Non Resident Indians (NRI) and Persons of Indian Origin (PIO) can invest in a wide variety of Indian Mutual Funds on a full repatriation as well as non-repatriation basis.
However, NRIs are required to comply with all regulatory requirements such as completion of KYC before investing. Also, a few countries such as US and Canada have certain restrictions on investments by NRIs in Mutual Funds without relevant disclosures. Hence, NRIs from these countries must check with their advisor before investing in Indian funds.
NRIs are provided most of the benefits and conveniences of resident Indian investors while investing. They can invest through SIPs, they can switch as per their convenience, they can opt for growth or dividend options and can repatriate the redemption proceeds whenever they want to.
As an NRI, you can invest on either on a repatriation basis or a non-repatriation basis. Repatriation implies that you can transfer your investment capital, dividends and returns out of India. Non-repatriation implies the opposite, that is, your investment capital, dividends and returns cannot be transferred outside India.
You can have three kinds of bank accounts in India. You can open all these three accounts with any bank in India and the accounts can be used to make investments in India.
Non-Resident External Rupee account (NRE account): Funds from an NRE account can be repatriated abroad.
Fully Convertible Non-Resident account (FCNR account): The FCNR account involves a fixed deposit in a foreign currency. Funds from this account can be repatriated abroad. However, this account cannot be used for investing in a foreign currency.
Non-Residential Ordinary account (NRO account): Funds from an NRO account cannot be repatriated abroad.
It must be noted that income and redemption amounts can be repatriated only if you continue being an NRI at the time of repatriation. Also note that you cannot invest in foreign currency; in other words, your investments in Indian mutual funds must be made in Indian rupees.
How to Invest
One of the highlights of Investing in mutual funds is the ease at which you can invest in them. You can invest offline or online. In case you choose to invest offline, it can be done through a common application form. Along with the form, you need to submit a cheque or bank draft for the investment amount; this should be made in the name of the fund in which you are investing. You can send this directly to the mutual fund company or its registrar or have your financial advisor/mutual fund distributor submit it on your behalf.
To invest online, you fill in the form online, which is available on the mutual fund company’s website, mutual fund distributor’s website and other platforms offered by Fintech companies. However, you must do your homework before choosing one of these options.
In both cases, offline and online investing, you must have completed your Know Your Customer (KYC) and Foreign Account Tax Compliance Act (FATCA) requirements.
When you invest in a mutual fund or any other financial instrument, the manager and custodian of your investment needs to have basic information about your identity. Central Know Your Customer (CKYC) is a process through which authorized institutions obtain and maintain investors’ identity information.
To fulfil your KYC requirements, you must submit the following documents along with your CKYC application:
Proof of identity: You can submit your photo PAN card or driving license /passport copy / voter ID /bank photo pass book.
Proof of address: You can submit your latest landline/mobile telephone bill, latest electricity bill, passport copy, latest bank passbook/bank account statement, latest dematerialized (electronic, or demat) account statement, voter ID, driving license, ration card, rent agreement, Aadhar card.
Passport size colour photograph.
For NRIs, a passport and proof of an overseas address are mandatory documents for KYC compliance.
You will submit your documents to a KYC registration agency (KRA) such as CAMS, Karvy etc. In-person verification/document attestation can be accomplished by visiting an AMC branch. For NRIs, this can also be accomplished through distributors or authorized officials of overseas branches of scheduled commercial banks registered in India, a notary public, a court magistrate, a judge, or the Indian Embassy/ Consulate General in the country in which the client resides.
You must go through the KYC process only once; that is, if you plan to invest in a number of schemes across different mutual funds, you don’t need to complete the KYC process for every investment.
The FATCA law was initiated by the US and requires mutual funds to report financial transactions of US persons to the relevant tax authorities. FATCA applies to you if you are a tax resident of the US.
To comply with FATCA, you must provide information which includes country of tax residence, tax identification number from such country, country of birth and country of citizenship, among other details.
FATCA was initiated to prevent US persons from avoiding US taxation on their income and assets.
TAX REGIME SPECIFIC TO MUTUAL FUND INVESTORS IN INDIA
Applicable for the Financial Year 2022-23 subject to enactment of the Finance Bill, 2022.
