented Funds are considered short-term if held for less than 36 months and long-term if held for 36 months or longer.
The income tax rate on mutual funds in India depends on the type of mutual fund. Hybrid Equity-Oriented Funds held for more than 12 months are taxed at 10% without indexation benefits for capital gains. For shortterm capital gains, the tax rate is 15%.

Mutual Funds for the NRI

NRIs often wonder if they can invest in mutual funds. The answer is yes - NRIs can invest in mutual funds in India. However, they must first open an NRE (Non-Resident External), NRO (Non-Resident Ordinary), or FCNR (Foreign Currency Non-Resident) account to make investments. This is because, under the Foreign Exchange Management Act (FEMA), NRIs cannot invest with a regular savings account in a bank. NRIs must invest in Indian Rupees as foreign currency investments are not allowed. NRIs residing in the US and Canada who invest in mutual funds in India may face application rejections due to the tedious paperwork involved under the Foreign Account Tax Compliance Act (FATCA).

Understanding the NRI Mutual Funds Taxation

Taxation rules for NRIs and residents of India are alike. For equity mutual funds, the investments made for 1 year or less will be taxed at 15% as per the short-term capital gains taxation rules. For long-term investments, the mutual funds are taxed at a rate of 10% as per the long-term capital gains taxation rules. For equity schemes, short-term capital gains are taxed at a rate of 15% and long-term capital gains at a rate of 10% if the gains exceed Rs 1 lakh. For non-equity schemes, short-term capital gains are taxed at a rate of 30% and long-term capital gains at a rate of 20% with indexation. If the country of NRI’s residence has not signed the DTAA (Double Tax Avoidance Agreement) then the NRI is liable to pay the tax in both the countries, the country of residence and in India. India has signed the DTAA with the USA and this helps to avoid double taxes on mutual funds for NRI in India

Regulations to Invest in Mutual Funds for NRIs

Investing in mutual funds as an NRI (Non-Resident Indian) requires compliance with certain regulations and steps. Some of the key regulations to invest in mutual funds for NRIs are: KYC (Know Your Customer): To complete the KYC process, NRIs are required to submit a copy of their passport along with the pages that have their name, address, age, photo, and other relevant information. Additionally, residential proof is also required. Some fund houses do not accept e-KYC and may require in-person verification. Remittance Certificate: When making payments to the fund house via a cheque or draft, NRIs must attach a Foreign Inward Remittance Certificate (FIRC) to confirm the source of funds. In the absence of FIRC, a letter from the bank can also be considered. Redemption: Upon redemption of the corpus, investments, and gains, the Asset Management Company (AMC) will credit the amount after deducting any applicable taxes. AMCs may also issue a cheque to the NRI or directly credit the corpus to their NRO/NRE account. If the NRI opts for a non-repatriable investment, the corpus or redeemed amountcan only be credited to their NRO account.