Who is a Non Resident Indian (NRI)?
Non Resident Indian (NRI)  means a person residing outside India who is a citizen of India or is a person of Indian origin. A person shall be deemed to be a “person of Indian origin” if he is a citizen of any country other than Bangladesh or Pakistan and if (a) he at any time held Indian passport; or (b) he or either of his parents or any of his grand parents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57of 1955); or (c) the person is a spouse of an Indian citizen or a spouse of the person referred to in points (a) or (b)

Who is a Foriegn Institutional Investor (FII)?
FII means an entity established or incorporated outside India which proposes to make investment in India for that purpose they have to register with Securities and Exchange Board of India.

What is the difference between an NRE account, NRO account and FCNR account?

1. Non-Resident (External) Rupee (NRE) accounts are Rupee accounts on a repatriable basis. They can be opened with either funds remitted from abroad or local funds, which can be remitted abroad.
2. Ordinary Non-resident Rupee (NRO) accounts are Rupee accounts and can be opened with funds either remitted from abroad or generated in India. The amount in such accounts is non-repatriable.
3. Fully Convertible Non-Rupee (FCNR) accounts are similar to the NRE account except that the funds are held in foreign currency like US$, £, Dm etc.

What are the permissible debits/credits to the NRE/FCNR Accounts?

1. Permissible Debits

   1. You can freely move funds along with interest earned, anywhere outside India without the prior approval of the Reserve Bank of India. This movement of funds is subject to guidelines laid down by the RBI.

1. Permissible Credits

   1. Credits to the account, through funds from a local source would be permissible only if the funds are eligible for repatriation.

   2. Proceeds of remittances received from abroad in freely convertible currency through normal banking channels may be credited freely.

   3. Traveller's Cheques or foreign currency tendered by the account holder during his temporary visit to India.

   4. Interest / Maturity Proceeds of Government securities including National Savings Certificates, dividends of Unit Trust of India, provided these securities were purchased out of funds from NRE / FCNR Accounts

1. Can a NRI repatriate funds in NRI Account?

Can a NRI invest in mutual fund schemes?
Yes, NRIs can invest in mutual fund schemes.

Can NRIs invest in Mutual Funds (MFs)? Do they require any special permission from the RBI?
NRIs are eligible to invest in MFs on a repatriable as well as on non-repatriable basis. RBI has granted general permission in this regard and as such, no special permission is required each time an NRI desires to invest.

Are there any specific procedures to be followed for making the investment on a repatriable basis?
The investment should be made by the non-resident investors out of Funds remitted from abroad in free foreign exchange through normal banking channels or out of balances held in their NRE/FCNR accounts maintained with Authorised Dealers (A.D.) in India. Payment may be made by means of Indian Rupee Drafts purchased abroad or by a cheque drawn on NRE /FCNR accounts payable at Mumbai. Payments can also be made from funds held in NRE /FCNR accounts maintained with banks authorized to deal in foreign exchange in India.

The above may be sent together with the complete application form directly by registered post to the registrar or the office of the AMC.

1. By a rupee draft issued by a bank/exchange house abroad on its Indian correspondent bank
2. By a rupee cheque/draft issued out of NRE deposits of the applicant or received as a gift from another NRI out of the donor’s NRE deposits or by a rupee draft purchased by him from a bank abroad
3. By a rupee cheque/draft issued out of NRO deposits of the applicant or out of the proceeds of the NRNR/NRSR deposits.

What are the taxes applicable for income from MFs?
There are essentially two kinds of income i.e. dividend income and capital gains (ensued from redemption of units), that a NRI investor can earn from Mutual Fund investments. These incomes are further segregated for tax purpose and different tax rates are levied as per the type of income, for example, capital gains segregated into short-term and long–term gains have different tax rates applicable.

