An NRI can earn handsomely from investing in mutual funds in India. There is no restriction on the amount they can put in.
The average return for a high-quality debt fund in India is between 7-9% per annum, an unheard-of return from low-risk security (until the end of the quarter in December 2020).
For those with higher-risk appetites, equity funds offer returns of 16-22% yearly (until the end of the quarter in December 2020).
This makes investment in India highly profitable for interested NRIs.
Many NRIs do not wish to go down the property investment route because it requires repeated travel to India to buy, maintain, and sell the property. The lack of required travel adds to the appeal of mutual funds in India as an investment opportunity for NRIs.
However, there are certain caveats that NRIs have to be aware of before investing in India-based mutual funds.
Factors to Keep in Mind While Investing in Indian Mutual Funds
U.S.-based NRIs must comply with the Foreign Account Tax Compliance Act (FATCA). This is a self-declaration form allowing U.S. authorities to trace offshore investments by short- and long-term U.S. residents. The downside is that it requires mutual funds to share information with U.S. authorities. This is seen as a hindrance, and few top-notch mutual funds refuse investments that require FATCA compliance. However, a large number of funds such as UTI and L&T do not have any problems.
The income from mutual funds is subject to capital gains tax in India. If the holding period is less than a year, then it is STCG, and in case of above a year, LTCG applies.
Any income accruing in India, such as MF dividends, are fully taxable in India. India has a double-taxation avoidance agreement (DTAA) with several countries including the U.S., UAE, UK, Canada, Australia, Singapore, and Saudi Arabia. If tax is paid in India, it will not be taxed again if India has DTAA with that country. It may be possible that you fall into a higher tax rate bracket in the country in which you reside (non-India). In such case, you will need to pay the difference of the tax liability in your home country.
Any redemption is in Indian rupees.
How to Invest in Indian Mutual Funds?
- The first step is the same as any other investment in India. The NRI cannot invest directly from a foreign bank account but has to have an NRE or NRO bank account in India. Every reputed public and private sector bank in India offers this facility. Of course, the KYC norms require a copy of your passport, photograph, duration of stay in India and abroad, and last few years of tax returns/income statements filed elsewhere.
- Using the NRE/O bank account, an NRI can either buy mutual fund units directly or grant a local person power of attorney (PoA). PoA must be a verified person and cannot be a company.
- Basically, an NRI must seek to be as transparent as possible to avoid further paperwork in India and abroad.
Application of Capital Gains
Equity and balanced funds attract STCG at 15% and LTCG at 10% without any indexation. Debt funds attract STCG as per-income tax slab and LTCG at 20% with indexation.
Tax Deduction at Source will, of course, apply as per tax laws.
Note: Indexation is a method of evaluating the notional value of your asset for the year during which you are paying capital gains tax on it. Its further details are out of the scope of this article.
Benefits of Investing in India Mutual Funds
India is an emerging market that has exceptional potential. In 2019, the Nifty advanced 12% while the Sensex advanced 14.4%.
With professional management and some of the best global names in asset management services, the Indian mutual fund industry is well regulated and reliable.
- Flexibility: All four types of funds (equity, debt, balanced, and index) are available, and an NRI can tailor their investment to a unique risk profile.
- Liquidity: The open-ended funds can be sold at any time, and this makes them as liquid as a bank fixed deposit.
- Low management fee: Compared to the rest of the world, the average fund management fee in India is highly competitive, making investments cheap to maintain.
- Gain from rupee devaluation: When the rupee falls, the dollar buys more in India. The depreciation of the rupee in the past few years has provided an extra boost to NRIs since they can buy more stocks with the same dollar investment.
- Courteous service: Last but not least, customer service is definitely a factor. $250,000 is a typical corpus in the U.S. or UAE, but the same customer would be considered a high net worth individual in India. Every grievance would be fast-tracked to upper levels of management and resolved immediately. Prompt service and status as a prestigious, exclusive, high-net-worth investor does matter.
