India’s rapidly growing economy and its strong stock market potential have made it an enticing destination for investors everywhere. One of the most convenient ways for retail investors to participate in this growth is through SIPs (Systematic Investment Plans). Through SIPs, investors can contribute regular amounts over time instead of making a lump sum investment, and enjoy benefits like diversification and professional management.
Their simplicity and effectiveness have made SIPs an essential part of financial planning. NRIs can also invest in SIPs and take advantage of India’s growing economy, though they need to comply with specific banking, investment, and tax regulations. But don’t worry, it’s not as complicated as it sounds! With the right knowledge and just a little bit of planning, investing in sip plans for NRI individuals can be easy and rewarding. Here, we’ll take you through eligibility, taxation, and repatriation rules to get you started. Let’s go!
Understanding SIPs: What NRIs Need to Know
What are SIPs and How Do They Work?
When investing in mutual funds, investors have two modes of investment to choose from – lump sum investment and SIP. An SIP allows investors to make regular contributions instead of making a large one-time investment. Investors can customise SIPs however they’d like. They can alter the contribution amount, change the frequency of investment, add top-up and trigger options, pause temporarily, and even stop the SIP whenever needed. This flexibility is just one of the many benefits of investing via SIPs.
Every contribution you make buys a certain number of the fund’s units at the prevailing Net Asset Value (NAV). A fund’s NAV changes daily, so the amount of units you buy periodically will also differ. When the market is up and the NAV is high, you buy fewer units, and when the market is down and the NAV is low, you buy more units.
This effect is known as rupee cost averaging, and it is one of SIPs’ biggest strengths. Over a period, the average cost of your investment tends to even out, which means the impact of short-term market fluctuations is mitigated. You don’t need to worry about timing the market and can simply make regular contributions towards your goals.
Investing in sip plans for NRI individuals requires compliance with the RBI and Foreign Exchange Management Act (FEMA). We’ll go deeper into these requirements in the later sections.
Why Should You Invest in SIPs?
SIPs offer many benefits such as:
1. Professional management
Highly qualified and experienced managers and their expert analysts conduct in-depth market research, and make informed decisions to maximise returns while minimising risks.
2. In-built diversification
Mutual funds invest in a number of securities, which spreads risk across companies, assets, and industries.
3. Rupee cost averaging
When the NAV is lower, more units can be bought, and vice versa. This evens out the cost of investment and eliminates worries about waiting for the perfect time to invest.
4. Flexibility and convenience
It’s quite easy to start an SIP, even for NRIs. Once set up, you can make changes easily to reflect your risk tolerance, goals, and financial situation. For example, if you receive a bonus or a promotion, you can simply increase the SIP amount in just a few clicks. The amount also gets automatically deducted from your linked account, so there’s no need to manually intervene.
Eligibility Criteria for NRIs to Invest in SIPs
According to FEMA, an NRI can only invest in India through an NRI bank account. Upon reaching NRI status, their existing savings accounts must either be converted to one of the NRI accounts (generally NRO) or closed. These accounts include:
1. Non Resident Ordinary (NRO) Account
Income earned in India, such as from rent, salary, dividends, interest, and pension is managed in an NRO account. If you decide to make your SIP investments through this account, Indian tax laws will be applicable. Capital gains will also attract TDS. NROs are not fully repatriable. You can repatriate only up to USD 1 million per financial year.
2. Non Resident External (NRE) Account
Money earned abroad can be deposited in an NRE account, and the currency is converted to Rupees according to the prevailing exchange rates. Any sip investment for NRI individuals made through this account is fully repatriable, so an NRO is ideal if your goal is to freely repatriate returns. If you want to use your foreign income as a remittance, an NRE account is the better option. It also allows you to invest without worrying about tax on interest earned because NRE accounts are completely tax-exempt in India.
For NRIs, SIP investment can be made through these two options. Even though they differ in terms of repatriation and taxation, both accounts hold your funds in Rupees. If after getting your NRI status you want to continue your SIP investment, you’ll need to update your residential status with your mutual fund house and bank to comply with FEMA.
Once your residential status changes to NRI, a compulsory KYC update is required to continue investing. Here are some documents needed for the entire process:
- Passport
- Visa, work or residence permit, or other documents as proof of NRI status
- KYC Form
- PAN
- Photograph
- Address proof like driving license or an Aadhaar card
- NRIs from the US and Canada require declaration documents to comply with FATCA and CRS
Best SIP Investment Plans for NRIs
The variety of sip plans for NRI individuals to choose from is broad. Mutual funds suited for different risk appetites and financial goals allow NRIs to invest based on their income, risk tolerance, and investment horizon. For example,
Equity Funds
1. Large-cap Funds
These funds invest in well-established companies with strong fundamentals, stable returns and relatively lower risk. These consist of the top 100 companies by market cap.
2. Mid-cap Funds
Here, the investment is made largely in companies lying between 101st to 250th by market cap. Risk and return potential is higher compared to large-cap funds.
3. Small-cap Funds
Primary investment is made in growing companies beyond 251st in market cap. Very high-risk funds which offer potentially attractive returns.
4. Flexi Cap Funds
As the name suggests, these funds invest across market capitalisations, thus offering greater diversification and flexibility.
5. ELSS Funds
Also known as tax-saving funds due to benefiting from Section 80C deductions. Equity Linked Savings Schemes have a lock-in period of 3 years and offer attractive returns.
6. Multi-cap Funds
In these funds the portfolio is allocated across large, mid, and small-cap stocks for more balance.
Debt Funds
1. Liquid Funds
These funds are good for the short-term as they invest in highly liquid securities with short maturities.
2. Long-duration Funds
Investment is made in long-term bonds, which offer higher yields but are also more exposed to interest rate risk.
