NRIs Cannot Freely Invest in All Indian Mutual Funds: The KYC, FATCA, and Category Rules Under ITA 2025
Most NRIs assume that opening an NRO account is enough to invest in any Indian mutual fund. That assumption is wrong. US and Canada-based NRIs are blocked by most major AMCs due to FATCA compliance requirements. Overseas fund-of-funds have halted fresh NRI investments. And the TDS regime for NRIs is harsher than for residents — up to 30 percent deducted at source on debt fund gains. Under ITA 2025, equity LTCG is taxed at 12.5 percent and STCG at 20 percent, with TDS deducted on every NRI redemption regardless of amount. This guide maps which fund categories NRIs can access, what FATCA self-certification requires, which bank account to use for full repatriation, and how to claim TDS refunds via Form 26AS (now Form 168 under ITA 2025).
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
NRIs Cannot Freely Invest in All Indian Mutual Funds: The KYC, FATCA, and Category Rules Under ITA 2025
Most WhatsApp groups tell NRIs: "Just open an NRO account and you can invest in any Indian mutual fund, same as a resident." That advice is wrong on at least three counts. Certain fund categories are closed to NRIs entirely. US and Canada-based NRIs are blocked by most major AMCs due to FATCA compliance costs. And the tax treatment — including mandatory TDS at rates up to 30% — is materially different from what residents pay.
Here is the complete, accurate picture.
What the Law Actually Says
SEBI's Framework for NRI Mutual Fund Investment
SEBI permits NRIs to invest in Indian mutual funds under the Portfolio Investment Scheme (PIS) or directly through NRO/NRE accounts, subject to AMC-level acceptance. The legal basis is RBI's FEMA Notification 20(R) and SEBI Circular CIR/IMD/DF/21/2012 and subsequent updates. There is no blanket bar on NRI mutual fund investment — but there are significant category and jurisdiction-level restrictions that most NRIs discover only after trying to open an account.
ITA 2025 on Taxation of Mutual Fund Gains
Under the Income Tax Act 1961 (and continued under the Income Tax Act 2025, effective Tax Year 2025-26 onwards), the tax rates on mutual fund redemptions for NRIs are as follows:
Equity-oriented mutual funds (equity allocation above 65%):
Long-term capital gains on units held more than 12 months are taxed at 12.5% under Section 112A ITA 1961 and the equivalent provision in ITA 2025. The ₹1.25 lakh annual exemption applies to NRIs as well as residents. Short-term capital gains on units held 12 months or less are taxed at 20% under Section 111A ITA 1961 and the ITA 2025 equivalent.
Debt-oriented and other mutual funds (investments made on or after 1 April 2023):
After the Finance Act 2023 amendment, gains from debt funds acquired on or after 1 April 2023 are taxed at slab rates regardless of holding period. For NRIs, this means TDS is deducted at 30% plus applicable surcharge and health and education cess at the time of redemption.
ITA 2025 terminology note: ITA 2025 replaces "Previous Year" and "Assessment Year" with the single term "Tax Year." When AMC documents or fund house KYC forms still refer to AY 2026-27, they mean Tax Year 2026-27 under ITA 2025 — income earned April 2026 to March 2027. Operationally nothing changes for the investor, but the terminology shift matters when reading official income tax communications and filing ITR.
TDS on Mutual Fund Redemptions: NRI vs Resident
This is where the difference bites hardest. The fund house deducts TDS at source on every NRI redemption:
Residents pay no TDS on equity fund redemptions — they self-assess at ITR filing. NRIs have TDS deducted on every redemption, regardless of the gains amount. You can claim a refund by filing ITR-2 for the relevant Tax Year if your actual Indian tax liability is lower — but the excess TDS remains with the government until the refund is processed, which can take months.
The FATCA Bar for US and Canada-Based NRIs
FATCA — the US Foreign Account Tax Compliance Act — requires Indian financial institutions to report accounts held by US Persons to the US Internal Revenue Service (IRS). This includes mutual fund folios. Filing these reports costs AMCs significant compliance resources, and the penalties for errors or non-compliance under FATCA are severe.
As a result, most major Indian AMCs have stopped accepting new investments from NRIs with a US or Canada address, or with US or Canada tax residency. This includes Nippon India Mutual Fund, Franklin Templeton India, UTI Mutual Fund, and SBI Mutual Fund, among others. Some have also asked existing US and Canada NRI investors to exit their folios.
