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NRI's - Tax Implications Of Mutual Fund Investments

What are the investment choices for NRI’s?
NRI’s can have bank deposits on which they can earn Indian rupee interest (NRO deposit, not repatriable 30% TDS) or Libor linked interest (NRE, FCNR deposits, fully repatriable, interest fully exempt from tax).  Bank deposits are still the most popular form of investment for NRI’s.
If the objective is to earn the higher interest rates (Interest rates in Indian markets are higher than the international rates that are Libor-linked) they are primarily interested in debt-oriented products.

Debt products
•  Government sponsored saving schemes like Post office NSC – Not eligible to invest
•  RBI Savings Bonds – Not eligible to invest
•  Bank deposit – Eligible. Have to obtain PAN number. TDS applies on taxable NRO deposits
•  Corporate Bonds – Eligible. Low liquidity. Interest taxable. TDS applies
•  Debt Mutual Funds – Eligible. High liquidity. Dividend (subject to DDT) exempt from tax. Capital gains subject to indexation (TDS applies)

Equity products
NRI’s are eligible to invest directly in equity markets or through mutual funds. Dividend is exempt from tax, long term capital gains are exempt.  Short-term capital gains are taxable at 15%+sc+cess, effective 16.995% for direct investment and equity funds.

Why mutual funds?
a. Range of products – from Liquid fund, to FMP, MIP and equity and FMP, mutual funds have them all. They can choose the product they are most comfortable with
b. Tax exempt income – Mutual fund dividends are fully exempt from tax. No TDS
c. Benefit of Indexation – They can choose a growth option in a debt fund, so that their long term capital gains can be indexed. The actual long term capital gain is thus drastically reduced
d. Procedural Ease – NRI’s worry the most about the procedures for PAN and returns, and the hassle of getting the income tax refund. They will love a mutual fund product that gives them the return, which is tax exempt
e. Facility to re-invest dividend - In a mutual fund product, they can choose a dividend re-investment option that enables them to deal with payouts easily, without having to worry about small amounts getting credited into bank accounts

Which mutual fund products would appeal to the NRI’s who are currently investing in fixed deposits?
Since the NRI’s are comfortable with fixed income products, the FMP would appeal to them.

How can NRI's protect their investment from currency fluctuations?
It is possible to buy a forward cover against the mutual fund investments, from a bank. A lien will be marked on the investments, and a cover for exchange risk can be purchased.

Can the money be repatriated?
As long as the investment is from a NRE account, and the banker certificate is attached to the application, the funds are fully repatriable. Only investments from NRO accounts are non-repatriable.

Summary Table of Tax Implications of NRI Investment in Mutual Funds
  Equity Funds Debt Funds TDS
Short Term Capital Gains 15% + 3% E. Cess = 15.45% + Surcharge if applicable * As per slab Equity - 16.995%
Debt - 33.99%
Long Term Capital Gains NIL 10% without indexation + 3% E. Cess = 10.30% + Surcharge if applicable * 20% with indexation + 3% E. Cess = 20.60% + Surcharge if applicable * Equity - Nil
Debt - 22.66% after indexation
Dividends Tax free Dividends are tax free. Subject to DDT @ 25% + 10% Surcharge + 3% E. Cess = 28.325% No TDS
 
Surcharge @ 10% applicable for when net income exceeds INR 1 crore.
Education Cess is levied at the rate of 3% calculated on tax payable plus surcharge.


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