How NRIs, PIOs may invest in Mutual Funds in India and how much tax they have to pay

By: |
October 9, 2020 7:05 PM

Even as PIOs have acquired citizenship of foreign countries, they are treated like NRIs holding Indian passports for the purpose of investing in MFs.

mutual fund, MF, MF investments, persons of Indian origin, PIO, non-resident Indian, NRI, Foreign Exchange Management Act, FEMA. FACTA, NRE Accoun, NRO Account, KYC process, equity-oriented funds, tax on MF redemptiosPersons of Indian Origin (PIOs) and Non-Resident Indians (NRIs) are allowed to invest directly in Mutual Fund (MF) schemes.

As a growing economy, India is one of the most attractive investment destinations in the world. While foreign investors – especially through foreign institutional investors (FIIs) – invest in India for better gains, Persons of Indian Origin (PIOs) and Non-Resident Indians (NRIs) are allowed to invest directly in Mutual Fund (MF) schemes.

Even as PIOs have acquired citizenship of foreign countries, they are treated like NRIs holding Indian passports for the purpose of investing in MFs.

Compliances

So, the investors of both the categories may invest in MF in India subject to the provisions of Foreign Exchange Management Act (FEMA).

Persons having tax residency of any country other than India should also comply with the provisions of Foreign Account Tax Compliance Act (FATCA).

Bank Account

As MFs in India don’t accept investments in foreign currency, PIO/NRIs need to open either a non-resident external rupee (NRE) account or a non-resident ordinary rupee (NRO) account in India to invest.

NRE accounts have tax benefits and may be used to park foreign earnings. Balances in NRE accounts may also be transferred freely to foreign accounts.

On the other hand, in NRO accounts, only earnings generated in India may be deposited. There are restrictions in transferring balances from NRO accounts to foreign accounts and interest earned on the balances in such accounts are taxable.

KYC Process

Once the account is functional, the PIO/NRI may apply for investment along with KYC details accompanied by the required KYC documents like, latest photograph, attested copies of PAN card, passport, residence proof (outside India), bank statement, PIO Card (for PIOs), etc.

A PIO/NRI applicant may get the documents attested by public notaries, court magistrate, judge, authorised officials of overseas branches of scheduled commercial banks registered in India or the Indian embassy/consulate general in the country that they reside.

The applicant must indicate in the KYC form, whether the investment is on a repatriable or non-repatriable basis.

Investment through POA

A PIO/NRI may also invest in MF through another person by giving him/her Power of Attorney (POA). In such a case, signatures of both the PIO/NRI investor and PoA should be present on the KYC documents.

Investment Options

PIO/NRIs may invest in selected equity-oriented funds or other than equity funds (like debt funds, balanced/hybrid funds) of the AMCs, which allows the investors with tax residencies of other countries to invest.

Not all the AMCs allow PIO/NRIs to invest in their MF schemes. Before applying, PIO/NRIs should inquire about the AMCs and the schemes in which they are eligible to invest.

Taxation

The tax is deducted at source (TDS) on short-term and long-term capital gains that arise at the time of redemption of MF units by PIO/NRIs.

Tax on equity-oriented schemes

On LTCG

The long-term capital gain (LTCG) arises when units of an equity-oriented scheme are sold after holding for a period of one year.

The tax on LTCG on equity-oriented funds is 10 per cent without indexation and foreign currency fluctuation benefits + Surcharge as applicable + 4 per cent Cess.

So, the rate of TDS will be 11.96 per cent or 11.44 per cent, depending on surcharge.

On STCG

The short-term capital gain (STCG) arises when units of an equity-oriented scheme are sold within one year of purchasing the units.

The tax on STCG on an equity-oriented scheme is 15 per cent + Surcharge as applicable + 4 per cent Cess.

So, the rate of TDS will be 17.94 per cent or 17.16 per cent, depending on surcharge.

Tax on schemes other than equity-oriented schemes

On LTCG

The long-term capital gain (LTCG) arises when units of a scheme other than an equity-oriented scheme are sold after holding for a period of 36 months.

The tax on LTCG on a scheme other than an equity-oriented scheme is 20 per cent with indexation + Surcharge as applicable + 4 per cent Cess.

So, the rate of TDS will be 28.496 per cent or 26 per cent or 23.92 per cent or 22.88 per cent, depending on surcharge.

On STCG

The short-term capital gain (STCG) arises when units of a scheme other than an equity-oriented scheme are sold within 36 months of purchasing the units.

The tax on STCG on an equity-oriented scheme is marginal income tax rate (i.e. the tax bracket in which the investor falls) + Surcharge as applicable + 4 per cent Cess.

So, assuming that the investor falls in the highest tax bracket of 30 per cent, the rate of TDS will be 42.744 per cent or 39 per cent or 35.88 per cent or 34.32 per cent, depending on surcharge.

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