Who does FATCA affect?
FATCA applies to any "US Person," which includes US citizens (including dual citizens), permanent residents (green card holders), H-1B, L-1, and O-1 visa holders who meet the substantial presence test, and Canadian citizens under the Canada-US Intergovernmental Agreement (IGA). A Dubai-based NRI who holds a US passport is a US Person under FATCA regardless of where they currently live. FATCA compliance is based on citizenship and tax status, not country of current residence.
Which AMCs still accept US and Canada NRIs (as of mid-2026)?
Mirae Asset India Mutual Fund accepts US and Canada NRI investors with proper FATCA self-certification, including Form W-8BEN for US investors. A handful of smaller AMCs also do. Verify directly with each AMC before completing KYC, as policies change and exceptions exist for specific scheme types.
Which Fund Categories Are Restricted or Barred for NRIs
Open to NRIs (subject to AMC acceptance and completed KYC):
Large-cap, mid-cap, small-cap, and flexi-cap equity funds are generally available. Multi-asset and balanced hybrid funds are accessible. ELSS (Equity Linked Savings Scheme) is available, with the Section 80C deduction claimable against Indian taxable income. Liquid and overnight funds are open. Index funds and ETFs are accessible via a Demat account. Debt and fixed-income funds are available, but note the 30% TDS on gains for NRIs.
Restricted or unavailable for NRI investment:
Overseas Fund-of-Funds (FOFs) are partially suspended. SEBI caps total overseas investment by Indian mutual funds at an industry-wide limit. Multiple AMCs hit this limit and suspended fresh subscriptions — including from NRIs — in US equity FOFs, global technology funds, and similar schemes. As of mid-2026, some AMCs have partially reopened with low daily subscription caps. Check with specific AMCs before attempting to invest.
Certain Infrastructure Debt Funds (IDFs) are closed to retail NRI investors under RBI guidelines. Category III AIFs structured as mutual fund schemes are subject to additional SEBI eligibility conditions that typically exclude most NRI investor profiles.
ELSS and Section 80C for NRIs: NRIs can invest in ELSS and claim the Rs 1.5 lakh deduction under Section 80C ITA 1961 and the equivalent provision under ITA 2025, but only against Indian taxable income. If your only Indian income is NRE interest — fully exempt under Section 10(4) ITA 1961 and ITA 2025 — or NRO interest on which TDS has already been deducted at the maximum rate, the 80C deduction may offer limited practical benefit. Run the numbers before allocating to ELSS purely for the tax angle.
KYC Requirements for NRI Mutual Fund Investment
The KYC process for NRIs requires more steps than for resident investors.
Step 1 — CKYC (Central KYC via a SEBI-registered KRA): NRIs must complete KYC with a KYC Registration Agency. In-person verification (IPV) is required, conducted either at an Indian bank branch during a visit to India, at an Indian embassy or consulate abroad, or via video KYC if the AMC supports it. HDFC Mutual Fund, ICICI Prudential, and Axis Mutual Fund offer video KYC for NRIs in select countries.
Step 2 — Documents required: Valid Indian passport, proof of NRI status (valid visa, OCI card, or employment/residence permit), overseas address proof (recent bank statement or utility bill from country of current residence), Indian address proof linked to PAN if applicable, PAN card (mandatory for all mutual fund investments above Rs 50,000 per financial year), and a FATCA/CRS self-certification declaration (mandatory for all investors since 2016).
Step 3 — NRE vs NRO account: Investments funded from an NRE account are fully repatriable — principal and gains can be remitted abroad without any approval or cap. Investments funded from an NRO account are subject to the $1 million annual repatriation cap under FEMA. An NRO-to-NRE transfer before investment converts it into fully repatriable funds but requires a CA certificate using Form 15CA (now Form 145 under ITA 2025) and Form 15CB (now Form 146 under ITA 2025) for amounts above USD 25,000 equivalent.
Practical Scenarios for NRI Mutual Fund Investors
Scenario 1 — Rohan in Singapore:
Rohan has Rs 20 lakh in his NRE account and wants to invest in an Indian large-cap index fund. His Singapore-based KYC is accepted by most major AMCs. He invests through his NRE account. After 14 months, he redeems. The fund deducts TDS at 12.5% on the long-term gains. He files ITR-2 in India for the relevant Tax Year, claims the TDS credit from Form 26AS (now Form 168 under ITA 2025), and if his total Indian income is below the basic exemption limit, he receives a full refund of the TDS deducted.
