Who is NRI?
A Non-Resident Indian is a citizen of India (holding a valid passport of
Govt. of India) temporarily residing in the country of his/her present residence. He/she should not have applied or planning to apply in the near future for acquiring citizenship of his/her present country of residence or any other country.
Can NRIs invest in Mutual Funds in India?
Investments by NRIs in Mutual Funds can be made on a repatriable or on a non-repatriable basis, as preferred by the investor.
Repatriable Basis
To invest on a repatriable basis, you must have an NRE or FCNR Bank Account in India. The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on repatriation basis, subject to the following conditions:
- The mutual fund should comply with the terms and conditions stipulated by SEBI.
- The amount representing investment should be received by inward remittance through normal banking channels, or by debit to an NRE/FCNR account of the non-resident investor.
- The net amount representing the dividend / interest and maturity proceeds of units may be remitted through normal banking channels or credited to NRE / FCNR account of the investor, as desired by him subject to payment of applicable tax.
Non-Repatriable Basis
The Reserve Bank of India (RBI) has granted a general permission to Mutual
Funds to offer mutual fund schemes on non-repatriation basis, subject to
the following conditions:
- Funds for investment should be provided by debit to NRO account of the NRI investor. Alternatively, funds may be invested by inward remittance or by debit to NRE / FCNR Account.
- The current income in the form of dividends is allowed to be repatriated. No permission of Reserve Bank either by the Mutual Fund or the NRI investor is necessary.
Does an NRI need any approvals from the Reserve Bank of India to invest in mutual fund schemes?
No. As an NRI one does not need any specific approval from the RBI for investing or redeeming from Mutual Funds. Only OCBs and
Can NRI individuals make investments in domestic public/private sector Mutual Funds or Money Market Mutual Funds floated by commercial banks and public/private sector financial institution on non/repatriation basis?
Yes.
What are the investment restrictions on NRIs for investments in Mutual funds?
There are no investment restrictions on NRIs for investing in mutual funds. RBI does not restrict investment in mutual funds either on repatriable or non-repatriable basis.
Do Mutual Funds assure returns ?
Although SEBI regulations allow Mutual Funds to offer guaranteed returns subject to the Fund meeting certain conditions, most Mutual Funds in India do no provide a guaranteed return on their schemes. In such cases, the sponsor, the AMC, or any other person, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum. The name of the guarantor and the manner in which the guarantee shall be met must be disclosed in the offer document by the Mutual Fund. Investment in mutual funds is not guaranteed by the Government of India, the Reserve Bank of India or any other government body.
Can I gift Mutual Fund units to my relatives in India?
Yes. Certain funds do permit gifting of units. One should refer to the offer document of the specific fund to know the details.
Can I repatriate my earnings on redemption?
If the investment is made on a repatriation basis, the net income or capital gains (after tax) arising out of investment are eligible for repatriation subject to regulatory guidelines in force at the time of repatriation. If the investment is made on a non-repatriation basis, only the net income, that is, dividend, arising out of investment is eligible for repatriation.
Can I repatriate my initial investment, earnings (capital gains) from redemption and any dividend arising from it?
If the investment is made on a repatriation basis, the net income or capital gains (after tax) arising out of investment is eligible for repatriation subject to regulatory guidelines in force at the time of the repatriation. If the investment is made on a non-repatriation basis, only the net income, that is, dividend, arising out of investment is eligible for repatriation.
Is there any ceiling on NRI investments in mutual fund schemes?
There are no ceilings on investments in mutual fund schemes by NRIs.
What is the procedure for redeeming mutual fund units?
NRIs can redeem their units by signing on the tear-off portion of the account statement & sending it to any of the AMC or your personal MF investment advisor through post or by sending a letter requesting redemption with the signatures and the amount to be redeemed. The redemption request would be processed at the applicable NAV based price. The redemption proceeds will be sent directly to the bank branch where NRE/NRO account depending upon whether repatriable or non-repatriable account within three business days. The redemption proceeds will be net of tax deduction at source on the profits.
What is the tax liability on receipt of Income on Mutual Fund Units?
As per Section 10(33) of the Income Tax Act, 1961 (‘Act’) income received in respect of units of a mutual fund specified under Section 10(23D) is exempt from income tax in India and the mutual funds are subject to pay distribution tax in debt-oriented schemes. Hence all dividends are tax-free in the hands of non-resident investors and no TDS is applicable on the same.
What is the tax liability on Redemptions? What is the rate of Tax Deduction at Source for NRIs / PIOs? What is the tax - rate on capital gains for NRIs / PIOs?
Under Section 2(42A) of the Income Tax Act, units of the Scheme held as a capital asset, for a period of More than twelve months immediately preceding the date of transfer, will be treated as a long term capital asset for the computation of capital gains – thus attracting long term capital gains tax rate. In all other cases it would be treated as a short-term capital asset and would attract short-term capital gains tax rate. Hence depending on the period of investments, long term or short capital gains and tax thereon is applicable on redemption’s. Though there is currently no long-term capital gain tax liability for redemptions from equity schemes, there is a liability at the time of redeeming from the debt schemes.
