NRI Mutual Fund Investment: FEMA Rules, Gift Mode, and Why Some AMCs Refuse US/Canada NRIs

Mutual funds are the most under-utilised legal route for an NRI to participate in India's equity story, and the gap is almost entirely structural. Around 36 of the 44 SEBI-registered Asset Management Companies tracked by AMFI accept Indian-resident lump-sum subscriptions without question, but only a thin slice — eight to ten houses, depending on which CAMS or KFintech registrar list one consults — actively onboard NRIs based in the United States or Canada. The friction is not Indian law. The Foreign Exchange Management Act, 1999 (FEMA), through Notification No. FEMA 20(R)/2015-RB issued by the Reserve Bank of India on 7 November 2017, expressly permits an NRI to subscribe to units of an Indian mutual fund on a repatriation or non-repatriation basis. The wall is built out of US and Canadian securities rules and FATCA, which raise compliance costs most AMCs will not bear for retail product.

FEMA / DTAA Position

FEMA Notification 20(R), as last consolidated by the RBI on 26 March 2019, draws a clean line. Schedule 5 (read with paragraph 1 of Schedule 4 for non-PIS investments) authorises an NRI or an Overseas Citizen of India to purchase units of domestic mutual funds either on a repatriation basis — with the inflow routed through a Non-Resident External (NRE) or Foreign Currency Non-Resident (Bank) (FCNR-B) account — or on a non-repatriation basis through a Non-Resident Ordinary (NRO) account. There is no SEBI-imposed ceiling on the amount an NRI can deploy, and unlike direct equity, the Portfolio Investment Scheme (PIS) approval mandated under Schedule 3 of FEMA 20(R) is not required for mutual fund subscriptions. AMFI's circular 35P/MEM-COR/57/2017-18 dated 11 January 2018 confirmed this carve-out for AMCs.

Where FEMA permits, foreign law often forbids. The US Securities Act of 1933 requires any security offered to a US resident to be SEC-registered or fall within a narrow exemption like Regulation S or Regulation D, and Indian mutual fund units satisfy neither. Layered on top is FATCA, codified at sections 1471 to 1474 of the US Internal Revenue Code, which forces every Foreign Financial Institution — including every Indian AMC and registrar — to identify US persons and report balances, gross proceeds and dividend flows annually to the IRS. India operationalised this through the Inter-Governmental Agreement signed at New Delhi on 9 July 2015, with reporting rules notified by CBDT under Rule 114F to 114H of the Income-tax Rules, 1962. Canada mirrors this through Income Tax Act (Canada) sections 263 to 269 and the Canada-US IGA of 5 February 2014. The combined compliance load is why most AMCs accept NRIs from the United Kingdom, the Gulf, Singapore and Australia freely but keep narrow whitelists for US and Canada residents.

Gift mode — an Indian-resident relative subscribing to units in their own folio and later transferring them to an NRI as a gift — is not a FEMA workaround. Section 56(2)(x) of the Income-tax Act, 1961 exempts gifts between specified relatives from tax in the hands of the recipient, but FEMA's Master Direction still requires that any subsequent redemption proceeds payable to the NRI be credited to an NRO account, with repatriation governed by the same USD 1 million per financial year ceiling that applies to all NRO balances. Gift-mode therefore solves the AMC onboarding problem, not the foreign-tax-reporting problem.

Tax Treatment in India

The Indian tax position on NRI mutual fund redemptions follows two parallel tracks: the headline rate that the Income-tax Act prescribes, and the Tax Deducted at Source that the AMC must withhold under section 195 read with section 196A. Post-Budget 2024 — specifically the Finance (No. 2) Act, 2024 notified on 16 August 2024 — the rate card was rewritten with effect from 23 July 2024.

For equity-oriented schemes (defined under section 112A as schemes with at least 65 per cent equity exposure), long-term capital gains arising on units held for more than 12 months are taxed at 12.5 per cent without indexation, with a cumulative annual exemption of Rs 1.25 lakh per assessee. Short-term capital gains under section 111A on the same schemes attract 20 per cent. For debt and other non-equity schemes acquired on or after 1 April 2023, the entire gain is treated as short-term irrespective of holding period and taxed at the assessee's slab rate under section 50AA, after the amendment introduced by the Finance Act, 2023.

