Things NRI Should Keep In Mind Before Investing In India

If you are a Non-Resident Indian (NRI) wanting to invest in India, you have a wide range of options.
Things NRI Should Keep In Mind Before Investing In India
3 min
25-June-2024

Yes, indeed Non-Resident Indians (NRIs) can invest in mutual funds through various means in India, enjoying almost the same level of accessibility as resident Indians. The Indian mutual funds market offers numerous opportunities for NRIs to diversify their investment portfolios and partake in India's economic growth.

Before you can begin investing in India, you must complete KYC formalities. This includes submitting passport-sized photographs, self-attested copies of your passport (relevant pages as specified by the fund house), address proof, and birth certificate.

Essential banking requirements for NRIs

For conducting mutual fund investments, NRIs need to transact in Indian Rupees (INR). This necessitates having an Indian bank account, specifically:

  • Non-resident external (NRE) account: Allows fund flow from abroad and facilitates repatriation of the principal and returns.
  • Non-resident ordinary (NRO) account: Suitable for managing income earned in India, but only the returns are freely repatriable, not the principal amount.

Many NRIs already have these accounts, setting the stage for their investment journey in India.

Investment prerequisites for NRIs investing in India

Mutual fund investment by NRIs requires NRIs to be KYC (Know Your Customer) compliant, involving:

  • Self-attested photocopies of valid documents for identity, address, and other relevant details.
  • An in-person verification to finalise the KYC process.

Tax implications for NRIs

The income from mutual fund investments by NRIs is subject to Indian tax laws, with specifics depending on the type of gains:

  • Short-term gains: Equity funds are taxed at 15% if sold within a year. For debt funds, the tax rate aligns with the investor's income tax slab if sold before three years.
  • Long-term gains: Equity funds enjoy tax exemption if held for over a year. Debt funds benefit from a 20% tax rate with indexation if sold after three years.

Additionally, tax liabilities in the resident country are subject to its laws and the Double Tax Avoidance Agreement (DTAA) India has with 88 countries, including the USA and Canada, to prevent double taxation.

Why NRIs should consider investing in India?

India's robust economic growth prospects, as forecasted by the IMF and World Bank, along with being a prime recipient of foreign direct investment (FDI), make it an attractive investment destination. Despite global economic challenges, India stands out as a beacon of growth, compelling NRIs to explore investment opportunities in mutual funds. Additionally, NRIs have the opportunity to explore the diverse range of mutual funds available, including those suitable for SIP (Systematic Investment Plan) investments, on the Bajaj Finserv Mutual Fund Platform.

Process for NRI investment in mutual funds

1. Account setup for NRIs: understanding the essentials

  • NRIs cannot invest in Indian mutual funds using foreign currency due to regulations by the Foreign Exchange Management Act (FEMA).
  • It is mandatory for NRIs to differentiate between NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts, understanding which type best suits their investment needs.
  • After setting up the appropriate bank account, NRIs have two primary methods for investing in mutual funds:
    • Directly: Where the NRI invests on their own behalf.
    • Via Power of Attorney (PoA): A trusted representative can manage investments on behalf of the NRI. Both the NRI and the PoA holder must have their signatures on the KYC documents.

2. Completing KYC for investment

  • NRIs must undergo the KYC (Know Your Customer) process prior to investing in Indian mutual funds.

Required documents include:

  • Passport copies showcasing the investor's name, date of birth, photograph, and address.
  • Proof of current residence, whether it is a temporary or permanent address in the country of residence.
  • In-person verification may be required by some mutual fund houses.

Due to stringent compliance with the Foreign Account Tax Compliance Act (FATCA), mutual fund houses in India may restrict investments from NRIs based in the USA and Canada. However, some fund houses do accommodate these investors under specific conditions.

High-return mutual fund categories for smart investing

Equity Mutual Funds

Hybrid Mutual Funds

Debt Mutual Funds

Tax Saving Mutual Funds

NFO Mutual Funds

Multi Cap Mutual Funds

 

Special considerations for NRIs from the USA/Canada

NRIs from these regions face certain restrictions, with some mutual fund schemes requiring physical presence in India for investments. However, select mutual fund houses offer online investment options to circumvent this limitation.

Sector and instrument restrictions

NRIs must navigate specific restrictions in the Indian stock market, including:

  • Sector restrictions: Certain sectors are off-limits for NRI investments as per RBI guidelines, with significant penalties for non-compliance.
  • Instrument restrictions: NRIs are barred from investing in currency derivatives and commodities, among others.
  • Intraday trading: This is not permissible for NRIs, though short-term investments following share delivery are allowed.
  • Investment caps: NRIs cannot exceed 10% of the paid-up value of shares in a company and are limited to 5% of the paid-up value of shares available to all NRIs.

Repatriation rules

While dividends and interest can be repatriated, the principal amount often has restrictions. IPO investments are an exception, allowing full repatriation under certain conditions.

Conclusion

Investing in India offers NRIs a chance to participate in a rapidly growing economy, with mutual funds serving as a viable vehicle for such investments. You can also compare the mutual fund options in India and choose a scheme that aligns with your risk tolerance levels as well as your financial goals. While the process mirrors that for resident investors, NRIs must adhere to specific regulations and tax implications. Make sure to place your investments with reputable Asset Management Companies (AMCs). Considering the complexities, particularly for those from the USA and Canada, seeking advice from a financial advisor could be prudent to navigate the regulatory landscape and optimise investment strategies within the permissible boundaries. For NRIs looking to diversify their investment portfolio, the Bajaj Finserv Mutual Fund Platform offers an extensive selection, with 1000+ mutual funds listed, making it a comprehensive solution for accessing the Indian mutual fund market.

Essential tools for mutual fund investors

Mutual Fund Calculator SIP Calculator Lumpsum Calculator Step Up SIP Calculator
SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator ABSL SIP Calculator
Tata SIP Calculator BOI SIP Calculator Motilal Oswal Mutual Fund SIP Calculator Kotak Bank SIP Calculator

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.