Mutual Funds For NRIs

NRIs can now explore mutual fund investments in India with greater confidence. A favourable ITAT ruling simplifies taxation on capital gains. Using DTAA provisions, NRIs can manage taxes effectively and grow their Indian mutual fund portfolio while staying compliant. Prajwal Wakhare outlines the benefits and key compliance steps to help NRIs invest confidently in India’s growing mutual fund space 

When an NRI moves abroad, one of the key considerations is securing financial stability for themselves and their family back home. India, with its strong growth potential and the possibility of becoming the world’s third-largest economy in the near future from the current fourth, presents a compelling case for long-term investment. With expanding sectors, rising consumption, and a favourable demographic profile, investing in India can align well with the financial goals of NRIs seeking both stability and future growth in the long term. 

But two things always bother NRIs:
one is currency depreciation, and the second is taxation. 

Currency depreciation affects NRIs in multiple ways. While a weaker INR can make remittances more valuable when sent back to India, it may reduce the value of investments in India when converted back to the NRI's home currency. This includes returns from stocks, fixed deposits, and real estate. Although currency depreciation can benefit remittances, it may diminish the overall value of an NRI’s assets and returns in foreign currency. 

Currently, NRIs are increasingly considering India as a compelling destination for long-term wealth creation. The numbers speak aloud: between April and October of FY25 alone, NRIs poured nearly USD 12 billion into non-resident deposit schemes, almost double that of the USD 6.11 billion they invested in the same period a year ago. As of December 2024, the total outstanding NRI deposits now stand at USD 161.8 billion, according to the Reserve Bank of India. The intent is clear: more NRIs want to take part in India’s economic ascent. 

How NRIs Invest in Mutual Funds in India? 

Non-Resident Indians (NRIs) are allowed to invest in mutual funds in India, provided they follow the guidelines under the Foreign Exchange Management Act (FEMA). 

• Who is an NRI under FEMA?
  As per Regulation 2 of FEMA Notification No.13 dated May 3, 2000, an NRI is defined as: “A person who resides outside India and is a citizen of India.” This definition plays a key role in determining where and how NRIs can invest in Indian mutual funds.
• Who is an NRI under the Income Tax Act?
  The Income-tax Act, 1961 defines residential status based on the number of days an individual stays in India:
  
  A person is considered a resident if:
  They stay in India for 120 days or more during a financial year, and have been in India for 365 days or more in the past four financial years.
  
  Therefore, if an individual stays in India for less than 120 days in a financial year, they typically qualify as an NRI. Important Amendment: Previously, the threshold was 182 days, but it was reduced to 120 days for individuals whose total Indian income exceeds ₹15 lakh in a financial year. If the taxable Indian income is ₹15 lakh or less, the old 182 day rule still applies.
• Dual Definitions: FEMA vs. Income Tax Act
  – The FEMA definition determines eligibility to invest in Indian mutual funds.
  – The Income Tax Act definition governs how these investments are taxed. 
   

Why are Mutual Funds a compelling option for NRIs?
The Indian mutual fund industry has grown significantly, with total Assets Under Management (AUM) reaching ₹65.74 lakh crore as of March 2025, more than double in the last five years. This growth reflects rising investor trust and makes mutual funds a popular choice for both Indian and international investors looking to benefit from India’s growth. 

A mutual fund collects money from many investors and invests in a mix of stocks, bonds, or other securities. It is managed by a professional fund manager, giving investors access to expert management, shared costs, and a diversified portfolio. For NRIs who may not actively manage investments, mutual funds offer a convenient option. Key benefits include potential capital growth, diversification, expert handling, a wide range of fund types, and possible gains from rupee appreciation. 

Before you begin your investment journey, you need to complete certain regulatory requirements to be able to start. 

Step-by-Step Guide for NRIs to Start Mutual Fund Investments in India
►Step 1: Complete the KYC Process
Before investing, every Non-Resident Indian (NRI) must complete the Know Your Customer (KYC) process, as per SEBI regulations. It is a mandatory requirement for all new investors in the Indian financial market.
Current Status: KYC is offline-only as of now, requiring physical presence in India. SEBI is working on enabling digital KYC through apps with video verification and geo-location tagging for smoother onboarding.
Documents Required: Passport, PAN Card, Overseas Address Proof (Utility Bill/Driving License), Continuous Discharge Certificate (CDC) – only for Merchant Navy personnel, Cancelled Cheque or Recent Bank Statement, FATCA Declaration.    

