October 31, 2025
8 mins read
Sameer Bhatia, a 36-year-old investment banker based in New York, has spent over ten years living outside of India. His financial ties to India have never diminished, even though he developed his profession elsewhere. His thoughts of investment were often thwarted by India's rapidly expanding economy.
Mutual funds were the obvious choice for Sameer. They gave him the chance to increase his riches without having to worry about daily stock tracking. The fact that mutual funds are run by experts who put in the effort on behalf of investors gave him peace of mind, as it does for many NRIs.
To make this easier to understand, let's dissect it step-by-step using straightforward language.
Whether or not an NRI is permitted to invest in mutual funds in India is the first thing that people inquire about. Yes, is the response. Although there are certain regulations to be aware of, you can invest.
The Foreign Exchange Management Act (FEMA) governs all NRI investments. This means that you have to meet the requirements of this statute to be an NRI.
You are not permitted to make direct investments in US dollars or any other foreign currency. You must use Indian rupees for your investments. You must have an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account in order to do this.
Update your Know Your Customer (KYC) information with the fund house as soon as your residential status changes. This entails providing proof of your bank account, passport, visa information, and overseas location.
You can begin or continue investing in mutual funds as soon as these conditions are satisfied.
Tax Deducted at Source (TDS) is the technique used to collect taxes from non-resident individuals. The mutual fund provider deducts tax before transferring the redemption amount to your account, saving you from having to pay tax later.
Let's say, for instance, that you sell mutual fund units and earn. Tax is already withheld and deposited with the Indian government before the money even reaches you. TDS will still be applied even if your total Indian income is less than the exemption threshold.
This does not, however, imply that you will always lose the money. You can always file your income tax return (ITR) in India and request a refund if too much tax has been withheld.
NRIs are taxed according to their income earned or accumulated in India under the previous tax system. India does not tax your foreign income. The slabs are as follows:
Up to ₹2.5 lakh in income is tax-free.
5% of ₹2.5 lakh to ₹5 lakh
20% of ₹5 lakh to ₹10 lakh
30% over ₹10 lakh
Remember that the refund under Section 87A is only available to residents and cannot be claimed by non-residents. However, if qualified, you can still claim deductions such as Section 80D (medical insurance), 80C (ELSS investments, life insurance, and home loan principal), and Section 80D (interest on housing loans).
More slabs and reduced rates are provided under the 2020 tax regime, although the majority of exemptions and deductions are not permitted. The slabs for FY 2024–2025 are as follows:
Under the new tax regime (Section 115BAC), applicable to NRIs by default, tax rates are as follows:
Income up to ₹12 lakh: No tax
₹12 lakh – ₹16 lakh: 15%
₹16 lakh – ₹20 lakh: 20%
₹20 lakh – ₹24 lakh: 25%
Above ₹24 lakh: 30%
A standard deduction of ₹75,000 applies, which effectively raises the tax-free threshold to ₹12.75 lakhs.
Your income sources and whether or not deductions are advantageous to you will determine whether you choose the old or new regime. NRIs have to make a choice while submitting their ITR.
Taxation on mutual funds is dependent on two factors:
The mutual fund kind (debt or equity)
How much time you spend holding it
1. Short-Term Capital Gains (STCG)
If equity shares or equity-oriented mutual funds are sold within 12 months, the STCG tax rate has been raised from 15% to 20%, plus applicable cess and surcharge.
2. Long-Term Capital Gains (LTCG)
For investments held longer than 12 months, gains exceeding the exemption threshold are now taxed at 12.5% (previously 10%) without indexation benefits.
The exemption limit has been increased to ₹1.25 lakh per financial year (up from ₹1 lakh) before LTCG is applied.
Gains that are short-term (less than 36 months) are taxed at your slab rate and added to your income.
Long-Term (over 36 months): Gains are subject to 20% indexation tax, which lowers the taxable profit by adjusting for inflation.
The mutual fund company credits your account with the remaining amount after deducting TDS at these rates.
Paying taxes twice—once in India and again in their home country—is one of the main concerns for non-resident Indians. India has DTAAs (Double Taxation Avoidance Agreements) with numerous nations to circumvent this.
As an NRI, your eligibility to claim deductions under Section 80C of the Income Tax Act is limited but still provides room to reduce taxable income in India. Here are the main deductions available to you:
Premiums paid on life insurance policies in your name, your spouse, or children are eligible for deduction under Section 80C.
You can invest in Equity Linked Savings Schemes (ELSS), which qualify for deductions up to ₹1.5 lakh per financial year under Section 80C.
If you have taken a home loan for property in India, the principal repayment amount is deductible under this section.
You can claim deduction on tuition fees paid for your children’s education in India, provided it is for a full-time course in a recognised institution.
Premiums paid towards ULIPs also qualify under Section 80C for NRIs.
While many 80C instruments like PPF or NSC are not open to NRIs, the available options still allow you to plan your taxable income responsibly within the permitted limits.
NRIs have an easy way to take part in India's economic growth through mutual funds. They offer significant profit potential, professional management, and diversification. However, the shape of your net gains is greatly influenced by taxes.
With careful planning and understanding of tax laws, you may ensure that your investments will remain profitable and compliant.
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Starting July 23, 2024, the STCG tax rates for NRIs on stocks and equity mutual funds have risen from 15% to 20%
In the Union Budget 2024, it was announced that NRIs would no longer be eligible for the indexation benefit on long-term capital gains (LTCG) received from property sales. While there has been a 12.5% reduction in the tax rate, the inability to adjust for inflation means higher tax liabilities for NRIs.
There has been an increase in the TDS for NRIs on the sale of listed equity shares and equity mutual fund units.
LTCG: The rate has risen from 10% to 12.5%,
STCG (of less than 12 months): The rate has gone up from 15% to 20%.
As an NRI (Non-Resident Indian), you can purchase new or continue your investments in mutual funds. However, it’s crucial to comply with the rules and guidelines outlined by the Foreign Exchange Management Act (FEMA).
The LTGC for NRIs in the stock market has been increased to 12.5%, while the STCG have now been set at 20%
Once you become an NRI, you need to update your KYC details with your Asset Management Company (AMC). SEBI has relaxed the "KYC Registered" status rules for NRIs, and you can invest in mutual fund schemes (both new or existing) till 30th April 2025, without submitting any new paperwork.
The choice of mutual funds depends greatly on your financial goals, and also the country that you reside in. You should also keep in mind that certain mutual fund houses discourage investments from USA and Canadian NRIs.
For NRIs, short-term capital gains (STCG) from mutual fund units held for less than a year are taxed at 15%. Investments in equity-oriented mutual funds are tax-free up to the annual exemption limit of ₹1 lakh for long-term capital gains (LTCG)
No, tax on mutual fund capital gains isn’t automatically deducted. You have to pay it when you redeem your units. However, TDS (Tax Deducted at Source) is applicable on dividend income from debt funds.
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