NRI Investment in Mutual Funds in India

Just like resident individuals, Non-Resident Indians (NRIs) can also invest in mutual funds in India, subject to compliance with the provisions of the Foreign Exchange Management Act (FEMA).

Mutual funds give NRIs the opportunity to build a diversified portfolio of equity and debt within India. While equities provide long-term growth potential, debt funds can offer relatively higher returns compared to many developed markets, thanks to India’s interest rate environment.

Although currency fluctuations may impact returns, investing in India can be particularly beneficial when the funds are to be used domestically. Additionally, if the Indian Rupee appreciates against the foreign currency, NRIs may gain more value when converting investments back into their resident currency.

How NRIs Can Invest in Mutual Funds

The process for NRIs to invest in mutual funds is broadly similar to that of resident individuals, but with a few additional compliance requirements.

1. KYC Compliance

The first step is completing Know Your Customer (KYC) formalities. Along with the standard documents required for residents (identity proof and Indian address proof), NRIs must also provide:

• Attested copy of passport

• Overseas Citizenship of India (OCI) card (if applicable)

• Proof of overseas residence

• Other supporting documents as required

In some cases, In-Person Verification (IPV) may also be required.

2. Bank Account Requirement

Investments must be made through an NRE (Non-Resident External) account or NRO (Non-Resident Ordinary) account. Direct investment in foreign currency is not permitted.

3. Power of Attorney (POA)

If a Power of Attorney holder is investing on behalf of the NRI, both the investor and the POA holder must complete KYC formalities.

Taxation of Mutual Fund Returns for NRIs

NRIs are subject to Indian tax laws for income that accrues or is received within India. Returns from mutual funds in India are taxable in India, although relief may be available under the Double Taxation Avoidance Agreement (DTAA) between India and the investor’s country of residence.

For example, while interest on NRI deposits attracts TDS at 30%, DTAA provisions with many countries reduce this rate to 10–15%. Investors should check the applicable DTAA provisions to understand their exact tax liability.

Tax on Dividend Income

• Equity & Debt Mutual Funds: Taxed as per the investor’s income slab.

• TDS: 20% (plus surcharge & cess) deducted at source for NRIs.

• Dividend Distribution Tax (DDT): Nil (payable by mutual funds was abolished).

Capital Gains Tax

Equity-Oriented Schemes (65%+ in equity):

• Short-Term (≤ 12 months): 15% + 4% cess

• Long-Term (> 12 months): 10% + 4% cess

Other Schemes (Debt/Hybrid, etc.):

• Short-Term (≤ 36 months): Taxed at 30% (highest slab) + 4% cess

• Long-Term (> 36 months):

  • Listed funds: 20% + 4% cess (after indexation)

  • Unlisted funds: 10% + 4% cess (without indexation/forex benefit)

TDS is deducted at source on redemption/switch of units for NRIs.

Note: Tax rates mentioned are as per Finance Act 2021 and subject to change. The applicable tax will depend on the law at the time of redemption/sale.