Scenario 2 — Priya in New Jersey (US citizen):
Priya wants to invest in Indian equity funds. Most large AMCs decline her KYC application due to FATCA. She approaches Mirae Asset India, submits Form W-8BEN, and completes FATCA self-certification. Her Indian gains are taxed in India via TDS. She must also declare these gains on her US federal tax return. If the Indian fund qualifies as a Passive Foreign Investment Company (PFIC) under US law — which most Indian mutual funds do — she faces PFIC taxation in the US. Her Indian TDS payments qualify for the US foreign tax credit, but the PFIC computation adds complexity on the US side.
Scenario 3 — Anil, a UK-based NRI with Indian rental income:
Anil already files ITR-2 in India because he earns Rs 6 lakh annually from a Mumbai flat. He invests Rs 1.5 lakh in ELSS through an NRO account. He can claim the Rs 1.5 lakh Section 80C deduction against his Rs 6 lakh rental income, meaningfully reducing his Indian tax liability. After the mandatory 3-year ELSS lock-in, his LTCG on redemption is taxed at 12.5%, with TDS deducted — which he reconciles against his rental income ITR filing.
Step-by-Step: How to Start Investing as an NRI
- Check FATCA status first. If you are a US or Canadian citizen, green card holder, or meet the US substantial presence test, identify which AMCs accept investors from your jurisdiction before completing any KYC. Starting the process with an AMC that will reject you wastes significant time.
- Complete CKYC. Use your Indian bank branch during a trip to India, an Indian consulate or embassy abroad, or video KYC if available from your chosen AMC. Bring your passport, overseas address proof, and PAN.
- Ensure your NRE or NRO account is active and linked to your Indian PAN. For full repatriability of gains, invest via the NRE account. For NRO-funded investments, maintain records for the annual $1 million repatriation calculation.
- Submit FATCA and CRS self-certification. All investors complete this. US and Canada NRIs additionally need Form W-8BEN at the time of investment.
- Select your fund category based on investment horizon and tax position. If you have Indian taxable income and want to use Section 80C, consider ELSS with the 3-year lock-in in mind. For liquidity, overnight or liquid funds work — but remember the 30% TDS on any gains for NRIs.
- File ITR-2 for every Tax Year in which you have Indian income, including mutual fund gains. Download Form 26AS (Form 168 under ITA 2025) from the income tax portal to verify all TDS credits before filing. Excess TDS can be claimed as a refund.
- Declare in your country of residence. Most countries tax worldwide income. Check the applicable DTAA between India and your country of residence to determine which country has primary taxation rights on the gains and whether a foreign tax credit is available.
Frequently Asked Questions
Q: Can NRIs invest in Indian mutual funds via SIP?
Yes. NRIs can invest via Systematic Investment Plan in any fund category they are eligible for. The SIP auto-debit works from NRE or NRO savings accounts. Each SIP instalment is treated as a fresh purchase, and the 12-month holding period for LTCG is counted separately from the date of each individual instalment.
Q: Is NRE account interest counted as Indian income for the Section 80C offset?
No. NRE account interest is fully exempt under Section 10(4) ITA 1961 and ITA 2025. It does not count as Indian taxable income and cannot be offset by 80C deductions. Only income that is actually taxable in India — such as rental income, Indian salary, or NRO interest — can be reduced using 80C investments like ELSS or PPF.
Q: The fund house deducted 30% TDS on my debt fund redemption. Can I recover it?
Yes. File ITR-2 for the relevant Tax Year, report the debt fund gains under the capital gains schedule, compute your actual tax at the applicable slab rate, and claim the excess TDS as a refund. Verify the TDS credit amount on Form 26AS (Form 168 under ITA 2025) before filing. The refund is credited to your Indian bank account and typically processed within 3 to 6 months of filing.
Q: Will becoming a resident affect my existing mutual fund investments?
No deemed transfer or capital gains event occurs when your residential status changes from NRI to resident. Your existing units continue as-is. The tax treatment at redemption is based on your residential status at the time of redemption — not at the time of investment. If you have become a resident by the date of redemption, no TDS will be deducted, and normal resident LTCG and STCG rules apply.
---
For your specific situation — including FATCA self-certification, NRE or NRO routing decisions, ELSS optimisation, and ITR-2 filing for mutual fund gains — book a consultation at harunraaj.com.
Need help with this?
Our team handles the paperwork. You focus on your business.