Mutual fund schemes in India are not just popular among Indians but also among Non-Resident Indians (NRIs). NRI basically constitute those people who are from India but are living abroad. They are not resident in India. However, they are allowed to invest in Indian markets.
As mutual funds do not require active tracking as in the case of equity shares, they are more popular among the NRI investors. However, mutual fund investments also attract NRI mutual fund taxes in India. Let’s understand the nuances of NRIs investing in mutual funds in India and its taxation aspects with Koshex!
How can NRIs invest in mutual funds in India?
NRIs willing to invest in mutual funds in India need to follow the Foreign Exchange Management Act (FEMA) provisions, rules, and regulations made thereunder. Further, they also need to comply with the KYC regulations. Some mutual fund houses may impose restrictions on the citizenships of NRIs due to compliance obligations related to the Foreign Account Tax Compliance Act (FATCA).
Why NRIs Consider Investing in Mutual Funds in India?
There are several reasons as to why NRIs consider investing in mutual funds in India:
1) Diversification
Mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, and other securities as per the terms of the scheme. This diversification helps spread risk across different assets thereby, reducing the impact of poor performance in any one investment.
2) Professional Management
Mutual funds are managed by professional fund managers who have expertise in financial markets. These managers make investment decisions on behalf of you and conduct research and analysis to optimize your returns. That’s one of the significant reasons why NRIs prefer mutual fund investments in India.
3) Liquidity
Mutual funds are quite liquid in nature. You can buy or sell units anytime at the prevailing Net Asset Value (NAV). This provides you the flexibility in case you need to access your funds at short notice.
4) Convenience
Investing in Indian mutual funds is relatively easy and convenient. You can invest in mutual funds through the Foreign Portfolio Investment (FPI) route. Also, many fund houses offer online platforms for easy transactions.
5) Highly Regulatory in Nature
Mutual funds in India are highly regulated by the Securities and Exchange Board of India (SEBI). This regulatory oversight ensures a high level of transparency and investor protection. Being an NRI, you can rest assured that your funds are always under the oversight of a regulatory authority.
6) Rupee Cost Averaging
You can benefit from rupee cost averaging in case you decide to invest through Systematic Investment Plans (SIPs). By investing a fixed amount regularly, you can automatically buy more units when prices are low and fewer units when the prices are high. This potentially reduces your overall average cost.
7) Access to Indian Markets
The Indian economy is currently one of the fastest-growing economies in the world. Analysts across the world are quite optimistic about the performance of the Indian economy. Mutual funds provide NRIs with an opportunity to participate in the growth of the Indian economy and capital markets without the need for direct involvement in stock selection and management.
8) Risk Tolerance
There are thousands of schemes to select from with different risk profiles. You can choose the funds based on your risk tolerance, financial goals, and your investment horizon.
9) Low Initial Investment
Many mutual funds have relatively low minimum investment requirements that make them accessible to a wide range of investors. Further, as the Rupee is quite devalued against foreign currencies like Dollars, Pounds, or Euros, it makes it even more affordable for the NRIs to invest in the Indian markets.
Also read: What Are The Taxation Rules For Hybrid Mutual Funds?
NRI Mutual Fund Tax Aspects in India
Following are some of the NRI mutual fund tax aspects in India:
1) Tax Deducted at Source
Tax Deducted at Source (TDS) basically constitutes advance tax that the government collects at the origin of the transaction. Whenever you redeem your mutual fund investments as NRI, TDS liability arises. The rate at which TDS will be deducted depends upon the type of mutual fund and the holding period.
- If you have invested in a long-term equity-oriented mutual fund, then the TDS shall be deducted @10%.
- In case of long-term capital gains from non-equity-oriented mutual funds, TDS shall be deducted @20%. This includes gold funds, debt funds, international funds, etc.
- In case of short-term capital gains on equity-oriented mutual funds (on which STT is paid), the TDS shall be deducted @15%.
- In the case of short-term capital gains on non-equity-oriented mutual funds, TDS should be deducted @30%.
Here is a quick summary of the above TDS rates:
| Type of Mutual Funds | TDS Rates on Long-Term Capital Gains | TDS Rates on Short-Term Capital Gains |
| Equity-Oriented Mutual Funds | 10% | 15% |
| Non-Equity Oriented Mutual Funds | 20% | 30% |
Also Read: Difference Between TDS And TCS Explained
2) Capital Gains Tax
Capital gains can be divided into short-term capital gains and long-term capital gains depending upon the period of holding. Here is how the capital gains will be taxed for NRIs on income generated from mutual funds:
| Type of Mutual Funds | TDS Rates on Long-Term Capital Gains | TDS Rates on Short-Term Capital Gains |
| Equity-Oriented Mutual Funds | Gains exceeding Rs 1 lakh – 10% without indexation benefit | 15% |
| Non-Equity Oriented Mutual Funds | Listed: 20%Unlisted: 10% | Based on the tax rate applicable to NRI |
3) Income Tax Return Filing in India
In case a person receives income in India, then such person is liable to furnish a return of income. However, NRIs have been provided with an exemption from filing the income tax return in this regard. This is a significant tax benefit of mutual funds for NRI. They are not required to file their income tax return in India if their income solely consists of investment income or capital gains if the TDS has been deducted from the same.
4) Tax on Dividend Income
Another important component of NRI mutual fund tax is dividend income. In case you receive any dividend income from your investments in mutual funds in India, then it shall be taxed at the rate applicable to you.
In a Nutshell
Mutual funds in India present an attractive opportunity to generate and grow wealth. Hence NRIs invest in mutual funds for reaping maximum benefit from the Indian economy. However, investments and taxes go hand in hand and therefore, it is important to understand NRI investment tax benefits in mutual funds.
The taxation of mutual funds is slightly different for domestic and NRI investors and therefore it becomes important to carry a basic understanding of the income tax provisions.
This allows you to plan your investments wisely. Further, the selection of the right platform for investment plays an equally important role. Koshex has been one of the leading wealth management platforms for investors investing in mutual funds in India.
With more than 5,000 funds to select from, it provides endless options that suit each investor’s needs and preferences. The registration process is quite simple and easy and once you get registered, you can choose from different investment instruments, such as Mutual Funds, Smart Deposits, Digital Gold, and Fixed Deposits. Sign up now with Koshex!
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