At the outset, one needs to be clear that there is no difference between NRIs from US/Canada investing in India and for NRIs from other countries investing in India. The only difference is the fairly elaborate compliance requirements under FATCA or Foreign Account Tax Compliance Act. Fund houses stopped taking investments from the USA and Canada because of the complexity associated with the compliance.
Under FATCA, it is mandatory for all investment intermediaries to share details of transactions involving US / Canadian citizens, including NRIs with the US Government. FATCA is intended to ensure that there is no deliberate tax evasion by US residents on income generated overseas. Some of the large mutual funds have already started accepting investments from US and Canada based NRIs, with caveats. While some AMCs insist on additional documentation and safe harbor provisions, there are others that bar US and Canada based NRIs from investing in closed-ended funds. But once these compliance issues are sorted out, US-based NRIs can invest in India like any other NRI based anywhere in the world. Why and How?
Having said all this, MF investments to US and Canada based clients are restricted to the below given 8 funds and they cannot invest in others.
- Birla Sun Life Mutual Fund
- SBI Mutual Fund
- UTI Mutual Fund
- ICICI Prudential Mutual Fund
- DHFL Pramerica Mutual Fund
- PPFAS Mutual Fund
- Sundaram Mutual Fund
- L&T Mutual Fund
- Reliance Mutual Fund
Why the lure of mutual funds for NRIs?
Traditionally, NRIs preferred bank deposits and real estate in India. Recently, NRIs have started investing aggressively in Indian mutual funds. Let us understand the process flow of how NRIs can invest in mutual funds in India? Are there specific mutual funds for NRIs to invest in or can they invest in funds of any AMC? In the last few years, interest rates have been coming down and the currency risk is also not as pronounced as it was in the past. This is impelled many NRIs to look at Indian equities more serious, albeit through the mutual fund’s route.
Repatriable versus Non-Repatriable Mutual Fund investments
NRIs, being based abroad, need to comply with the guidelines of the Foreign Exchange Management Act (FEMA) before investing in mutual funds. The first thing that NRIs need to do before investing in Indian mutual funds is to complete the Know Your Client (KYC) process for investing in India. KYC is the same as for resident Indians, but a little more stringent and comprehensive considering that detailed PMLA guidelines in place. The PMLA guidelines are for the prevention of money laundering and round-tripping of funds.
The NRI can invest on a Repatriable basis or on a non-Repatriable basis. One can invest on repatriation basis into Indian mutual funds with an NRE (Non-Resident External) account or an FCNR (Foreign Currency Non-Resident) account. In case, the NRI wants to invest on a non-repatriation basis, then the NRI can also use the NRO (Non-Resident Ordinary) account which is a rupee account that can be used for rupee payments. Investments in MFs made from the NRO account cannot be repatriated.Investments and redemptions in Indian mutual funds by NRIs
While submitting the application after completion of the KYC, the details of the Indian bank account must also be mentioned in detail in the application form. Mutual fund will not accept any foreign currency cheque and any cheque or draft must be payable in Indian rupees only. NRIs can transfer funds through a dollar cheque through their Authorized Dealers (bank) and get a rupee draft issued. NRIs can invest in mutual funds directly or through power of attorney (POA). When the NRI executes a POA the accountability for the transaction and the compliance still vests with the NRI!
The rules of capital gains will apply in the event of redemption of mutual funds like the way it applies to resident Indians. Redemption credit will be predicated on whether the investment was done on the Repatriable basis or non-Repatriable basis. The flow of funds into the mutual fund and the flow out have to follow the same route. If you have invested from an NRO account, then the redemption will only be credited into the favor of that particular NRO account. Investments by debit to FCNR or NRE account will also be credited to the same account. However, in case of NRI / FCNR investments, the NRI can opt for redemption into NRO account.
Capital gains calculations will be the same as in the case of resident Indians
In case of equity funds, short-term capital gains (up to 1 year) will be taxed at 15.45% (15% + cess). LTCG will be taxed at 10% flat above Rs.1 lakh of capital gains in the year. No indexation benefit will be available in this case. For debt funds, the STCG (up to 3 years) will be taxed at the peak rate applicable to the NRI. I LTCG on debt funds will be taxed at 20.6% after considering the benefit of indexation.
There is one area where the treatment of capital gains will be different compared to resident Indians and that is with respect to tax deduction at source (TDS). If the capital gains or dividends paid to the NRI are taxable, then the fund will deduct the TDS and only pay the net amount to the NRI. Specific TDS rates have been clearly elaborated in the Income Tax Act.
To sum it up, US / Canada based NRIs can invest in Indian mutual funds like any other NRI. However, the compliance requirements are a lot more stringent under FATCA. Mutual funds offer a good source for NRIs to diversify their overall global portfolio risk. It will also enable them to create wealth in India for their long-term requirements, in case they plan to return.
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