Gopal K Agarwal

In my earlier articles I had dealt with investment by NRI in Indian equity market. As equity market is very volatile and there are so many factors involved in the decision making process that it become difficult for an individual to track all these factors and take informed decision. It is also not cost effective to track individual portfolios. Therefore the investment through the mutual fund route is a suitable alternative for NRIs to invest into Indian markets. Some other factors favoring investment through mutual funds are:

• Professional Management: The primary advantage of funds is the professional management of your money.
• Diversification and Risk Management: By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out.
• Economies of Scale: Mutual fund buys and sells large amounts of securities at a time; its transaction costs are lower than you as an individual would pay.
• Liquidity: Mutual fund allows you to request that your shares be converted into cash at any time.
• Simplicity: Buying a mutual fund is easy and the minimum investment is small.

Procedure for investment
in Mutual Fund
Same procedure as indicated in my earlier articles for investment on non-repatriation and repatriation basis for capital Market is applicable. However, approvals already granted for portfolio investment in shares/debentures of Indian companies will also be valid for purchase of units of domestic mutual funds.

NRIs are permitted to open bank accounts in India out of funds remitted from abroad, foreign exchange brought in from abroad or out of funds legitimately due to them in India, with authorized dealer. Such accounts can be opened with banks specially authorized by the Reserve Bank in its behalf (Authorized Dealer).

There are five types of
NRI accounts:-
a) Non-Resident (External) Rupee Accounts (NRE Accounts)
b) Ordinary Non-Resident Rupee Accounts (NRO Accounts)
c) Non-resident (Non-reportable) Rupee Deposit Accounts (NRNR Accounts)
d) Non-Resident (Special) Rupee Accounts with banks in India.
e) Foreign Currency Accounts

GENERAL PERMISSION
Reserve Bank has granted general permission to NRIs/PIOs, for undertaking direct investments in Indian companies, under the Automatic Route purchase of shares under Portfolio Investment Scheme, investment in companies and proprietorship/partnership concerns on non-repatriation basis and for remittances of current income. NRIs/PIOs do not have to seek specific permission for approved activities under these schemes. The Reserve Bank of India has now further simplified financial transactions by NRIs/PIOs by granting general permissions to:

NRIs to transfer by way of gift shares/mutual funds held by them in Indian companies and to transfer by way of gift immovable property held by them in India subject to compliance with other applicable rules/regulations including the provisions of Foreign Contribution Regulations Act, 1976 by the charitable trust/organization concerned.

We give below FAQs on Mutual Fund for further understanding:

NRIs can invest in any of the mutual fund schemes.

No mutual fund scheme assures return.

Approvals from the Reserve Bank of India to invest in mutual fund schemes:

Yes. Specific approval has to be taken from RBI but most of the AMCs have taken the permission for NRI investments in their schemes, hence no permission is required for investing in the schemes of those AMCs. Only OCBs and FIIs require prior approvals before investing in our schemes. At Vogue Commercial company Limited ( Voguestock, we are approved intermediary for mutual fund investments.

REDEMPTIONS:

In case of open-ended mutual fund schemes by simply filing up the redemption slip and sending it to our offices. The cheques are normally mailed to you within 3 to 5 business days from the day of receipt of the redemption request.

In case of close ended mutual fund schemes it has to be sold at the stock exchange where the scheme is listed through a registered stock exchange member.

NRIs can invest in Systematic Investment Plan (SIP)?

NRIs updated on the performance of the schemes:

You can opt to receive daily NAVs, weekly performances and other subscription services over e-mail from Voguestock's desk. NAVs of all schemes are also updated. Besides you will receive quarterly newsletter from the Asset Management Companies and weekly reports from us.

NRIs can gift units of mutual fund schemes to relatives in India?

Yes.

Process of Repatriatation:

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 the redemption proceeds is 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 investment have been made on a repatriation basis.

Where investment has 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 after taking into consideration indexation benefits wherever applicable.

What will be the tax liability on receipt of income or on redemption?

NRI investors are eligible for tax benefits under sections 112, of the Income Tax Act, 1961.

As per the Finance Act 1999, no tax will be deducted from income distribution in the form of dividend (The mutual funds are subject to pay distribution tax in debt oriented schemes.).

However, tax will be deducted on any capital gains in case the payee is a non-resident in terms of the provision of the Income Tax Act, 1961.
We have summarized below the tax implications for NRI investors:

Tax deducted at source for NRI investments?

As per the Finance Act 1999, tax will not be deducted from income distribution in the form of dividends to unit holders.

However, tax will be deducted on any capital gains.

In respect to short-term capital gains, that is gain on sale of investments held for less than twelve months, tax is required to be deducted at source at the rate of 30% if the unit holder is a non-resident non-corporate and at the rate of 48% if the unit holder is a foreign company as per the provisions of Section 195 of the Indian Income Tax Act, 1961.

Under Section 2(42A) of the Act, a unit of a mutual fund is treated as long-term capital asset if the same is held for more than twelve months. Tax is deductible at source @ 20% on capital gains arising from transfer of a long-term capital asset. The benefit of indexation is available in respect of long-term capital gains.

As per the judicial decisions of courts, in case of remittance to a non-resident of a country with which a Double Taxation Avoidance Agreement (DTAA) is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or the rate provided in the DTAA whichever is more beneficial to the assessee. In order to claim the aforesaid tax benefit the non-resident investor will have to obtain a certificate from the Income Tax authorities relating to applicable tax benefit.

Tax rate on short-term capital gain

In case of non-resident non-corporate - 30% In case of foreign company - 48%

Permanent Account Number (PAN)

The Permanent Account Number (PAN) is now gaining grounds with NRIs too. Although, Non Resident Indians are not required to provide a Permanent Account Number in their Mutual Funds, shares, stocks and other related investments till now, the Securities and Exchange Board of India has directed the depositories to make PAN compulsory for all demat accounts that are opened after april 30th 2006.

Facilitation Agencies:

The main regulatory and facilitation agencies involved in the matters related to NRIs/OCBs investment are Reserve Bank of India (RBI), Securities and Exchange Board of India (SWBI), Authority for Advance Rulings (AAR), Secretariat for Industrial Assistance (SIA), Ministry of Commerce and Industry; and Office of the Chief Commissioner (Investments & NRIs).. n