As per India's Foreign Exchange Management Act 1999 (FEMA) an NRI is an Indian citizen or Foreign National of Indian Origin resident outside India for purposes of employment, carrying on business or vocation in circumstances as would indicate an intention to stay outside India for an indefinite period. An individual will also be considered NRI if his stay in India is less than 182 days during the preceding financial year or less than 365 days in total in previous four financial years.
So if you also meet the above criteria and have some funds which you wish to invests in India you are allowed to invest in few of the avenues including real estate, NRE/ NRO deposits, mutual funds etc. While some other schemes such as the post office schemes are not open for investment by you.
Here we shall discuss how NRIs can invest in Indian mutual funds
Similar to a resident Indian, NRIs also need to be first KYC compliant to begin mutual fund investments in India and his or her investments in mutual funds are subject to FEMA regulations.
For meeting KYC requirements, NRIs need to furnish overseas address proof together with the copy of his or her passport to the fund house in India. Also, upon your visit to India, an in-person verification (IPV) is to be completed with the respective AMC, R&T agent such Karvy or CAMS or the mutual fund distributor.
Another important pre-requisite for making investments in Indian mutual funds is that you need to maintain either an NRE or NRO savings account with the bank in India as fund houses are not allowed to accept investments in foreign currency.
And you can decide on opening either NRE or NRO account based on the source of income plus your repatriation requirements. Funds from NRE account can be repatriated fully without any set limitation while the case with NRO account is not the same and it comes with some set limitations. Also the interest earned on these accounts is taxable.
Furthermore, while NRE account manages your foreign remittances or earnings, NRO account typically handles NRIs earnings in India.
Power of Attorney
NRIs are also allowed a provision to give their power of attorney (POA) to some individual based in India to invest and redeem units in mutual funds on their behalf. The POA has to be first registered with the fund house and for it the holder of POA needs to furnish the original copy or duly notarized copy, upon which the POA holder can make investments and also redeem them on behalf of an NRI investor.
US and Canada based NRIs not allowed investments in all mutual funds in India
Due to additional compliance and regulatory requirements, NRIs based out of these nations need to first check with the fund house in India if they allow investments or not. Stringent compliance requirements of Foreign Account Tax Compliance Act (FATCA) restrict US-based NRIs to invest in some of the Indian mutual funds.
Tax treatment of NRIs investments in mutual funds
The tax treatment would depend on the type of mutual fund held i.e. debt or equity and the holding period of investment. In case of debt mutual funds, short term gains accrue if the period of holding is less than three years and the tax treatment is as per the slab rate of the individual and in case the investor makes LTCG then he will have to pay 20% with indexation and 10% without indexation.
On the other hand in case of equity mutual funds, LTCG accrue if the mutual funds are held for over a year and 10% tax will apply for gains in excess of Rs. 1 lakh in a financial year. For short term capital gains on equity, a tax of 15% is levied.