►Step 2: Choose the Right Bank Account
An NRI must hold one of the following Indian bank accounts to invest:

• NRE (Non-Resident External) Account - For foreign Income
• NRO (Non-Resident Ordinary) Account - Indian Income
  Important Considerations:
• Choose based on the source of funds (foreign or Indian income)

Consider repatriation needs and long-term financial goals.

►Step 3: Select a Platform to Invest
Once KYC is approved and a bank account is in place, you can begin investing via the following platforms:

• AMC Websites and Mobile Apps 
• Registrar Platforms: myCAMS, KFintech 
• Centralised Platforms: MF Central, MF Utility, 
• Stock Exchange Platforms: BSE STAR MF (BSE), MFSS and NMF-II (NSE) 
• EOPs (Exchange Online Portals) These platforms allow you to track and manage investments globally with ease.
   

►Step 4: Keep Your KYC Status Updated
NRIs can continue investing with ‘KYC Registered’ status only until April 2025. Post that, it is mandatory to upgrade to ‘KYC Validated’. This will require providing Aadhaar-based address proof. 

Tax: An Important Aspect of NRI Investments 

For most NRIs, taxes are a key part of investing. In mutual funds, tax depends on the type of fund category (equity or debt)—and how long you hold the investment, which decides if short-term or long-term capital gains tax applies. 

The Union Budget 2025-26 made no change in the capital tax regime. 

If you're an NRI and opt for the IDCW (dividend) option in mutual funds, the dividend income is taxable as per your income tax slab. However, Tax Deducted at Source (TDS) will be applied first at 20 per cent or at a lower rate, if specified under the Double Taxation Avoidance Agreement (DTAA), as per Section 196A of the Income Tax Act. 

India has signed DTAAs with around 90 countries to avoid double taxation on income earned in one country by a resident of another. Under this treaty, NRIs can claim credit for taxes paid in India on mutual fund earnings in their country of residence. In some cases, especially where the DTAA exempts capital gains in India, mutual fund capital gains may not be taxed in India at all. 

What happened in recent times?
ITAT Rules: No Tax on Mutual Fund Capital Gains for NRIs
The Mumbai Income Tax Appellate Tribunal (ITAT) has ruled that capital gains earned by NRIs from Indian mutual fund units are not taxable in India under the India-Singapore Double Taxation Avoidance Agreement (DTAA). 

This judgment came in the case of Ms. Anushka Sanjay Shah, a Singapore-based NRI, who earned ₹1.35 crore in short-term capital gains from selling equity and debt mutual fund units in the assessment year 2022-23. She claimed exemption under the DTAA, arguing that as a Singapore tax resident, the gains should not be taxed in India. However, the Assessing Officer disagreed and taxed the gains, treating mutual fund units as equivalent to shares of Indian companies. 

The ITAT rejected this view, clarifying that mutual funds in India are structured as trusts under SEBI regulations and not as companies. Since the DTAA does not define "shares," and mutual fund units are not treated as shares under the Companies Act, they cannot be taxed as such. The ruling highlights the clear distinction between mutual fund units and company shares for taxation purposes. 

So what does this mean?
The recent ITAT ruling in the case of Ms. Anushka Sanjay Shah has made capital gains from mutual fund investments taxexempt for NRIs under certain DTAAs. This could benefit NRIs from countries that have DTAAs with India. 

For Example,
If an NRI invests in India Mutual Funds, the tax applicable is the home country tax in case where India has a DTAA signed. Let's say UAE has no tax, and hence, when you invest in Indian Mutual Funds from UAE, the tax for you will be zero. 

If you are an NRI, what do you need to do for this?

• Get a tax residency certificaten
• Fill Form 10F
• Submit declaration for availing DTAA benefits with the AMC to avoid TDS This is only applicable to mutual funds & not related to stocks or real estate. 
   

The judgment may encourage more NRIs to invest in Indian mutual funds, boosting inflows and increasing the overall AUM of the mutual fund industry. 

Conclusion
The recent ruling by the Income Tax Appellate Tribunal (ITAT) brings good news, if you are an NRI from a country that has a Double Taxation Avoidance Agreement (DTAA) with India. You might not have to pay tax on mutual fund capital gains in India. This is a major benefit and can boost your overall returns. 

To make use of this, NRIs should get a Tax Residency Certificate, fill out Form 10F, and submit a declaration to the mutual fund company. 

India’s mutual fund industry is growing fast, and NRIs are showing more interest. With easy access through various platforms, expert fund management, and potential tax advantages under DTAA, mutual funds can be a smart choice for NRIs seeking long-term growth. 

While currency risks and compliance steps remain, the recent developments make mutual funds a more stable and taxefficient option. For NRIs, it’s a good time to explore mutual fund investments in India with proper planning.