Behind the barrier: Understanding the regulations impacting mutual fund investments for NRIs

To invest in the Indian MF market, NRIs need to open an NRO or NRE bank account with an Indian bank.

Many Indians move abroad in the hope of securing a better future for their families back home. Harbouring the dream of ensuring the financial well-being of their loved ones, making investments in India proves to be a smart option for them. With a plethora of investment options ranging from equities and mutual funds (MFs) to fixed deposits (FDs) and debt funds, the investment landscape in India holds immense promise.

As one of the emerging economies in the world, the Government of India has allowed non-resident Indians (NRIs) to invest in MFs in conjunction with the Securities and Exchange Board of India's (SEBI) rules of the Foreign Exchange Management Act (FEMA), ensuring that the investment process is transparent. However, it is important to note that certain asset management companies (AMCs) don’t accept MF applications from NRIs based in Canada and the US.

Decoding the MF investment process in India for NRIs 

To invest in the Indian MF market, NRIs need to open an NRO or NRE bank account with an Indian bank. Since AMCs are not allowed to accept investments in foreign currencies, NRI investments are made in Indian rupees, easing the entire investment and return process.

To enter the Indian mutual fund market, NRIs can proceed in two different ways. In the direct procedure, they can initiate the process on their own by submitting their application with the required know-your-customer (KYC) details indicating whether the investment is on a repatriable or non-repatriable basis. In case the bank requires in-person verification, they need to comply by visiting the Indian embassy in their resident country with the required documents.

The other mode is where the NRI can give a Power of Attorney (PoA) to a person to make investment decisions and invest on his/her behalf. However, the signatures of both the NRI investor and the PoA holder must be affixed to the KYC documents for investing in MFs in India.

Also read: Confused about which mutual funds to invest in? Check out MC30

Beyond the Barrier: MF regulations for NRIs

KYC compliance: Every NRI desiring to invest in MFs in India must clear the KYC process. The process involves submitting several documents: an attested copy of a passport, a PAN card, a recent photo, a bank statement, and address proof. It is mandatory to provide current residential proof, whether it's temporary or permanent.

FEMA declaration: When making foreign transactions, it's compulsory to abide by the country’s regulations. As a requisite, NRIs must provide a declaration in conjunction with the guidelines of the FEMA to certify that the investment funds comply with all Indian regulations.

Foreign Inward Remittance Certificate (FIRC): NRIs need to make payments for MF investments via cheque or demand draft. Also, an FIRC must be attached to confirm the source of funds. In the absence of a certificate, a letter from the bank is acceptable.

Redemption steps: Upon maturity of an MF investment or voluntary exit, the AMC will credit the corpus directly to the NRE/NRO bank account after deducting applicable taxes, if any. However, if the NRI opts for a non-repatriable investment, then the proceeds can only be credited to an NRO account.

Also read: Explained: Why NRIs must either close or convert their Indian bank accounts

Tax implications: Many NRI investors worry that they will have to pay double tax when they invest in India. Well, that is certainly not true if India has signed the Double Taxation Avoidance Treaty (DTAA) with the country of your residence.

Foreign Account Tax Compliance Act (FATCA): The Act, effective from January 2016, makes it mandatory for all Indian and NRI investors, both existing and new, to file a FATCA self-declaration for FDs, MFs, and more. The specific inclusion that applies to NRIs based in the US for US tax purposes is valid even after they move to India and holding Indian residency status.

Bottomline  

For NRIs, the opportunity to invest in the Indian MF space holds immense potential, being both lucrative and feasible. By staying informed and well-versed in the investment regulations, NRIs can seamlessly navigate through the MF landscape of India without any hurdles and secure their financial future in their home country.