I. TAX RATES FOR MUTUAL FUND INVESTORS
|EQUITY ORIENTED FUNDS (Subject to STT3)|
|Tax Status of Investor||Capital Gains Tax10||Tax on Distributed Income under IDCW@ Option||TDS on Capital Gains6,7||TDS6,7 on Income Distributed Income under IDCW@ Option|
|Short Term||Long Term|
|Resident Individual / HUF / AOP / BOI / Domestic Companies||15%||10%$12||At the applicable Tax slab rate||NIL||10%9|
|N R I s4||STCG – 15% LTCG – 10%$12||20%2|
*With indexation $Without indexation @IDCW = Income Distribution cum Capital Withdrawal
|OTHER THAN EQUITY ORIENTED FUNDS|
|Tax Status of Investor||Capital Gains Tax11||Tax on Distributed Income under IDCW@ Option||TDS on Capital Gains6,7||TDS6,7 on Income Distributed Income under IDCW@ Option|
|Short Term||Long Term|
|Resident Individual / HUF / AOP / BOI /||At the applicable Tax slab rate||20%*||At the applicable Tax slab rate||NIL||10%9|
|Domestic Companies / Firms||15%13/ 22%114/ 25%15/ 30%||STCG – 15% LTCG – 10%$12||20%2|
|N R I s4||At the applicable Tax slab rate|
|At the applicable Tax slab rate|
STCG – 30% LTCG –
*With indexation $Without indexation @IDCW = Income Distribution cum Capital Withdrawal
Tax & TDS are subject to applicable Surcharge and Health & Education Cess at the rate of 4%. Please see the Notes below
- Provided that the mutual fund units are held as capital assets.
- Tax to be deducted at source as per section 196A of the Income tax Act, 1961 (‘the Act’) [plus applicable surcharge, if any, and Health and Education Cess @ 4% on income-tax and surcharge].
- Securities Transaction Tax (‘STT’) is applicable only in respect of sale of units of Equity-oriented funds (EOFs) on a recognised stock exchange and on repurchase (redemption) of units of EOFs by the mutual fund. STT in not applicable in respect of purchase/ sale/ redemption of units of other schemes (other than EOFs).
- Non-resident individuals (NRI) shall be entitled to be governed by provisions of the applicable Tax Treaty, which India has entered with the country of residence of the NRI, if that is more beneficial than the provisions of the Act , subject to certain conditions. As per section 90(4) of the Act, a non-resident shall not be entitled to claim treaty benefits, unless the non-resident obtains a Tax Residency Certificate of being a resident of home country. Furthermore, as per section 90(5) of the Act, non-resident is also required to provide such other documents and information, as prescribed by CBDT, as applicable.
- As per section 112 of the Act, long-term capital gains in case of NRIs would be taxable @ 10% on transfer of capital assets, being unlisted securities, computed without giving effect to first and second proviso to section 48 i.e., without taking benefit of foreign currency fluctuation and indexation benefit.
- Relaxation to NRIs from deduction of tax at higher rate (except income distributed by mutual fund) in the absence of Permanent Account Number (PAN) is subject to the NRI providing specified information and documents. As per provisions of Section 206AA of the Act, if there is default on the part of a NRI (entitled to receive redemption proceeds from the Mutual Fund on which tax is deductible under Chapter XVII of the Act) to provide its PAN, the tax shall be deducted at higher of the following rates: i) rates specified in relevant provisions of the Act; or ii) rate or rates in force; or iii) rate of 20%. However, the provisions of section 206AA of the Act shall not apply, if the requirements as stated in Rule 37BC of the Income-tax Rules, 1962, are met.
- Section 206AB of the Act provides for higher rate for TDS for the non-filers of income-tax return. The TDS rate in this section is higher of the followings rates: i) twice the rate specified in the relevant provision of the Act; or ii) twice the rate or rates in force; or iii) the rate of five per cent. However, the said provision does not apply to a non-resident who does not have a permanent establishment in India.
