How can NRI investors deploy funds in mutual funds in India? Explained

Non-Resident Indians (NRIs) looking to invest in India have several options, and mutual funds remain one of the most popular avenues for building wealth.

Investing in Indian mutual funds allows NRIs to diversify their portfolio, benefit from the country’s growth story, and potentially earn attractive returns. Mutual funds offer professionally managed portfolios across equity and debt markets, simplifying investing.

However, there are certain rules and regulations that NRI investors must understand before starting their investing journey in mutual funds. Here’s a detailed guide on how NRIs can deploy their funds in mutual funds in India.

Who is an NRI?

Firstly, let's understand who accounts for an NRI in India. An NRI is an individual who is not a resident of India for tax purposes. Under the Income Tax Act, 1961, a key factor used to determine the NRI status is based on their physical presence in India. An individual will be treated as a Resident in India in any previous year if he/she satisfies any of the following conditions:

If he/she is in India for a period of 182 days or more during the previous year or

If he/she is in India for a period of 60 days or more during the previous year and 365 days or more for 4 years immediately preceding the previous year.

An individual who does not satisfy both conditions as mentioned above will be treated as a Non-Resident Indian.

Key requisites for investing in mutual funds: A guide for NRIs

The investment activities of NRIs in the Indian financial markets are governed by the Foreign Exchange Management Act (FEMA), along with rules issued by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

Open an NRI bank account

To invest in mutual funds, NRIs must first open a designated NRI bank account, as a regular savings account is not eligible. There are two types of accounts available, each serving different purposes:

Non-Resident Ordinary (NRO) Account: This account is used to manage income earned from India, like rent, dividends, and interest. However, only funds up to $1 million from an NRO account can be repatriated in a financial year.

Non-Resident External (NRE) Account: This account is used to hold income earned outside India and to remit it to India. There is no restriction on the investment and returns that can be repatriated. This means that NRIs can send the funds abroad freely with this account, making it a preferred choice for many.

For the purpose of investing in mutual funds, NRI investors can invest sums from any of these accounts.

Complete your KYC

All investments made by NRIs must be KYC (Know Your Customer) compliant. For NRI investors, these are the documents needed to complete the KYC:

Passport - for identity and address proof

PAN Card

Proof of NRI status such as a valid visa, work permit

Communication address in India and abroad

Cancelled cheque from your NRE/NRO account

Choosing the MFs

The next step for investors is to choose the mode of investment in mutual funds. They can invest in a mutual fund directly by visiting the fund house's website or office. Another way to invest is by using the online investment platforms that offer a hassle-free experience catered to NRIs. If you cannot manage your own investments, you can also appoint a power of attorney in India.

NRIs can invest in mutual funds either through a lump sum or via a Systematic Investment Plan (SIP). In both cases, the investment amount is debited from the investor’s chosen NRE or NRO account. They also need to select the funds they want to invest in.

FACTA Compliance

Depending on where you live, you may be required to submit a FATCA (Foreign Account Tax Compliance Act) or CRS declaration to confirm your tax residency outside India. So, if you’re an NRI — especially from the US, Canada, or other CRS-participating countries — you’ll need to provide this information to ensure your investments comply with global tax regulations.

While these requirements do not prevent NRIs from investing, they can limit the number of asset management companies (AMCs) available to them. They also involve additional documentation, and some AMCs may require the investor to be physically present in India to complete the process.

Taxation for NRI investors

The capital gains tax rates for NRIs are largely similar to those applicable to residents. However, TDS is directly deducted at source on payment to NRIs.

Equity schemes

Holding period and tax treatment:

Short-Term Capital Gains (STCG) Tax: If equity mutual fund units are sold within 12 months, the gains are treated as short-term capital gains and are taxed at 20%.

Long-Term Capital Gains (LTCG) Tax: If the units are held for more than 12 months, the gains are treated as long-term capital gains. LTCG is taxed at 12.5% on gains exceeding ₹1.25 lakh per financial year.

Debt schemes

For debt mutual funds purchased on or after April 1, 2023, all capital gains, regardless of the holding period, are added to the investor’s total income and taxed at the applicable income tax slab rate.

TDS for NRIs on Mutual Funds

For NRIs, tax is deducted at source (TDS) on capital gains from mutual funds before the money is credited to their NRE or NRO account. If excess tax is deducted, you can claim a refund by filing your income tax return in India.

Keep in mind, TDS is not the final tax—it’s just an advance. Your actual tax liability is calculated when you file your return.

How DTAA Helps

If you’re worried about paying tax twice—once in India and again in your country of residence, you need not worry. India has Double Taxation Avoidance Agreements (DTAA) with many countries to prevent this.

By submitting a Tax Residency Certificate (TRC), you can: