How can an NRI invest in mutual fund scheme?

What is the method for investing in Indian equity funds for NRIs? Which bank account can NRIs use for investing in equity mutual funds? What is the tax liability of NRI while redeeming equity mutual fund units?
- Sadu Venkat Reddy

An NRI investor will need to update the KYC (Know your Client) details after the change in residential status and submit the relevant documents before investing in MFs. NRIs can invest in mutual funds on two modes: repatriable basis or non repatriable basis. To invest on a repatriable basis you must have an NRE account with a bank in India. In this case the investment amount should be remitted from the NRE account of the NRI investor.

In case you seek the non-repatriable basis, NRIs are allowed to use the NRO account.

Please note that in mutual funds in India, investment cannot be made in foreign currency.

The taxation of mutual funds remains more or less similar for NRIs as for resident Indians except that NRI withdrawals are subject to tax deducted at source (TDS). If you withdraw from your MF within a year you have to pay a TDS at the rate of 30% if it's a debt fund or a gold fund and 15% for equity-oriented schemes.

Equity MFs are treated as capital assets and attract capital gains tax in India. If held for more than 12 months long term capital gains tax is nil for equity funds. For periods less than that short term capital gains tax is applicable at 15.45% (15% base rate and 3% cess).
Long-term capital gains tax on debt funds is 10.30% (10% base rate and 3% cess) without indexation benefits or 20.6% (20% base rate and 3% cess) with indexation benefits.

Short-term capital gains tax on debt funds is as per your tax bracket.

Redemption proceeds (after deduction of taxes) are paid by cheque. Some companies also offer direct credit of redemption proceeds to the NRE/NRO account. If investments are made on non-repatriable basis, redemption proceeds shall be credited to NRO account.

This article was originally published on June 21, 2016.