- Surcharge Rate as a percentage of Income-tax
Surcharge Rate as a percentage of Income-tax Tax Status Income < ₹50 lakh Income > ₹50 lakh but < /= ₹1 crore Income > ₹1 crore but < /= ₹2 crore Income > ₹2 crore but < /= ₹5 crore Income > Income > ₹5 crore Individual / HUF/ AOP (resident & foreign)*** NIL 10% 15% 25% 37% Tax Status Income < /= ₹1 crore Income > ₹1 crore, but < /= ₹10 crore Income > ₹10 crore/td> – – Partnership Firm (Domestic / foreign) NIL 12% 12% – – Domestic company NIL 7% 12% – – Domestic company (opting for new tax regime) NIL 10% 10% – – Foreign company NIL 2% 5% – –
In addition, “Health and Education Cess” @ 4% shall be applicable on aggregate of base tax and surcharge.
* The surcharge rate applicable to capital gains taxable under section 112A and 111A of the Act i.e. capital gains earned on sale of units of equity oriented mutual fund (which are subject to Securities Transaction Tax) is capped to 15%. The Finance Bill, 2022 has further proposed to cap the surcharge rate on long-term capital gains taxable under section 112 of the Act to 15%.
**The Finance Bill, 2022 has proposed to rationalise the surcharge rates in the case of an association of persons consisting of only companies as its members as under —
Particulars Rate Income > ₹50 lakh but <= ₹1 crore 10% Income > ₹1 crore 15%
- There shall be no TDS deductible if IDCW income paid / credited in respect of units of a mutual fund is below ₹ 5,000 in a financial year.
- Capital gains arising on the transfer or redemption of equity-oriented units held for a period of more than 12 months, immediately preceding the date of transfer, should be regarded as ‘long-term capital gains’.
- Capital gains arising on transfer or redemption of Units of schemes other than EOF shall be regarded as long-term capital gains, if such units are held for a period of more than 36 months immediately preceding the date of such transfer.
- As per section 112A of the Act, long-term capital gains on transfer of units of EOFs exceeding ₹ 100,000 shall be taxable @10% provided transfer of such units is subject to STT, without giving effect to first and second proviso to section 48 i.e., without taking benefit of foreign currency fluctuation and indexation benefit. Further, cost of acquisition to compute long-term capital gains is to be higher of (a) Actual cost of acquisition; and (b) Lower of (i) fair market value as on 31 January 2018; and (ii) full value of consideration received upon transfer.
- The lower rate @ 15% is optional for companies engaged in manufacturing business (set-up & registered on or after 1 October 2019) subject to fulfilment of certain conditions as provided in the section 115BAB.
- If a company decides to opt for the new taxation regime as per the Taxation Law Amendment Act, 2019, then tax shall be levied at the rate of 22%. i.e., the lower rate of 22% is optional and subject to fulfilment of certain conditions as provided in section 115BAA.
- Tax shall be levied @ 25%, if the total turnover or gross receipts of the financial year does not exceed ₹ 400 crores. Further, the domestic companies are subject to minimum alternate tax (except for those who opt for lower rate of tax of 22%/15%) not specified in above tax rates.
- 16. Securities Transaction Tax (STT) in respect of Units equity-oriented mutual fund Schemes
Transaction Rates Payable by Purchase of units of equity-oriented mutual fund NIL Not Appliable Sale of units of equity-oriented mutual fund (delivery based) 0.001% Seller Sale of units of equity-oriented mutual fund (non-delivery based) 0.025% Seller Sale of units of an equity-oriented fund to the Mutual Fund 0.001% Seller
- Various Categories of MF Schemes which fall under “Other than Equity Oriented Funds”:
- Liquid Funds /Overnight Funds / Money Market Funds / Income Funds (Debt Funds) / Gilt Funds
- Hybrid Fund (Equity exposure < 65%)
- Gold ETFs / Bond ETF / Liquid ETF
- Fund of Funds (Domestic) other than Fund of funds as defined under the “Equity Oriented Fund” definition under section 112A of the Act.
- Fund of Funds Investing Overseas
- Infrastructure Debt Funds
OTHER TAX PROVISIONS
- Capital gains arising on Transfer of units upon consolidation of mutual fund schemes of two or more schemes of EOFs or two or more schemes of a Scheme other than EOF in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains tax.
- Likewise, Capital gains arising on Transfer of units upon consolidation of Plans within a mutual fund scheme in accordance with SEBI (Mutual Funds) Regulations, 1996 is exempt from capital gains tax.
- Currently, switching units of mutual fund within the same scheme from Growth Plan to IDCW Plan (erstwhile Dividend Plan) and vice-versa is subject to capital gains tax.
