If you wonder whether NRIs can invest in Mutual Funds, then the simple answer to that question is Yes, they can, provided they comply with the rules and regulations put in place by SEBI (i.e. Securities & Exchange Board in India), the financial markets regulator in India and the other authorities like RBI etc. So now let us see the process & regulations which are required to be followed.
Step #1: Pre-requisite of having an NRO, NRE or FCNR account
As per FEMA ( i.e. Foreign Exchange Management Act), RBI (i.e. Reserve Bank of India) has issued guidelines that an NRI cannot hold a regular savings account in India. Instead the NRI has to compulsorily hold either an NRO (i.e. Non-Resident Ordinary) account and/or NRE (i.e. Non-Resident External) account. All your investments will be done via one of these accounts only. The NRO account is generally used to keep and utilise funds within India and remittance of funds back to the resident country of the NRI is not permitted with ease. This is called as a non-repatriable account. The NRE account however allows you remit funds to the original country of residence of the NRI hassle free. This is called as a repatriable account. Depending on whether you would want to ultimately transfer the redeemed or matured fund amount back to the foreign country or keep it in India you have to choose the account which is right for you. Also note that the Income tax treatment, of income in these accounts are different. This is a very critical step and has to be planned in advance as per your requirements.
Step #2: KYC or CKYC & supporting documents
KYC (i.e. Know your Customer) is a standard process of verifying the identity of an investor based on set of documents like Passport, Visa, PAN, Proof of residence etc. This process is mandatory for all investors be it resident or non-resident Indians. This process generally takes maximum 1 week to be completed post submission of the correct documents. Note that every time you would want to sign up with a finance oriented company this process has to be repeated. This is where CKYC (i.e. Central KYC) comes in. Central KYC or CKYC is a process where you have to do your KYC process with the necessary documents etc. only once. Then the investor will receive a 14 digit KYC Identification Number also called as KIN. This number can be used by the investor across the financial sector to complete KYC formalities hassle free. Since the NRI investor will be transacting between two different countries, additional guidelines set by FEMA & PMLA (Prevention of Money Laundering Act) will have to be complied as well. After complying with all of this, the NRI becomes eligible to invest in Mutual Funds in India.
Step #3: Specific Rules & Regulation for Specific Countries
There are many rules and regulations which are for specific countries where the NRI resides. For instance, there are some restrictions on NRIs residing in USA and Canada investing in Mutual Funds. They are not allowed to invest in Debt Funds. NRIs residing in these two countries should seek professional advice before investing in Mutual Funds in India especially to check if these funds are offered to residents of USA and/or Canada. Further, some Fund Houses do not let NRIs invest in some schemes due to FATCA(i.e. Foreign Account Tax Compliance Act) rules. In a gist you need to be aware as to what rules apply to your case else unknowingly might attract penalties etc.
Step #4: Account Opening & Fund Transfer
Post the KYC and other formalities like filling up the application form of the Mutual Fund House, your Mutual Fund folio creation process will be complete. A designated NRE or NRO account will be linked to this Mutual fund folio. You can only transact in the Mutual Fund folio via this designated account. Also note that Mutual Fund will accept funds only in Indian Rupees.
Step #5: Redemption of Funds & Tax Implications
Redemption process is very simple as the Mutual Fund house will remit the principle and the gains less TDS (if applicable) to the designated account. If this designated account is a NRE account which is a repatriable account then funds can be transferred to the country of the residence of the NRI hassle free.
Taxes applicable on the gains are categorised as short-term & long term capital gains depending upon the period. Also the slabs & rates are decided as per the type of Mutual Fund. Also note that NRI investing into Mutual Funds are exempted from wealth tax.
Well, now you know the process and regulations for an NRI Investing into Mutual Funds in India. We hope you have learnt something new today, as it is our constant endeavour at Motilal Oswal to educate & make an ‘investor’ a ‘sound investor’! Happy Investing!
