The Indian equity market – the BSE Sensex – has been a massive wealth creator over the long-term, clocking around 15.5% CAGR in Indian Rupee (INR) and 9.5% in US Dollar (USD) terms. Several reforms, particularly after liberalisation, have placed India on a high-growth trajectory in GDP, which, in turn, has led to this attractive compounding of wealth – despite various scams, economic challenges, wars, and geopolitical tensions.
This wealth creation opportunity has attracted Non-Resident Indians (NRIs) to invest in India, particularly through mutual funds. The Gujarat International Finance Tec-City (GIFT City) ecosystem is offering compelling opportunities to diversify, and it is proving to be a game-changer for NRIs looking to invest in India.
GIFT City Funds
GIFT City Fund allows NRIs to invest in major foreign currencies—USD, Euro, British Pound Sterling (GBP), Singapore Dollar (SGD), Australian Dollar (AUD), United Arab Emirates Dirham (AED), etc.—making it less complicated and eliminating the immediate worry of INR depreciation and repatriation of the money abroad (both principal amount and returns are fully repatriable to the country of residence, plus no FEMA or RBI approval is needed).
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Moreover, as per the extant tax rules, these funds are exempt from tax deduction at source (TDS) under the GIFT City regulations.
Additionally, if there is a double taxation avoidance agreement (DTAA) signed between your country of residence and India, as an NRI, you could benefit from lower withholding tax rates. Thus, it may also help in reducing tax liability in their country of residence on the same income.
Also, dividends and interest income earned by NRIs from a GIFT City fund are exempt from tax in India. Plus, there is zero capital gain tax on many GIFT City securities.
GIFT City Funds are regulated by the International Financial Services Centres Authority (IFSCA), a unified regulator which combines the powers of the RBI, SEBI, PFRDA, and IRDAI into a single body, ensuring compliance with global financial and regulatory norms.
This also means less paperwork and a seamless investing experience. To comply with Know Your Customer (KYC) requirements, GIFT City has introduced Aadhaar-based video KYC for NRIs in 11 countries, which can be completed on a smartphone, tablet, laptop, or desktop with a camera.
The best part is that seasoned fund managers with global expertise are appointed to manage assets and potentially achieve the investment objective.
GIFT City Funds allow investment in equities, bonds (ESG Bonds, Foreign Currency Bonds, Corporate Bonds), commodities, and multi-asset portfolios, and are positioned as global by nature.
To invest in a GIFT City Fund, all you have to do is approach your bank to check whether they offer access to these funds, or an asset management company (AMC) or financial advisor, and invest via your bank account (direct foreign bank account or an NRE account).
However, compared to typical mutual funds, GIFT City Funds have a higher investment threshold. This is because the primary two categories of GIFT City Funds are the Alternative Investment Funds (AIFs) and Portfolio Management Services (PMSs).
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Mutual Funds
Mutual funds are a versatile avenue for wealth creation that come in various types – equity, debt, hybrid, and others – and subcategories thereunder. Depending on risk profile, investment objective, and the financial goal(s) and time to achieve them, a prudent choice can be made. Moreover, they are a cost-effective medium for wealth creation.
Flexi-cap funds, multi-cap funds, and multi-asset allocation funds are the types of funds NRIs have preferred, according to the data. Also, those with a very high-risk appetite have exposure to sector & thematic funds and small cap funds.
Inflows are primarily from NRIs based in the US, the UK, the UAE, Canada, and Singapore, with most investors in the 30-45 age group, investing both lump sum and via the Systematic Investment Plan (SIP).
The capital gains have been quite attractive, which is why NRIs are investing in various mutual funds.
As per extant rules, the capital gains on mutual funds are taxed as follows:
- Equity mutual funds: Short-Term Capital Gains (STCG), i.e., units held for 12 months or less, are taxed at 20%. Whereas, the Long-Term Capital Gains (LTCG), i.e., units held for more than 12 months, are taxed at 12.5% if the gains exceed Rs 1.25 lakh in a financial year.
- Debt mutual funds: Irrespective of the holding period, the capital gains are taxed as per one income-tax slab, i.e., at the marginal rate of taxation.
Keep in mind, capital gains are subject to TDS as under:
- Equity mutual funds: In the case of STCG, the rate is 20%, while for LTCG it is 12.5%.
- Debt mutual funds: the TDS rate is 30%.
That being said, if there is a DTAA between your country of residence and India, the capital gains arising from the redemption of mutual fund units by NRI investors are not taxable in India under Article 13(5) of the applicable DTAA. To claim DTAA benefits, a valid Tax Residency Certificate and Form 10F are necessary.
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If you are an NRI wanting to invest, do this:
Complete your mandatory KYC compliance by furnishing/uploading address proof (Passport, PIO/OCI card, any overseas address proof), photo identification proof (PAN card), tax residency declaration (FATCA/CRS), and passport sized photo.
The verification can be done through KYC Registration Agencies (KRAs) like CAMS or KFintech.
NRIs also need to undergo In-Person Verification (IPV), which can be done at overseas branches of Scheduled Commercial Banks registered in India, Notary Public, Court Magistrate, Judge, or Indian Embassy / Consulate General in the country where the investor resides.
Once KYC is done and verified, you can invest without having to repeat the KYC process every time.
The investment can be made either through a Non-Resident External (NRE) account – suitable for investing overseas earnings in India and repatriating upon redemption – or a Non-Resident Ordinary (NRO) rupee-based account, where repatriation is not possible.
To sum up…
India's growth outlook and reforms offer a promising opportunity for wealth creation. Tap it right and benefit from diversification. Invest sensibly, be a thoughtful investor.
Happy investing!
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