NRI investments in mutual funds in India and Foreign Account Tax Compliance Act (FATCA) effects thereof
The Indian economy is considered a very lucrative option for investments by the NRIs. Despite the obvious geographical and taxation difference, most NRIs prefer to invest back in their home country. This could be because for various reasons like their emotional attachment towards their motherland, or the fact that India is the only place where the rate of return is higher as compared to their residency country say USA/Canada; and also they gain from the currency fluctuations at the time of redemption/sale.
While NRIs have a pool of investment options in India namely into real estate, fixed deposits, public provident funds (PPFs), etc. One of the most balanced options for investing is in mutual funds, given their risk to returns ratio is quite lower than the other options and also the ability to redemption is quick. The fact that these mutual funds are managed by professionals gives an added confidence to the NRIs that their cash won\’t be ill-utilized managed. These professionals usually manage the mutual funds for the investors by customizing their portfolios to meet their unique needs.
The Indian mutual funds market does not accept investments in foreign currencies, so interested NRIs must invest through an Indian Rupee account maintained as NRO/NRE account or they could invest through a Power of Attorney (POA). These NRI accounts stand for:
- Non-Resident External Account (NRE account) – it is an account of NRI to merely transfer his foreign earnings to India.
- Non-Resident Ordinary Account (NRO account) – it is an account of NRI to manage the income earned in India.
The Foreign Account Tax Compliance Act (FATCA) was first introduced in the year 2010 by US federal law. As per the guidelines of FATCA, every non-US foreign financial institution has to report information about any investments made by the US/Canada-based personnel. This puts the burden on the Indian mutual fund institutions to gather more KYC-related data from their NRI clients. But bear in mind that FATCA only implies gathering information and in no way prohibit the NRIs from investing globally.
FATCA is primarily introduced to eliminate tax evasion done by American individuals and businessmen. It is not illegal to earn from the global market but in order to irradicate non-disclosure of such foreign income is what FACTA really aims at. This is why any failure to disclose such foreign holdings or earnings would be considered illegal as per FACTA
The Indian Mutual Funds that accept funds from US and Canadian NRIs are:
- Sundaram Mutual Fund
- PGIM India Mutual Fund
- Nippon India Mutual Fund
- L&T Mutual Fund
- BNP Paribas Mutual Fund
- UTI Mutual Fund
When individuals earn globally, their earnings are taxed globally as well. This opens them to double taxations on their earnings, but the double tax avoidance agreement (DTAA) tax treaty aims to abolish double taxation. Many countries have signed this treaty in order to avoid the double taxation situation, and India and the USA have also signed this DTAA tax treaty. Given the backdrop of these tax treaties, NRIs could claim relief in their respective country of residence if their earnings are taxed in India.
Given that the potential growth opportunities to your funds outweigh the additional FATCA compliance requirements, NRIs must not fear and upon due diligence investment in Indian mutual funds.
So If you are an NRI and you have a Permanent Account Number (PAN) and an NRO/NRE account, you can directly download our app in the Android or iOS version, register and start investing!