NRI Corner — Investing in Indian Mutual Funds
A plain-language education guide for Non-Resident Indians: who counts as an NRI, how the NRE/NRO routes work, what KYC is needed, and how capital gains are taxed and withheld.
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A concise, plain-language guide from our Investing with a Purpose series — residency tests, NRE/NRO routes, the conversion checklist, and the full NRI capital-gains and TDS tables for FY 2026-27. Written for NRI investor families; shared free on request.
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1. Who is an NRI? Two different definitions
India uses two separate laws to decide whether you are a "non-resident" — and they can give different answers for the same person in the same year.
- FEMA (exchange control): under the Foreign Exchange Management Act, 1999, a "person resident in India" is broadly someone who resided in India for more than 182 days in the preceding financial year — but intention matters. A person who leaves India to take up employment, carry on business, or stay abroad for an uncertain period becomes a person resident outside India from the day of departure, regardless of day counts. FEMA status decides which bank accounts you may hold and how you may invest (NRE/NRO, repatriation rules).
- Income-tax: residential status under section 6 of the Income-tax Act (the Income-tax Act, 2025 applies from 1 April 2026, replacing the 1961 Act; section 6 continues to govern residence) is a pure day-count test for the current tax year, with special rules for Indian citizens and persons of Indian origin. Tax residency decides which of your incomes India taxes and at what point.
Simple way to remember: FEMA looks at where your life has moved; Income-tax counts your days. You could be a non-resident under FEMA (having just moved abroad for a job) yet still a tax resident for that first year, or vice versa.
2. Test of tax residency (Income-tax)
Under section 6 of the Income-tax Act, 2025 (which continues the framework of section 6 of the 1961 Act as amended by the Finance Act, 2020), an individual is a resident of India for a tax year if either basic condition is met — subject to the relaxations below.
| Rule | Condition | Who it applies to |
|---|---|---|
| 182-day rule | Stay in India for 182 days or more in the tax year → resident. | Everyone. |
| 60 + 365 rule | Stay of 60 days or more in the tax year and 365 days or more in the preceding 4 years → resident. | Everyone — but see the relaxation in the next row. |
| NRI / PIO relaxation | For an Indian citizen leaving India for employment abroad (or as crew of an Indian ship), and for an Indian citizen or person of Indian origin visiting India, the 60-day limit is relaxed to 182 days. | Indian citizens and persons of Indian origin living abroad. |
| 120-day rule | If an Indian citizen or PIO visiting India has India-sourced total income above ₹15 lakh (excluding foreign income), the relaxed limit is 120 days instead of 182. A stay of 120–181 days (with 365+ days in the prior 4 years) makes the person resident — but classified as RNOR. | Higher-income visiting NRIs/PIOs. |
| Deemed resident | An Indian citizen with India-sourced income above ₹15 lakh who is not liable to tax in any other country (by reason of domicile or residence) is deemed a resident — classified as RNOR — even with zero days in India. | Indian citizens in nil-tax jurisdictions. |
| RNOR conditions | A resident is "Resident but Not Ordinarily Resident" if: non-resident in 9 of the 10 preceding years, or present in India for 729 days or less in the preceding 7 years, or covered by the 120-day / deemed-resident rules above. An RNOR is taxed on Indian income (and foreign income from a business controlled in India) — not on other foreign income. | Typically returning NRIs, for a transition period. |
Anyone who meets neither basic condition is a non-resident for tax purposes and is taxed in India only on income received, accruing or arising (or deemed to accrue or arise) in India — which includes capital gains on Indian mutual fund units.
3. How NRIs invest in Indian mutual funds
- No special RBI permission is needed. Under the FEMA (Non-Debt Instruments) Rules, 2019, NRIs and OCIs may purchase units of domestic mutual funds on a repatriation basis or a non-repatriation basis as a permitted class of investors. The Portfolio Investment Scheme (PIS) requirement that applies to direct secondary-market equity shares does not apply to mutual fund units.
- NRE route (repatriable): investments made from a Non-Resident External (NRE) account are on repatriation basis — the invested capital and the redemption proceeds (after Indian taxes) can be freely remitted abroad, with no annual ceiling.
- NRO route (non-repatriable): investments from a Non-Resident Ordinary (NRO) account — for example, out of Indian rent, pension or dividends — are on non-repatriation basis. Balances in an NRO account (including mutual fund redemption proceeds credited there) can be remitted abroad up to USD 1 million per financial year, net of applicable Indian taxes; larger amounts need specific RBI approval.
- KYC: NRI KYC requires PAN, passport, proof of overseas address, NRI status evidence (visa / OCI / residence permit) and completion of in-person or video verification through a KYC Registration Agency. The folio must be linked to an NRE or NRO bank account — resident savings accounts cannot be used.