- Creation of segregated portfolio: SEBI has permitted creation of segregated portfolio of debt and money market instruments by mutual fund schemes in certain situations. As per the said SEBI circular, all existing unit holders in the affected mutual fund scheme as on the date of the credit event shall be allotted equal number of units in the segregated portfolio as held in the main portfolio. As per sub-sections (2AG) and (2AH) to Section 49 of the Act, cost of acquisition of a unit or units in a segregated portfolio shall be the amount which bears to the cost of acquisition of a unit or units held by the assessee in the total portfolio in the same proportion as the net asset value of the asset transferred to the segregated portfolio bears to the net asset value of the total portfolio immediately before the segregation of portfolios. Further, the cost of acquisition of the original units held by the unit holder in the main portfolio shall be reduced by the amount as so arrived for the units of segregated portfolio.
- An Equity Oriented Mutual Fund has been defined in section 112A of the Act. As per the said definition, a fund of fund scheme structure shall be treated as an Equity Oriented Fund if:
- a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and
- such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange
Thus, if a fund invests in units of other funds and fulfils the aforementioned criteria, then it shall be regarded as Equity Oriented Fund. However, if the aforementioned conditions are not fulfilled, then the same shall be regarded as other than Equity Oriented Fund and subjected to the same tax treatment as applicable to a non-equity-oriented fund.
- Bonus Stripping: As per Section 94(8), the loss due to sale of original units in the schemes, where bonus units are issued, will not be available for set off; if original units are: (A) bought within three months prior to the record date fixed for allotment of bonus units; and (B) sold within nine months after the record date fixed for allotment of bonus units. However, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such unsold bonus units held on the date of transfer of original units. The Finance Bill, 2022 has proposed to amend the provisions of the said sub-section such that it shall also be applicable to securities. Further, the definitions of the terms “unit” and “record date” are proposed to be expanded to also include the units of business trusts (i.e. Real Estate Investment Trusts [REITs]/ Infrastructure Investment Trusts [InvITs]) and units of Alternate Investment Funds in the ambit of the said section.
INCOME TAX RATES FOR INDIVIDUAL / HUF / AOP/ BOI – Existing tax rates
|Total Income||Up to ₹2,50,000(a) (b) (d)||₹2,50,001 to ₹500,000||₹5,00,001 to ₹10,00,000||₹10,00,001 and above|
- In the case of a resident individual of the age of 60 years or more but less than 80 years, the basic exemption limit is INR 300,000.
- In the case of a resident individual of the age of 80 years or more, the basic exemption limit is INR 500,000.
INCOME TAX RATES FOR INDIVIDUAL / HUF – New Tax Regimee
|Total Income||Up to ₹2,50,000(a)||₹2,50,001 to ₹500,000||₹5,00,001 to ₹7,50,000||₹7,50,001 to ₹10,00,000||₹10,00,001 to ₹12,50,000||₹12,50,001 to ₹15,00,000||₹15,00,000 & above|
- Plus, surcharge on income-tax, as applicable (Health and Education cess is applicable at the rate of 4% on income-tax and surcharge.)
- Rebate of upto ₹ 12,500 available for resident individuals whose total income does not exceed ₹ 500,000.
- Under section 115BAC, an option has been provided to pay tax at the above tax rates subject to the condition that certain exemptions/ losses/ deductions cannot be claimed. In case, the taxpayer intends to claim deductions / exemptions, the existing tax rates and slabs will continue to apply.
- Individuals having total income not exceeding ₹ 500,000 can avail rebate of lower of actual tax liability or ₹12,500.
The above information is provided for basic guidance for investments in mutual funds and is based on provisions of the Income-tax Act, 1961, as sought to be amended by the Finance Bill, 2022. The tax implications may vary for each assessee based on the details of his income. All rates and figures appearing are for illustrative purposes only. Tax benefits are subject to change in tax laws. Contents of this note have been drawn for informative purpose only and it is neither a complete disclosure of every material fact of Income-tax Act, 1961 nor does it constitute tax or legal advice. The AMC/Trustee/ Sponsor accept no liability whatsoever for any direct or consequential loss arising from any information provided in this note. Investors are advised to consult their tax advisor before taking any investment decision.