Tax Rates and TDS Rates to NRI’s / PIO’s / FII’s?
I. Income from Units of a mutual fund specified under section 10(23D) of the Income-tax Act, 1961 (the Act) is exempt in the hands of unit holders under section 10(35) of the Act. No income tax is deductible under section 194K and 196A of the Act on any income distribution by the Mutual Fund.
II. Capital Gains and TDS thereon:
| | | Tax Rates* under the Act | TDS Rate* under the Act | ||||
| | | Residents | NRIs / PIOs | FIIs | Residents | NRIs / PIOs / other Non | FIIs |
| Short Term Capital Gain | Units of a non equity oriented fund | Taxable at normal rates of tax applicable to the assessee | 30% without indexation benefit | NIL | 30% for non residents non corporate, | NIL
| |
| units of an equity oriented fund | 10% on redemption of units where STT is payable on redemption (u/s 111A) | | | Nil | |||
| Long Term Capital Gain ** | units of a non equity oriented fund | 10% without indexation, or 20% with indexation, whichever is lower | 10% with no indexation benefit | NIL | 20% for non residents (u/s 195) | NIL | |
| units of an equity oriented fund | Exempt in case of redemption of units where | | Nil | Nil | |||
*Plus surcharge as applicable: corporate, co-operative societies, firms and local authorities: 10% ; Individuals/HUFs/BOIs/AOPs, with total income exceeding Rs.10,00,000 : 10%; Artificial juridical person: 10%.
** Capital Gains on redemption of units held for a period of more than 12 months
from the date of allotment.
*** As per section 111A of the Act, effective from 1/10/2004 short-term capital
gains on equity oriented fund is chargeable to tax at a Lower rate of 10 percent.
•Long Term Capital Gains arising from redemption of unit of a non equity oriented fund are exempt from tax, if gains are invested in specified bonds within 6 months from the date of redemption, under Section 54EC of the Act or if gains are invested in eligible equity issues within 6 months from the date of redemption, under Section 54ED of the Act.
•In order for the unit holder to obtain the benefit of a lower rate under the DTAA, an eligibility certificate from unit holder’s Assessing Officer should be provided to the Fund.
Is the indexation benefit available to NRIs?
Yes, in case units are held for more than twelve months i.e. on long-term
capital gains.
Can an NRI gift the units of MFs to resident Indians?
An NRI may gift the units to any investor Indian or an NRI. Units gifted by
any person would not be liable to any gift tax since the units held under the
schemes are also not subject to provisions on the Gift Tax act, 1958.
Are units of MFs chargeable in Wealth Tax?
No. Units issued to investors (including NRIs) etc. will not be treated as assets as defined under section 2(ea) of the Wealth-Tax Act, 1957 and hence will not be liable to wealth-tax.
Is Securities Transaction Tax applicable to NRI investors?
Yes.
Is there any Tax liability on switching from one option to the other?
Yes. On switching from the Growth option to the Dividend option, the investor is liable to TDS at the applicable tax rate.
FAQs Related to Bank Accounts for NRI
Q: What types of bank accounts can be opened by NRIs/OCBs in India?
NRIs/OCBs can open the following types of accounts with banks in India, which hold authorised dealer licences, as also other banks, specifically authorised by the Reserve Bank to maintain accounts in the names of NRIs/OCBs.
Rupee Accounts:-
- Non-Resident (Ordinary) Account - NRO A/c.
- Non-Resident (External) Rupee Account - NRE A/c.
Foreign Currency Accounts:-
- Non-Resident (Foreign Currency) Account - FCNR A/c.
(in Pounds, Sterling, US Dollars, Japanese Yen and Euro).
A person, resident in India, who is earning foreign exchange, is also permitted to maintain a Foreign Currency account in India with an authorised dealer bank, to the extent of 50% of such foreign exchange earnings, under the Exchange Earners Foreign Currency Account (EEFC) Scheme.
Q: What are the special features of each account?
The special features are as under:
NRO A/c.: The funds, standing to the credit of this account, cannot be repatriated outside India in foreign exchange, without prior permission of the Reserve Bank of India. Interest, earned on these accounts, is, however, eligible for repatriation outside India, net of Indian taxes. The remittance of interest (net of taxes) will be permitted by the authorised dealer, where the account is maintained, if the account holder makes an application to the authorised dealer, in the prescribed form. No RBI permission is required for remittance of interest.
