KYC Documentation and Taxation for NRI Investments

  • Real Estate used to be the first choice for Non-Resident Indians (NRIs) when it comes to investments in India. However, off late NRIs have been exploring other asset classes like Mutual Funds, Portfolio Management Services, Alternative Investments, Bonds and Market Linked Debentures to name a few.

    Some of the key factors need to be kept in mind in case of NRI investments.

    Who is a Non-Resident Indian?

    NRI is an Indian Citizen who is residing out of India for employment, business, studies, etc. for 182 days or more, during a financial/calendar year.

    Rules applicable for NRI Investment

    NRI investments are mainly governed by the Foreign Exchange Management Act 1999, commonly known as FEMA. According to the current provisions of the act, NRI is allowed to make investments into capital markets including direct stocks, exchange-traded funds (ETFs) and mutual funds subject to key terms/conditions. However, these investments are allowed only when a certain set of conditions are met including performing fresh KYC for NRI and setting up a rupee-denominated NRE/NRO account.

    Non-Resident Ordinary (NRO) and Non-Resident External (NRE) Account

    NRE and NRO accounts are the commonly used accounts and having either of them is mandatory to make investments in India. Both these accounts are rupee-denominated accounts irrespective of the currency in which the initial deposits were made. While both these accounts are subject to currency risk and are similar in many respects, but there are a few key differences between NRE & NRO accounts.

    • NRE Ac. It is used to deposit offshore earnings into a rupee account but NRO Ac. It is used to hold income earned in India by a non-resident Indian from locally through rent, dividend, etc.
    • The balance in NRE Ac. is tax-free, whereas, NRO account balance attracts tax liabilities as per the applicable slab.
    • NRE Ac.  balance can be repatriated freely but NRO Ac. Deposits are partially repatriable (up to US$ 1mn/yr)

    KYC Documentation for NRIs:

    As an NRI investor you need to submit fresh KYC (Know Your Customer) docs for making investments in Mutual Funds, Portfolio Management Services, Alternative Investments, Bonds and Market Linked Debentures. Post KYC completion, NRIs are allowed to make investments.

    KYC Documents required:

    • PAN Card
    • Copy of valid Passport (front and back pages)
    •  Proof of foreign address residence
    •  Canceled cheque of NRE/NRO account

    Direct Investment (Self Investment)

    Under direct investment, the NRIs can do the transactions via usual banking channels, and the investments must have the KYC docs attached with it and also indicate that the invested amount is capable of repatriation or not. The KYC documents include - Self-attested latest photograph of the investor, PAN card, Residence proof, Passport copy, and certified bank statement.  A face-to-face verification is also mandatory by the bank and the same may be executed by visiting the Indian Embassy in the resident country.

    Investments via POA- Power of Attorney 

    Through POA, NRI can make investments through someone else on his behalf... The Fund houses allow the NRI to make use of the Power of Attorney and invest with the help of someone who is an Indian resident. However, in-person verification of the POA holder will be demanded by the Fund house. Also, the signatures of both the individuals involved- NRI and POA holder- are mandatory.

    Note:  Apart from normal compliance and KYC documentation, Investments by US and Canada based NRI Investors are governed by FATCA (Foreign Account Tax Compliance Act), which requires additional compliance by the Fund Houses.

    NRI Taxation:

    Taxation rules of mutual funds for resident and NRI investors are almost exactly the same. For example, dividends are tax-free in the hands of the investor whether resident or NRI.

    • Short term capital gains (STCG) taxation rules apply to equity mutual fund investments made for 1 year or less and the applicable tax rate is 15% of gains.
    • LTCG (Long term capital gains tax) rule is applied when equity schemes have been held for over 1 year. LTCG applicable is 10% on incremental capital gains over Rs. 1 lakh for a financial year.
    • In case of debt mutual funds, STCG taxation rules are applicable for investments made for 3 years or less. The applicable rate for short term gains on debt investments is the same as the income tax slab rate of the investor but in the case of NRI investors, the TDS applicable is 30% (the highest tax slab). In the case of LTCG debt mutual fund investments, one needs to stay invested for at least 3 years. The applicable rates for LTCG on debt schemes are 20% with indexation benefit in case of listed funds or 10% without indexation benefit in case of unlisted securities & funds.

    Please contact ALTwealth Team for more information on Investments and taxation in India across different asset classes ...

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