Surcharge sits on top of these base rates and is itself capped. The Finance Act, 2023 retained the 25 per cent surcharge ceiling under section 115BAC (new regime), while the old regime ceiling of 37 per cent for income above Rs 5 crore continues for those who opt out. Health and education cess of 4 per cent applies on tax-plus-surcharge across both regimes.

A practical worry is the mismatch between TDS and final liability. Section 196A withholds at the headline rate, but if the NRI's total Indian income falls below the Rs 4 lakh new-regime basic exemption, the section 87A rebate of up to Rs 60,000 in the new regime can wipe out the slab portion — a refund is then claimed by filing Form ITR-2 by 31 July. Our NRI tax calculator walks through both the TDS and the final-liability columns; pair it with the repatriation calculator when the same fund forms part of a bigger remittance plan.

Tax Treatment Abroad

The foreign tax treatment is where Indian AMCs and overseas tax counsel most often fail to coordinate, and the consequences usually surface only at foreign return filing. The starting point is the Double Taxation Avoidance Agreement between India and the country of residence, which both grants residence-state taxing rights and prescribes a credit mechanism for tax already paid in India.

Under Article 13 of the India-USA DTAA notified at GSR 990(E) on 20 December 1990 and effective 12 September 1991, India retains primary taxing rights on capital gains from the alienation of property situated in India, including mutual fund units. The treaty does not exempt mutual fund gains from US taxation; rather, Article 25 obliges the US to grant a foreign tax credit equal to the Indian tax paid, capped at the US tax that would otherwise be payable on the same income. A US-resident NRI whose Indian AMC withholds 12.5 per cent under section 196A on equity LTCG must still report the gain on Form 1040 Schedule D and claim the corresponding credit on Form 1116, computed under section 904 of the Internal Revenue Code. We covered the Indian-tax / US-tax overlap in DTAA India-USA capital gains: why MF gains for US NRIs get taxed in India and reported in US.

The UAE column deserves a footnote. Because the United Arab Emirates does not levy personal income tax on individuals (Federal Decree-Law No. 47 of 2022 imposes corporate tax but exempts individual investment income), the Indian-tax cost on a UAE-resident NRI's mutual fund redemption is also the final cost — there is no foreign-tax-credit step. That arithmetic is why UAE is over-represented in NRI mutual fund AUM relative to its NRI population, as we unpacked in DTAA India-UAE: why the 0 per cent UAE tax rate drives the most treaty-shopping.

A wrinkle that catches almost every US NRI: most Indian mutual funds qualify as Passive Foreign Investment Companies under section 1297 of the US Internal Revenue Code. The default 'excess distribution' regime in section 1291 imposes ordinary-income tax plus punitive interest charges on deemed distributions, which can exceed the underlying economic gain. A Qualified Electing Fund election under section 1295 or a mark-to-market election under section 1296, made annually on Form 8621, neutralises the punitive arithmetic but requires the AMC to issue a PFIC Annual Information Statement — something only a handful of Indian AMCs offer. Our glossary entry on Foreign Tax Credit sets out the section 904 limitation in fuller detail.

Repatriation Mechanics

The repatriation rule book separates NRE-sourced subscriptions from NRO-sourced subscriptions. Schedule 1 to FEMA 20(R) treats sums credited from abroad through banking channels (or a tested NRE balance) as repatriable in their entirety, including capital gains realised on Indian mutual fund units. Subscriptions made out of an NRO account, by contrast, fall under the consolidated USD 1 million per financial year ceiling laid down in Regulation 4(2) of the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 notified at GSR 396(E) on 1 April 2016.

The practical workflow is dictated by AMFI's standard operating procedure of 26 June 2019 and SEBI Master Circular SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/90 dated 27 June 2024. When an NRI submits a redemption request from a folio funded by NRE inflows, the AMC must credit the proceeds back to the same NRE account and issue a TDS certificate in Form 16A under Rule 31(1)(a). For NRO-funded folios, the AMC credits the NRO account; the NRI must then file Form 15CA (self-declaration) and Form 15CB (chartered-accountant certificate under Rule 37BB) before the bank releases the foreign-currency outward remittance. Our repatriation calculator bakes the USD 1 million ceiling into its arithmetic.