3. Income Funds
Investors looking for a stable income can invest in these funds which generate earnings through investments in bonds and debt instruments.
4. Gilt Funds
The majority of the portfolio in gilt funds consists of Government securities.
Hybrid Funds
1. Dynamic Asset Allocation / Balanced Advantage Funds
Such funds adjust equity and debt allocation based on market conditions.
2. Arbitrage Funds
These funds generate profits from price differences in cash and derivatives markets, and offer low-risk returns.
Which One Should You Choose?
Picking the right SIPs depends on your risk tolerance, financial situation, and goals. For example, a younger NRI planning for retirement can take an aggressive approach and invest in high-risk high-reward options like growth equity SIPs. Over the long term, the risk associated with such funds tends to go down, thus they are excellent vehicles for wealth creation. A conservative investor, on the other hand, can opt for hybrid or debt funds to preserve their capital.
They can also invest in IDCW funds to generate a steady stream of income while enjoying market-linked returns. The best way to build a suitable portfolio is by consulting with an sip investment planner who can create a personalised plan considering not only your unique profile but also market conditions, taxation policies, and repatriation needs.
How to Start SIP Investment as an NRI
Starting an SIP generally follows this process:
- Open an NRO or NRE account and complete the KYC process. You should mention whether your investment will be on a repatriable or non-repatriable basis.
- Your KYC update can be completed via Aadhar or through a video call. It can also be done physically by contacting your AMC, visiting the Indian embassy, or through a Power of Attorney.
- Select an AMC. Not all mutual fund houses allow NRIs to participate in their schemes due to strict regulations. For example, NRIs living in Canada and the USA face challenges as many mutual fund houses do not accept investments due to FATCA and CRS regulations.
- Select fund types. As discussed above, different types of funds are suitable for different goals and risk profiles. Pick the ones that align best with your needs.
- After starting your SIPs you should monitor their progress and make adjustments as your needs, goals, or market conditions change.
Investing in sip plans for NRI individuals can be a cumbersome process due to various regulatory, banking, and tax requirements. Having a certified financial advisor by your side can make the process much smoother. An expert can help you understand FEMA and the regulations of your country of residence. They can also ensure compliance with KYC and help you select the best SIP plans aligned with your risk profile and financial goals.
Taxation Rules for NRIs Investing in SIPs
There are two ways to generate income from sip investment for NRI individuals – through capital gains after selling or redeeming an investment, or through dividends. Here’s how each income is taxed:
Capital Gains
Capital gains are the profits made after selling or redeeming a mutual fund investment. Capital gains taxation depends on the type of fund invested in and its holding period. Based on these factors, gains can be classified into long-term capital gains or short-term capital gains.
1. LTCG and STCG tax on equity-oriented mutual funds
If the investment is sold after at least being held for 12 months, gains are termed LTCG and taxed at 12.5% above Rs. 1.25 lakh. If the equity fund investment is sold before 12 months, an STCG tax is levied at 20%.
2. LTCG and STCG tax on debt-oriented mutual funds
Profits from such funds are considered LTCG when investment is held for 24 months or more, and STCG when held for less than 24 months. Investments redeemed after 23 July 2024 are levied a 12.5% LTCG tax without any indexation benefit. STCG profits are added to the total income and taxed according to the income tax slab rate.
Dividend Income
Capital gain taxation is largely the same for residents and NRIs (except TDS). However, dividend income is where things start to differ significantly for NRIs. Dividends earned by residents are added to their total income and taxed according to their slab rates. They are also taxed 10% TDS on dividend income exceeding Rs. 5,000.
NRIs, on the other hand, are charged a 20% rate on all dividend income except dividends earned from Global Depository Receipts of Indian companies or PSUs bought using foreign currency, which is taxed at a reduced 10% rate. As far as TDS goes, NRIs must pay a higher 20% rate compared to residents.
NRIs can benefit from Double Taxation Avoidance Agreements and save more of their hard-earned money. It’s best to meet up with a qualified tax consultant who can guide you on how to minimise tax liability, ensure compliance, and claim all possible tax benefits.
Repatriation Rules: How NRIs Can Withdraw Investments
Investing in sip plans for NRI individuals can be done on the basis of full or non-repatriation. Investments made through an NRE account are fully repatriable, and both the principal and interest can be transferred back to your country of residence without restrictions. If you invest through an NRO account, up to USD 1 million in a financial year can be repatriated.
Common Mistakes to Avoid While Investing in SIPs as an NRI
- Residential status should be updated as soon as your status changes to NRI to ensure compliance with regulations. The old residential status could lead to mutual fund houses rejecting your application.
- Capital gains earned by NRIs attract TDS. You can use DTAA benefits to your advantage and reduce your tax liability.
- Selecting funds based on just past returns is a mistake. Many factors, including consistency of performance, fund manager expertise, expense ratio, risk-adjusted returns, and market conditions, should be considered before investing.
- Always make sure to align your SIP investment with your financial goals and risk tolerance.
- Currency risk can also dilute the returns of sip investment for NRI individuals. This risk can be managed by regular exchange rate monitoring to time remittances efficiently, diversifying across currencies, opening Foreign Currency Non-Resident (FCNR) accounts, hedging strategies, and consulting with investment planners.
- While SIPs invest in a basket of securities, diversifying across different SIPs can be a wise move. Make sure your portfolio doesn’t overlap too much.
Conclusion
Investing in sip plans for NRI individuals is a great way to participate in India’s growth. Making regular contributions to suitable funds can help investors realise their financial dreams and also let them enjoy many benefits like compound interest, rupee cost averaging, diversification, and professional fund management. Opening an NRO or NRE account and completing KYC are essential steps for NRIs to make sure they stay compliant with FEMA and Income Tax Act regulations.
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