NRI investment accounts

An NRI cannot fund a mutual fund purchase from just any bank account. Indian regulations route the money through two specific kinds of rupee account, and which one is used decides something an ordinary resident investor never has to think about: whether the money can leave India again.

The workbook is direct about this: an NRI can invest in mutual funds only from an NRE or NRO bank account.

The two accounts do different jobs:

• Non-Resident External Rupee (NRE) account — a rupee account from which money can be sent back to the country of the investor's residence. It is repatriable.
• Non-Resident Ordinary Rupee (NRO) account — a rupee account that is non-repatriable.

Which account funded the purchase carries through to redemption: money invested from an NRE or FCNR account, or by remittance of foreign exchange from abroad, can be paid out on a repatriation basis; money invested from a rupee account or an NRO account cannot be paid into a repatriable account on redemption. The general rule the workbook gives is simple to state and easy to forget: redemption payments follow the source of funds of the purchase.

Beyond the bank account, an NRI's KYC is heavier than a resident's: in addition to the normal KYC documents, an NRI must provide a copy of the passport and overseas address proof. An Indian PAN is still necessary for the investment, exactly as it is for a resident.

Mr Anand, an NRI in Singapore, wants to invest Rs 15,00,000 in an Indian debt fund. He remits foreign exchange into his NRE account and invests from there, submitting his passport copy, Singapore address proof, and his Indian PAN alongside the usual KYC.

Two years later he redeems the full holding, now worth Rs 17,20,000. Because the original investment came from his NRE account, the proceeds can be paid on a repatriation basis — straight back to his Singapore bank account if he chooses, subject to RBI regulations and TDS on the capital gain.

Had he instead funded the same investment from his NRO account — money he already holds in India, say rental income from a flat he owns — the Rs 17,20,000 on redemption cannot be paid into a repatriable account. It stays within the Indian banking system, credited back to an NRO account, even though the units, the fund, and the gain are otherwise identical to Mr Anand's NRE-funded investment.

Chapter 12 (Investors in Mutual Funds), in the individual-investor documentation section, defines NRE and NRO accounts and the additional KYC an NRI provides. Chapter 14 (Financial Transactions) supplies the repatriation rule on redemption, tying the payout back to the source of the original subscription. Expect a question asking which account is repatriable, and a question on what happens to redemption proceeds when the source account differs from an NRE account.

• NRE is repatriable; NRO is not. This is the one fact every question on this topic turns on.
• Redemption proceeds follow the source of the subscription, not the investor's current wish — an NRO-funded investment cannot suddenly be repatriated on redemption.
• An NRI still needs an Indian PAN. The extra passport and overseas-address documents are additional to KYC, not a substitute for it.
• FCNR-sourced investments are treated like NRE for repatriation purposes — both allow the redemption to go out on a repatriation basis.
• This is a bank-account and documentation rule, distinct from the TDS treatment of NRI dividends and capital gains, which is taxed differently but does not itself decide which account can receive the money.