Dividend distribution tax to be paid by the Mutual Fund scheme:

1. No dividend distribution tax is payable on income distributed by open ended equity oriented funds.
2. Mutual funds which are ‘Money Market Mutual Fund’ or ‘Liquid Fund’ are required to pay dividend distribution tax at the rate of 25% (excluding applicable surcharge @10%, education cess @2% and Secondary and higher education cess at the rate of 1%).
3. Mutual funds which are “funds other than a money market mutual fund or a liquid fund” are required to pay Dividend Distribution tax at 12.5% (excluding applicable surcharge @10%, education cess @2% and Secondary and higher education cess at the rate of 1%) for income distributed to an individual or a Hindu Undivided Family. An increased rate at 20% on income distributed to any person other than an individual and HUF (excluding applicable surcharge @10%, education cess @2% and Secondary and higher education cess at the rate of 1%)

As far as capital redemption is concerned, tax treatment differs for equity oriented schemes vis a vis other schemes such as income schemes etc.

Tax treatment for non-equity oriented schemes

If the Mutual Fund units were held for more than 12 months, the same would qualify as long-term capital assets else they would be termed as short-term capital assets.

Under section 115E of the Act, income by way of long-term capital gains in respect of Units other than equity oriented is chargeable at the rate of 20% (plus applicable surcharge and cess). Such long-term capital gains would be calculated without indexation of cost of acquisition.

According to the provision of Section 115I, non-resident Indians may opt for computation of long term capital gains as per section 112 of the act, which seems to be more beneficial and which is given below.

Income up to Rs. 1.50 lakh is not taxable. Income from Rs. 1.50 lakh to Rs. 3 lakh is taxed at the rate of 10%. Income between 3 lakh to Rs. 5 lakh is taxed at the rate of 20% and income above these levels is subject to taxes at the rate of 30% of the total income. There is a surcharge of 10% on applicable income tax for income of Rs. 10 lakh and above and this surcharge is payable by both Residents and NRIs. There is an additional Education cess of 3% (inclusive of 1% additional cess for Secondary & Higher Education Cess) payable on the total applicable tax amount (arrived after including surcharge amount).

In the case of sale of Mutual Fund units which are long-term capital assets, capital gains tax is payable at the rate of 10% without indexation or at the rate of 20% with indexation, whichever is beneficial to the assessee, as the option to select either of the rates lies with him.

In case income by way of short-term capital gain in respect of units is chargeable at the rate 30% (plus applicable surcharge and cess).

For NRI, such long term as well as the short term gains is eligible for the Rs 1.50 lakh basic exemption threshold and therefore capital gains would not be taxable up to Rs 1.50 lakh, assuming that the NRI has no other income in India. However, no deduction u/s 80C is available for Income from Capital Gains.

If the funds are invested in growth option of a Mutual Fund scheme, the growth in investment amount is not taxable as long as there are no withdrawals (sale or repurchase).

Tax treatment for equity oriented schemes

In case of Units of Equity oriented funds the Securities Transaction Tax (STT) is applicable as under

What about the special threshold rates of Rs. 1,80 lakh for ladies and Rs. 2.25 lakh for senior citizens?
As per the present guidelines / interpretation, these special limits for ladies and senior citizens are applicable only to Residents and not to NRIs.

What are the provisions regarding Tax Deduction at Source (TDS) a.k.a. withholding tax?
Since the dividends from units are tax-free in the hands of the investor, there is no question of TDS thereon. However, capital gains are subject to TDS. 

The TDS on long-term capital gain is @20% (plus applicable surcharge and education cess) and on short-term gains is @ 30% (plus applicable surcharge and education cess).

Consequently the TDS rates would be  22.66% and 33.99% respectively.

For equity-oriented schemes, since long-term capital gains are tax-free, no Tax is deducted at the source.However, short term investors in these schemes are liable for Short Term Capital Gain (STCG) tax. Though STCG is taxed at the rate of 15%, the TDS rate as per the law has remained unchanged at 30%. This gives rise to the anomaly that the final tax liability is lower than the withholding tax rate.

Are the Special Provisions relating to NRIs u/s 115C to 115I applicable?
Under these provisions, the benefit is in the form of investment income being taxed at the rate of 20% and long-term capital gains at the rate of 10%. In the case of Mutual Funds, dividends are tax-free in any case and long-term gains are taxed at the rate of 10% or NIL as the case may be. Therefore, the non-applicability of the Special Provisions is of no consequence to the NRI.

