Mutual Funds for the NRI (Non Resident Indian)

NRI can invest in a mutual fund. For an NRI to make investments in mutual funds in India, the person
needs to open an NRE (Non-Resident External) account or an NRO (Non-Resident Ordinary) account.

The reason being, under FEMA (Foreign Exchange Management Act) an NRI cannot invest with regular
savings account in a bank. NRIs cannot invest in foreign currency as well; they have to invest in Indian
Rupees.

Before investing in Mutual Funds, an NRI must fulfill two major requirements.

1. An NRI Mutual Fund KYC should be completed.

2. A rupee-denominated NRE/NRO Bank Account should be opened.

NRIs investing in mutual funds in India but living in the US and Canada has to undergo through
paperwork under FATCA (Foreign Account Tax Compliance Act).

Understanding the NRI Mutual Funds Taxation

Taxation rules for NRIs and residents of India are alike.

For equity schemes –

• If holding period is less than 1 year and the gains realized are termed as short-term capital
gains and are taxed at a rate of 15%.
• If holding period is more than 1 year and the gains realized are termed as long-term capital
gains and are taxed at a rate of 10% if the gains exceeds Rs 1 lakh in a financial year.

For non-equity schemes –

Debt Funds
• Irrespective of holding period the gains realized are short-term capital gains and are taxed as
per individual’s tax bracket.
Hybrid Funds
• If holding period is less than 3 years and the gains realized are termed as short-term capital
gains and are taxed as per the individual’s tax bracket.
• If holding period is more than 3 years and the gains realized are termed as long-term capital
gains and are taxed at a rate of 20% with indexation benefit.

Condition Types of mutual funds Taxation

If a fund has over 65%
allocation in equities
If a fund has equity
allocation between 35-65%
If a fund has below 35%
allocation in equities
Large-cap , mid-cap, small-cap,
flexi-cap funds, focused funds,
multicap funds
Multi-asset funds, balanced
hybrid funds, dynamic asset
allocation funds
All types of debt funds. Even
international funds because
foreign stocks are not viewed as
equities by AMFI
Equity Taxation –
LTCG @ 10% if the gains exceed
Rs 1 lakh.
STCG @ 15%
✅ Indexation benefit.
LTCG @ 20% post indexation
STCG @ will be taxed as per the
individual’s tax bracket.
Debt Taxation
STCG @ will be taxed as per the
individual’s tax bracket.
If the country of NRI’s residence has not signed the DTAA (Double Tax Avoidance Agreement) then the
NRI is liable to pay the tax in both the countries, the country of residence and in India. India has signed
the DTAA with the USA and this helps to avoid double taxes on mutual funds for NRI in India.

Individual - Taxes on personal income in Bahrain

There is no personal income tax (PIT) regime in Bahrain. However, individuals employed by a natural
person or a legal entity or an enterprise in the Kingdom of Bahrain are subject to contributions to
the Social Insurance Organisation (SIO) rules in Bahrain.
Capital gains and income of residents or non-residents not paid in Bahrain are not subject to tax or
social insurance rules in Bahrain.

Individual - Income determination in Bahrain

Employment income
There is no PIT regime in Bahrain. However, from a social insurance perspective, employee gross
income is defined as all that is given in cash regularly or periodically to the worker in consideration
of one’s work, whether payable monthly, weekly, daily, hourly, by piecework, or by the amount of
production.

Capital gains and investment income

Capital gains and investment income are not subject to tax in Bahrain.

TDS on Investments by NRI on Mutual Funds

Taxation on Mutual funds is almost the same for NRIs as for Resident Individuals. The returns are
taxable in both cases, just the TDS gets deducted in the case of NRIs.

NRIs can make investments in listed stocks, ETFs, Debt Funds, NCDs, etc.

• For long-term capital gains (LTCG) on listed equity shares or equity-oriented mutual funds - TDS is
deducted at 10% same as LTCG is taxed.
• In the case of LTCG, non-equity-oriented funds include debt funds, gold funds, international funds,
etc. TDS is applicable at 20% for NRI income from investments. However, the unit holders can claim
indexation benefits while filing ITR.
• Short-term capital gains (STCG) on equity-oriented mutual funds (STT paid) are taxed at 15%, and
so is the TDS for NRI on income on investments.
• In the case of non-equity fund TDS rate on short-term capital gain is 30%. Surcharges and cess are
also levied wherever applicable.

TDS on TDS on TDS on

Particulars
Long-Term Capital Gains Short-term Capital Gains Dividend
Equity 10% 15% 20%
Non-Equity 20% 30%(Highest Tax) 20%

Return of Income Taxes

If an NRI's entire income consists solely of investment income or long-term capital gains after the
proper TDS deductions, they are not obliged to file a return of income.
When submitting returns, you are entitled to a refund of the TDS deduction if your income is in a
lower tax bracket.

Dividend taxation
Dividends from both equity and non-equity dividend plans will be treated as income for the year and
taxed at the appropriate tax slab rate.

The Benefits
NRIs investing in Mutual Funds in India can benefit from the Double Taxation Avoidance Agreement
(DTAA), which prevents double taxation and allows them to offset taxes paid in India against their tax
liability in their home country. Additionally, they can enjoy tax deductions of up to ₹ 1,50,000 under
Section 80C by investing in Equity Linked Saving Schemes (ELSS).