Micro investment

Almost every investment in India needs a PAN. Mutual funds have one narrow exception, and it exists so that a very small investor is not locked out.

If the total you put into a fund house stays within Rs 50,000, you may invest without giving a PAN. The workbook calls such investments micro investments.

The limit is not per scheme. It is the total across all schemes of that fund house, counted over a rolling 12 months or a financial year.

Two things are often misread. The exemption is only from PAN. KYC still has to be done, through a KYC Registration Agency or through Aadhaar-based e-KYC. And it is only for individuals — an HUF or a company cannot use it.

What the investor gets instead of a PAN is a reference number. The KRA issues a PAN Exempt KYC Reference Number, and that number goes on the application form in place of the PAN.

Section 17.2.1 sets out the exemption and its boundaries.

The threshold. Certain mutual fund transactions are exempt from submitting PAN: micro investments, i.e. investments upto Rs. 50,000 in aggregate under all schemes of a fund house. The limit of Rs 50,000 is reckoned on a rolling 12 month period or in a financial year.

Who may use it. Micro investments made by individual investors alone are exempt. Hindu undivided families and non-individual investors are not eligible.

How the money may come in. Investments exempt from PAN may be made as a lump sum or through a systematic investment plan. Separately, cash investments not exceeding Rs 50,000 per mutual fund in a year are permitted for investors who may not have a PAN.

What replaces the PAN. Such investors must enclose a copy of the KYC acknowledgement letter quoting the "PAN Exempt KYC" Reference Number obtained from the KYC Registration Agency along with the application form, and eligible investors must hold only one PAN Exempt KYC Reference Number.

KYC is not waived. Section 17.2.2 is explicit: investors making micro investments must comply with the KYC requirement through a registered KRA or UIDAI, and the PAN exemption continues to apply for the KYC process, with the PAN Exempt KYC Ref No. quoted in the application form.

The Rs 50,000 figure recurs elsewhere in the same section, for different things — insurance premium payments in cash up to Rs 50,000 per transaction, and cash contributions to the NPS up to Rs 50,000, also do not require PAN details. A Basic Savings Bank Deposit Account needs no PAN either. Same number, different products; only the mutual fund one is a micro investment.

Illustrative figures. Lakshmi works as a tailor, has no PAN, and wants to start investing.

She completes KYC through a KRA using Aadhaar-based e-KYC and receives a PAN Exempt KYC Reference Number. She then starts a Rs 2,000 monthly SIP with Pragati Mutual Fund.

The third row is where candidates go wrong. Her Rs 24,000 and Rs 20,000 sit in two different schemes, but the limit is the aggregate under all schemes of a fund house, so she has Rs 6,000 of headroom, not Rs 30,000.

One route is still open to her without a PAN. She may invest up to Rs 50,000 in a year with a different mutual fund — the limit is per fund house. So Rs 6,000 more with Pragati, and a fresh Rs 50,000 ceiling with another AMC.

And two things she cannot do. She cannot use the exemption for her family HUF, which needs a PAN whatever the amount. And she cannot skip KYC — without that PAN Exempt KYC Reference Number, the Rs 2,000 SIP is not accepted at all.

Chapter 17 (Operational Aspects of Investment Management), section 17.2.1 (Permanent Account Number), under Exemptions from PAN, and section 17.2.2 (Know Your Customer Process). This is prime factual territory: the Rs 50,000 aggregate limit, that it is per fund house and not per scheme, the rolling 12 month or financial year basis, that HUFs and non-individuals are excluded, and that KYC still applies through a KRA or UIDAI.

• Rs 50,000 is the aggregate across all schemes of one fund house, not per scheme and not per investment.
• Reckoned on a rolling 12 month period or in a financial year — not per calendar year.
• Individuals only. HUFs and non-individual investors get no exemption.
• PAN exempt is not KYC exempt. KYC must be completed through a registered KRA or UIDAI, and the PAN Exempt KYC Reference Number quoted on the form.
• Only one PAN Exempt KYC Reference Number per eligible investor.
• Cash investments up to Rs 50,000 per mutual fund in a year are a separate permission for investors without a PAN — do not merge the two rules into one.
• The same Rs 50,000 appears for cash insurance premiums and cash NPS contributions. Those are not micro investments in mutual funds.