Problems NRIs Face When Investing In Equity Funds In India

Are you an NRI looking to put money in the Indian stock market? Do you want to invest in a vibrant economy and reap the benefits? You may consider investing cost-effectively through equity funds. However, not all mutual funds accept NRI investments. For example, you have some AMCs who don’t accept mutual fund applications from NRIs in the USA and Canada. Let’s take a look at the problems NRIs face when investing in equity funds in India. 

What is an NRI

NRI can be classified as any Indian citizen who is not a resident in India. We will first have to determine the residential status as per the income tax act as follows. A person is considered as a resident who has stayed in India for a period of:

• More than 182 days in a particular financial year or
• More than 60 days in a particular financial year and 365 days in the last four preceding years subject to other conditions.

If the above conditions are not met, the individual will be classified as ‘Non-Resident Indian’.

You will have to open either a Non-Resident Ordinary (NRO), Non-Resident External (NRE) or a Foreign Currency Non-Resident (FCNR) Account with an Indian bank to put money in equity funds. NRIs cannot have a regular savings bank account under the Foreign Exchange Management Act (FEMA). 

You must note that mutual funds in India don’t accept foreign currency for mutual fund investments. You could open an NRE account if you seek to repatriate your earnings from equity funds to your country of residence. However, you cannot repatriate the money in your NRO account. 

Problems NRIs face when investing in equity funds in India

You may consider investing in equity funds in India if you are an NRI. However, you have some mutual fund houses refusing to accept NRI investments based in Canada and the USA. It could be due to the paperwork involved for compliance under the Foreign Account Tax Compliance Act (FATCA). 

Moreover, AMCs allow you to transact in equity mutual funds only through the offline channel. You will have to attach the FIRC (Foreign Inward Remittance Certificate) to show the funds source when you invest in equity funds through a cheque or a demand draft. You may find the offline mode uncomfortable if you often transact digitally while investing your money. 

You may find the KYC (Know Your Customer) quite a hurdle if you are an NRI looking to put money in India’s equity funds. You must submit certified copies of your PAN Card and passport, proof showing residence outside India, bank statements and even a recent passport-size photograph. 

You will have to visit the Indian embassy in the country where you reside for in-person verification (IPV). For example, you must visit the Indian embassy in the United Kingdom for IPV if you are an NRI who lives in the UK. 

You will find NRIs having different tax rules when redeeming equity mutual funds in India compared to resident Indians. You have NRIs subject to tax deducted at source (TDS) at the highest applicable tax rate when redeeming equity funds in the country. It is tax deducted at source on STCG (Short-Term Capital Gains) at 15% if you redeem equity and equity-oriented investments within one year. Moreover, you have TDS on LTCG (Long-Term Capital Gains) at 10% without indexation if you exit equity and equity-oriented investments after one year.

Moreover, tax on investments by NRIs could result in double taxation where you pay income tax twice on the same source of income. You can invest in India’s equity funds easily if the country where you reside as an NRI has a DTAA (Double Tax Avoidance Treaty) with India. It is a tax treaty between countries that helps you avoid paying tax twice on the same income source. You can easily claim relief for the TDS, which you have already paid in India. 

You may consider putting money in equity funds in India if you are an NRI. It helps you participate in an economy that is fast rising to be one of the best in the world. Moreover, any inconvenience you face when investing for the first time in the Indian stock markets is made up through the investment returns. In a nutshell, NRIs may invest in India’s equity funds if they are looking for an attractive investment. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in