NRI Guide to Investing in Indian Mutual Funds: 2025 Handbook
Are you a Non-Resident Indian (NRI) looking to tap into one of the world's fastest-growing economies? Investing in Indian mutual funds is an excellent way to build wealth and diversify your portfolio. But navigating the rules can seem complex.
Don't worry, we've got you covered. This ultimate guide breaks down everything you need to know about NRI investment in mutual funds for 2025, from choosing the right bank account to understanding taxation.
Who is a Non-Resident Indian (NRI) as per the Income Tax Act?
Under the Indian Income Tax Act, 1961, the determination of whether an individual is a Non-Resident Indian (NRI) for a financial year is based on their physical presence in India. An individual's residential status is not dependent on their citizenship.
An individual is classified as a Non-Resident Indian (NRI) for a financial year if they do not meet either of the following fundamental conditions to be considered a "resident" of India:
- They are in India for a period of 182 days or more in that financial year. OR
- They are in India for a period of 60 days or more during that financial year and have also been in India for 365 days or more in the four years immediately preceding that financial year.
Essentially, if an individual fails to satisfy both of the above conditions, they are treated as an NRI for income tax purposes for that specific year.
Why Should NRIs Invest in Indian Mutual Funds?
Investing in India offers a unique opportunity to be part of a vibrant growth story. Mutual funds provide a simple and effective way to do this:
- Diversification: Spread your investment across various stocks and sectors.
- Professional Management: Funds are managed by expert fund managers.
- High Growth Potential: Benefit from the long-term growth of the Indian economy^.
- Accessibility: Investing is now easier than ever with digital platforms.
Getting Started: Your 3-Step Checklist for NRI Investing
Ready to begin your investment journey? Here are the three essential steps every NRI must follow.
Step 1: Open a NRI Bank Account
You cannot use a regular resident savings account. You must open a designated NRI bank account. Your choice here is crucial as it determines how your money moves and how it's taxed. You have two options:
- NRE (Non-Resident External) Account: Use this to invest your foreign earnings. Both your investment and returns are fully repatriable, meaning you can freely transfer the money back abroad. Plus, the interest earned is tax-free in India*.
- NRO (Non-Resident Ordinary) Account: Use this to manage your Indian income (like rent or dividends earned in India). Repatriation from this account is limited to USD 1 million per year, and the interest earned is taxable in India.
Pro-Tip: If your goal is to invest foreign income and have the flexibility to take it back, the NRE account is your best choice for mutual fund investments.
Step 2: Get Your PAN Card
A Permanent Account Number (PAN) is mandatory for all financial transactions in India. If you don't already have one, you can easily apply for it online.
Step 3: Complete Your KYC
KYC (Know Your Customer) is a one-time verification process. You will need to submit:
- A copy of your PAN card
- A copy of your passport
- Proof of your overseas address
- A cancelled cheque from your NRE/NRO account
Many financial institutions now offer a digital KYC process, making it convenient to complete from anywhere in the world.
Navigating NRI Taxation: TDS, Capital Gains, and DTAA
Understanding taxes is key to maximizing your returns. For NRIs, the most significant factor is Tax Deducted at Source (TDS). The capital gains tax rates for NRIs are generally the same as those applicable to residents. However, TDS is directly deducted at source on payment to NRIs.
Here’s a simple breakdown of the tax rates:
* Holding period for transfers before 23rd July 2024 is 36 Months and after 23rd July it would be 24 months
** STCG for transfers before 23rd July 2024 is 15% whereas after 23rd July it would be 20%
The DTAA Lifeline
Worried about being taxed twice (in India and your country of residence)? The Double Taxation Avoidance Agreement (DTAA) is here to help. India has a DTAA with over 90 countries. By submitting a Tax Residency Certificate (TRC), you can either:
- Claim credit for the tax paid in India against your tax liability in your country of residence.
- Be subject to a lower TDS rate in India as per the treaty.
Special Alert for NRIs in the USA and Canada (FATCA Compliance)
If you reside in the US or Canada, there’s an extra layer of compliance. Due to the Foreign Account Tax Compliance Act (FATCA), not all Indian fund houses accept investments from these countries.
FATCA requires Indian financial institutions to report investment details of US citizens and residents to the US tax authorities. While this doesn't stop you from investing, it does mean:
- You have a limited choice of AMCs (Asset Management Companies).
- You may need to provide additional declarations and paperwork.
- Some AMCs may require you to be physically present in India to make an investment.
Action Point: Always check directly with the AMC to see if they accept investments from US or Canada-based NRIs before you begin.
Frequently Asked Questions (FAQs)
1. Can I continue my existing SIPs after becoming an NRI?
Yes, you can. However, you must inform the AMC of your change in residential status from "Resident Indian" to "Non-Resident Indian." Your bank account must and KYC status also be changed from a resident account to an NRO account for future SIP debits.
2. Which is better for an NRI, a Growth or IDCW plan?
This depends on your goal. In a Growth plan, profits are reinvested, leading to faster wealth compounding. In an IDCW plan, profits are paid out periodically. From a tax perspective, Growth plans are often more efficient as you only pay tax upon selling your units.
3. Is the money invested through an NRE account taxable?
While the interest earned in an NRE bank account is tax-free, the capital gains from mutual fund investments made through it are taxable as per the rules mentioned above.
4. How do I redeem my mutual fund investments as an NRI?
The redemption process is simple. You can place a redemption request online. The proceeds (after TDS) will be credited to your NRE or NRO account, depending on which one you used to invest.
5. What will be the status of my mutual fund investments if I return to India and become a Resident?
Your mutual fund investments are completely safe and remain yours. However, you're legally required to inform your mutual fund houses (AMCs) and your bank about your change in residential status. This ensures you're compliant with SEBI and FEMA regulations.
Consult with a financial advisor to build a portfolio that aligns with your financial goals.
*Tax laws are subject to change and investors should consult their own advisors.
^The above information is illustrative, actual returns are subject to market conditions.
All investments by Non-Resident Indians (NRIs) are subject to the rules and regulations of the Foreign Exchange Management Act (FEMA), 1999.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Published on 13th Sept 2025