- FATCA / CRS declaration: every investor must declare their country (or countries) of tax residence and foreign tax identification numbers. This is a global automatic-exchange-of-information requirement; Indian fund houses report account details of foreign tax residents to Indian authorities, who share them with treaty partner countries.
4. Taxation for NRIs — capital gains and TDS
The capital-gains framework rewritten by the Finance (No. 2) Act, 2024 (effective 23 July 2024) continues to apply for FY 2026-27 under the Income-tax Act, 2025 — the Finance Act, 2026 made no change to these rates, holding periods or the ₹1.25 lakh exemption. For NRIs, tax is deducted at source (TDS) by the fund's registrar at the time of every redemption, unlike residents who self-assess.
| Fund category | Holding period | Tax rate for NRIs | TDS on redemption |
|---|---|---|---|
| Equity-oriented funds (≥65% in domestic listed equity) |
12 months or less — STCG | 20% (section 111A of the 1961 Act; now section 196, Income-tax Act 2025) | 20% + surcharge + 4% cess |
| More than 12 months — LTCG | 12.5% on gains above ₹1.25 lakh per year, no indexation (section 112A; now section 198) | 12.5% + surcharge + 4% cess | |
| Other (non-equity, non-specified) funds (e.g. hybrid with 35–65% equity, most gold/international funds) |
24 months or less — STCG | Applicable slab rate | 30% + surcharge + 4% cess |
| More than 24 months — LTCG | 12.5%, no indexation (section 112; now section 197) | 12.5% + surcharge + 4% cess | |
| Specified mutual funds (>65% in debt & money-market instruments; units acquired on or after 1 Apr 2023) |
Any — always deemed short-term (section 50AA framework) | Applicable slab rate, regardless of holding period | 30% + surcharge + 4% cess |
| IDCW (dividend) payouts | — | Applicable slab rate | 20% (section 196A of the 1961 Act) or the lower DTAA rate, + surcharge + cess |
- Surcharge cap: surcharge on equity capital gains and on all LTCG is capped at 15%; health & education cess of 4% applies on tax plus surcharge.
- Basic exemption limit: non-residents cannot adjust the unexhausted basic exemption limit against equity STCG (section 111A type) or LTCG (sections 112/112A type) gains — a benefit available only to resident individuals and HUFs. The section 87A rebate is also not available to non-residents.
- TDS is not the final word: TDS is withheld on the gain at the rates above; your actual liability is settled when you file an Indian income-tax return, and excess TDS is refundable.
- DTAA relief: if India's Double Taxation Avoidance Agreement with your country of residence provides beneficial treatment, you can claim it — this generally requires a valid Tax Residency Certificate (TRC) from your home country and electronic Form 10F. Most DTAAs also allow a credit in your home country for tax paid in India.
5. US and Canada-based NRIs — an extra step
Because of additional securities-law and FATCA reporting obligations in the United States and Canada, many Indian fund houses do not accept investments from persons resident in the US or Canada, while a subset accepts them subject to conditions — for example, additional declarations, investment only through certain modes, or transacting while physically present in India. The exact position varies by fund house and changes from time to time, so eligibility has to be checked before onboarding. US and Canada residents may also have home-country tax reporting on foreign mutual funds (such as the US PFIC rules) that a local tax adviser should evaluate.
6. Becoming an NRI with existing investments
If you already hold mutual fund folios as a resident and your status changes, the folios continue — but the paperwork must catch up:
- Update KYC: your KYC record must be modified from "Resident Individual" to "Non-Resident", with passport, visa/residence details and overseas address.
- Change the bank account: under FEMA, a resident savings account must be re-designated as an NRO account (or closed) once you become a non-resident; folios should be re-linked to the NRO (or a new NRE) account.
- Fresh FATCA/CRS declaration: declaring your new country of tax residence and its tax identification number.
- Existing SIPs: can generally continue once the folio is converted, drawing from the NRO account; new investments follow the NRI eligibility rules of each fund house (including the US/Canada point above).
- Taxation changes: from the redemption date on which you are a non-resident, TDS applies at the rates in the table above, even on units bought while you were a resident.
Disclaimer, currency and sources
Last updated: 25 August 2026 | Based on: the Income-tax Act, 2025 (in force from 1 April 2026), read with the Finance (No. 2) Act, 2024, the Finance Act, 2025 and the Finance Act, 2026; the Foreign Exchange Management Act, 1999 and the FEMA (Non-Debt Instruments) Rules, 2019.
Sources:
- Income Tax Department — incometaxindia.gov.in (Income-tax Act, 2025 text and CBDT FAQs on transition)
- Income Tax Department — Non-Resident help pages
- Reserve Bank of India — FEMA and remittance FAQs
- AMFI — investor education on NRI investing