NRE A/c.: The funds, standing to the credit of this account, as well as interest earned thereon, are remittable outside India in free foreign exchange, without permission of the RBI. The interest income is not subject to Indian Income-tax. Credits to the accounts should be in the form of remittance in foreign exchange from outside India, as well as other funds, which are eligible to be remitted outside India, in free foreign exchange. Funds, emanating from local sources, are not eligible to be credited to these accounts, unless these funds are otherwise remittable outside India, in terms of the existing Exchange Control Regulations.
FCNR A/c.: These accounts can be opened in four foreign currencies:
- Pounds Sterling;
- US Dollars;
- Japanese Yen;
- Euro.
For the purpose of opening an account, remittance in foreign exchange, in the same currency, should be received in India. The accounts can be opened only as fixed deposits, with a minimum maturity of one year and, a maximum maturity of three years. The principal, as well as interest, earned on these accounts, is remittable outside India, in the same currency or, in other convertible currency, as desired by the account holder. The interest, earned on these deposits, is exempt from Indian Income-tax.
Q: Can Non Resident accounts be opened/ operated by the Power of Attorney holder in India, on behalf of the non-resident?
The accounts cannot be opened by the Power of Attorney holder in India. However, the latter can operate the accounts for the purpose of local payments to be made on behalf of the non-resident account holder. The Power of Attorney holder is not permitted to make gifts from these accounts and, is not allowed to make remittances outside India.
Q: What happens to the status of these accounts when the non-resident holder becomes a person, resident in India?
The accounts are to be re-designed as resident accounts, when the non-resident account holder becomes a person, resident in India. In the case of fixed deposits opened by the account holder, before becoming resident in India, the contracted rate of interest will be paid till maturity of the deposits. Similarly, FCNR deposits will be eligible to be held in respective currencies till maturity of the deposits, even after the non-resident holder become a resident in India. He will, however, cease to get tax exemption on interest on the erstwhile deposits (NRE/FCNR deposits), after he becomes resident in India. In certain situations, it might be advisable for the account holder to convert the account to a Resident Foreign Currency Account Deposit (RFC)
Q: What are the various facilities available to NRIs/OCBs?
The facilities available to NRIs/OCBs for making investment in India are as follows:
- opening and maintenance of bank accounts in India;
- investment in shares and securities of Indian companies, government securities, units of domestic mutual funds and ,deposits with Indian companies/firms;
- investment in immovable properties in India;
- investment in proprietorship/partnership concerns in India.
Q: Are NRIs permitted to send remittances outside India out of the assets in India that are inherited by them?
Yes. RBI will consider application from NRIs for remittance of assets, inherited by them in India. Such remittance may be permitted up to US$ 100,000 per year.
Q: Can a person of Indian origin acquire any immovable property in India by way of inheritance?
A person of Indian origin, resident outside India, may acquire any immovable property in India by way of inheritance from a person, resident outside India, who had acquired such property in accordance with the provisions of foreign exchange law in force at the time of acquisition by him or the provisions of Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000. Immovable property, by way of inheritance, can also be acquired by a person of Indian origin resident outside from a person resident in India.
Q: Can NRIs and Overseas Corporate Bodies (OCBs) invest in India?
The Government of India has adopted a liberal policy, with respect to investments by NRIs and OCBs in India. Such investments are allowed, both, through the RBI route and also through the Government route, i.e., through the Foreign Investment Promotion Board (FIPB) NRIs and OCBs are permitted to invest up to 100% equity in real estate development activity and civil aviation sectors. Investment, made by the NRIs and OCBs, are fully repatriable, except in the case of real estate, which has a 3 year lock-in period on original investment and, 16% cap on dividend repatriation.
For those proposals that do not qualify under the automatic route, Government approval is granted through FIPB.
Q: What is the extent and application of Foreign Exchange Management Act (FEMA)?
FEMA extends to the whole of India. It also applies to all branches, offices and agencies outside India, owned or controlled by a person, resident in India. It also applies to any contravention, there under, committed in or, outside India, by any person to whom the Act applies.
Q: What is the penalty for contravention of FEMA?
Any person, contravening FEMA, shall be liable, upon adjudication, to a penalty up to three times the sum involved in such contravention, where such amount is quantifiable, or up to Rupees Two hundred thousand, where the amount is not quantifiable. In addition, where such contravention is a continuing one, the person will be liable to further penalty, which may extend to Rupees Five thousand for every day after the first day, during which the contravention continues.
Q: Can a person of Indian origin resident outside India gift properties acquired earlier in terms of the provisions of FERA/FEMA?
Yes. A person of Indian origin resident outside India may transfer residential or commercial property in India by way of gift to a person resident in India or to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India. A Person of Indian origin resident outside India may also transfer by way of gift agriculture land/farm house/plantation property in India to a person resident in India who is a citizen of India.
Q: Can an NRI account be opened in the name of crew members of shipping companies?
Yes. NRI accounts can be opend in the name of crew members of shipping companies if their posting is not based in India and they derive their income from abroad in foreign currency.
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