What are the tax saving methods that an NRI can use to save tax on income from MFs?
There are several ways to save tax on long-term gains that an NRI can employ.

1. Investment u/s 54EC

Sec. 54EC offers tax exemption if the long-term gains are invested in Bonds of NABARD, NHAI, REC, NHB and SIDBI within a period of six months from the date of transfer. These bonds have a lock-in of three years. The interest payable on the bonds (in the range of 5% - 5.25%) is fully taxable. However, there is no TDS. If only a part of the capital gain is invested, exemption would be proportional. Maximum amount allowed for investment is Rs. 50 lakh.

1. Investment u/s 54F

Exemption u/s 54F for long term gains is available if thethe investor purchases a residential house within one year or two years after the date of transfer or constructs within three years after such date. If the cost of the house is not less than the net consideration, the entire capital gain is exempt from tax. Else, the exemption would be proportional. The investor should not own more than one residential house at the time of transfer nor should he purchase another residential house for 2 years from the date of transfer of the Units. The new residential house should not be sold for 3 years.

Do NRIs need any approvals from the Reserve Bank of India to invest in mutual fund schemes?
 No. As an NRI, you do not need to take RBI permission for investing in mutual funds. You can invest through repatriable or non repatriable basis.

Can a NRI invest in foreign currency? 
 No. All investments have to be in Indian Rupees. A convenient way to invest would be through your NRE / NRO account. .

How do I redeem?
In case of open-ended mutual fund schemes, you simply fill up the redemption slip and send it to our offices or Investor Service Centres of AMCs. The cheques are normally mailed to you within 3 to 5 business days from the day of receipt of the redemption request.

Close ended schemes will automatically be redeemed at the time of maturity of the scheme. A close ended scheme can be redeemed prior to maturity subject to necessary exit load and unamortized issue expenses.

Can a NRI invest through Systematic Investment Plan (SIP)? 
 Yes.

How will I be updated on the performance of the schemes?
 You can opt to receive daily NAVs, weekly performances and other subscription services over e-mail. NAVs of all schemes are updated on our web site every day or in AMFI Website
In addition, you will receive quarterly newsletters from the Asset Management Companies.

Can a NRI repatriate my earnings on redeeming from mutual fund schemes?
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 some compliance.

If the investment is made on a non-repatriation basis, only the net income, that is, dividend (after tax), arising out of investment is eligible for repatriation.

How will the redemption proceeds be paid?
The redemption proceeds will be paid by means of a Rupee cheque payable to the NRE account of the investor, or else by a US dollar draft drawn at the then current rates of exchange subject to RBI procedures, where investments have been made on a repatriation basis.

Where investments have been made on non-repatriation basis, redemption proceeds will be paid by means of a Rupee cheque payable to the investor's NRO account.

Accompanying the redemption proceeds is an updated account statement, a TDS certificate and a covering letter that mentions whether the funds were invested out of NRE/FCNR/NRO accounts. The tax on capital gain is deducted (as explained below) after taking into consideration indexation benefits wherever applicable.

Further the payment procedure for redemption is mentioned as under:
(a) Where units had been purchased by the unit holder himself while he was a resident in India or out of funds held in his NRO Account or out of proceeds from his NRSR/ NRNR deposits, the proceeds can be sent to his bankers in India in rupees for credit to his NRO account.

(b) If the investment had been made by the unit holder out of funds in his NRE account or from proceeds of FCNR deposits or by rupee draft purchased from a bank / exchange house operating abroad or received as gift from another NRI out of the donor’s NRE /FCNR account or by rupee draft purchased by him /her from a bank abroad, the redemption proceeds could be credited to if SEBI so directs in the interest of the unit holders his NRE / NRO account provided he/she continues to be an NRI at the time of redemption.

(c) In other cases payment will be made in rupees for credit to his NRO a/c.

Is the indexation benefit available to NRIs?
Yes, in case units are held for more than twelve months as per section 48 of the Income tax Act 1961.