NRIs can invest in the Mutual Funds on repartiable as well as non – repartiable basis. They don’t require any special permission in this regard from RBI. RBI has vide Notification No. FEMA 20/2000 dated May 3, 2000 granted general permission to NRIs to purchase, on a repatriation as well as non repatriation basis the units of domestic mutual fund.

Investment on a repartiable basis
An NRI can invest in the domestic mutual funds on repartiable basis, provided the consideration is paid either by inward remittance through normal banking channels viz., Rupee drafts purchased abroad or out of funds held in his NRE/FCNR account. In case of Indian Rupee drafts purchased aboard or if investment is made from funds in NRE/FCNR A/c a debit certificate from the issuing bank shall be required.

Investment on a Non - repartiable basis
An NRI can invest in the domestic mutual funds on Non- repartiable basis, provided the consideration is paid either by inward remittance through normal banking channels or out of funds held in his NRO/NRSR/NRNR account.

There are two types of income that an NRI investor would earn from Mutual Fund Investment a) Dividend and b) Capital Gains.

a) Dividend income is exempt from income tax under section 10(35) of the Income Tax Act.
b) Capital Gains can be taxed as Long term & Short term capital gains:-

Long Term Capital Gains:-
Under Section 10(38), Long Term Capital Gain on sale of units of Equity Oriented Funds are exempt from Income Tax in the hands of the unit holders, provided such transactions are entered into a recognised stock exchange or such units are sold to the Mutual Fund and are chargeable to Securities Transactions Tax.

Income by way of long term capital gains that is not exempted under section 10(38) will be taxed under section 112 at the rate of 20% plus applicable surcharge and cess. Such long term capital gains will be calculated after taking into account cost of acquisition as adjusted by cost of inflation index notified by Central Government and expenditure incurred wholly and exclusively in connection with such transfer.

Where the Long term capital gains are taxable, the NRI may opt for computation of long term capital gains at a concessional rate of 10% plus applicable surcharge.

Such long term Capital gains would be calculated without indexation of cost of acquisition.

Short Term Capital Gains:-
Section 111A provides that short-term capital gains arising on sale of units of Equity Oriented Funds are chargeable to income tax at a concessional rate of 10% plus applicable surcharge and cess, provided transactions are entered on a recognised stock exchange or such units are sold to Mutual Funds and are chargeable to STT. Further, Section 48 provides that no deduction shall be allowed in respect of STT paid for the purpose of computing Capital Gains.

Income by way of short term capital gains in respect of units other that Equity Units that is not charged at concessional rates of 10% under Section 111A and which is held for a period of not more than 12 months is added to the total income. For NRIs Total income including short-term capital gains is chargeable to tax at 30% plus surcharge and cess.  

Mutual Fund Units are not included in the definition of ‘Foreign Exchange Asset’; therefore Special Provisions relating to NRIs u/s 115C to 115I will not be applicable in respect of Mutual Fund investments.