A reclassification trap deserves mention. A resident Indian who later acquires NRI status under section 6 of the Income-tax Act and section 2(w) of FEMA 1999 must, under paragraph 4 of the RBI's Master Direction on Deposits and Accounts (RBI/FED/2015-16/14, updated 1 January 2024), redesignate her resident savings account as NRO and any resident mutual fund folio with the AMC. Failure can contravene section 6(3) of FEMA, with compounding under the Foreign Exchange (Compounding Proceedings) Rules, 2000. The Enforcement Directorate's database at the RBI FEMA notifications portal shows multiple compounding orders against unconverted resident folios in the Rs 50,000 to Rs 5 lakh band over FY 2024-25.

The property-sale parallel is instructive. NRIs selling Indian real estate face TDS at 12.5 per cent on long-term gains and 30 per cent on short-term gains under section 195, with the same Form 15CA/15CB chain on repatriation — only the gross-up is larger. We unpacked the property-side mechanics in NRI property sale TDS section 195.

On AMC selection: as of FY 2025-26 registrar tracker reports filed with CAMS and KFintech, ICICI Prudential, Aditya Birla Sun Life, Nippon India, Sundaram, UTI, SBI, DSP, Tata, PPFAS and Quant are the houses most consistently named as accepting US and Canada residents, typically with a physical-presence requirement. Verify the AMC's current FATCA stance directly before remitting — policies have been tightened twice in the last 18 months.

FAQ

Can a US-resident NRI invest in Indian mutual funds at all?

Yes. FEMA 20(R) read with AMFI Circular 35P of 11 January 2018 expressly permits it. The constraint is that only roughly eight to ten of the 44 SEBI-registered AMCs onboard US-resident NRIs, owing to FATCA reporting cost under sections 1471 to 1474 of the US Internal Revenue Code, and most require an in-person verification or physical-presence carve-out.

Is a Portfolio Investment Scheme (PIS) account needed for mutual fund SIPs?

No. PIS approval under Schedule 3 of FEMA 20(R) is required only for direct equity purchases on Indian stock exchanges. Subscriptions to mutual fund units are governed by Schedule 5, and AMFI's 11 January 2018 circular confirms AMCs may accept NRI subscriptions directly from NRE or NRO accounts without PIS routing.

What is the TDS on mutual fund redemption proceeds for NRIs in FY 2025-26?

Under section 196A of the Income-tax Act, 1961, AMCs deduct TDS at 12.5 per cent on equity LTCG above Rs 1.25 lakh, 20 per cent on equity STCG, 12.5 per cent on debt LTCG (units acquired before 1 April 2023, held above 24 months), and 30 per cent on all other debt fund redemptions. Surcharge and 4 per cent cess apply on top, capped at 25 per cent in the new regime under section 115BAC.

How does the gift-mode route work and what are its risks?

An Indian-resident relative subscribes to mutual fund units in her own folio and later transfers them to an NRI relative as a gift, exempt under section 56(2)(x). The NRI receives the units in an NRO-tagged folio, redemption proceeds are credited to NRO, and repatriation is capped at USD 1 million per financial year under FEMA. Gift-mode solves the AMC onboarding problem but does not unlock NRE-grade free repatriation.

What is the PFIC issue for US NRIs?

Most Indian mutual funds meet the asset or income tests in section 1297 of the US Internal Revenue Code and are PFICs. The default section 1291 regime imposes ordinary-income tax plus interest on deemed distributions. A Qualified Electing Fund election (Form 8621, section 1295) or a mark-to-market election (section 1296) neutralises this, but requires the AMC to issue a PFIC Annual Information Statement, which only a handful of Indian houses offer.

Can a UK-resident NRI repatriate mutual fund proceeds without limit?

If the SIP was funded from an NRE or FCNR-B account, the proceeds are fully repatriable under Schedule 1 of FEMA 20(R) and need only a Form A2 declaration. If the SIP was funded from an NRO account, the consolidated USD 1 million per financial year ceiling under the 2016 Remittance of Assets Regulations applies, and the bank requires both Form 15CA and Form 15CB before releasing the outward remittance.