Introduction

As an NRI residing in the UAE, you may already be aware of the significant investment opportunities available in India. However, understanding how to make the most of these opportunities from a tax perspective is key to maximizing your returns. For UAE-based NRIs, investing in Indian mutual funds stands out as a particularly tax-efficient strategy, offering several advantages over other investment options.

In this blog, we’ll explore why mutual funds are a smart choice for NRIs living in the UAE and how to go about investing in them.

The UAE Advantage: No Capital Gains Tax

The UAE offers a significant advantage for investors due to the absence of capital gains tax. This means any profits from investments, including mutual funds, are tax-free. However, when investing in India, many may worry about Indian taxes. 

Fortunately, the Double Taxation Avoidance Agreement (DTAA) between India and the UAE ensures that UAE-based NRIs do not have to pay capital gains tax on mutual fund investments in India. This agreement eliminates the risk of being taxed in both countries, making mutual funds an even more attractive and tax-efficient option for investors looking to benefit from India’s growing market without the extra tax burden.

Why Mutual Funds Are a Tax-Efficient Investment Option?

There are several reasons why mutual funds are particularly well-suited for UAE NRIs:

1. Tax-Free Capital Gains: The profits you earn from mutual fund investments in India are not subject to capital gains tax. This is a clear benefit over other investment types where capital gains might be taxed, impacting your overall returns.

2. TDS Refund Process: Even if taxes are deducted at source (TDS) on your mutual fund dividends or capital gains, you can claim a refund for the tax deducted. To do this, you simply need to provide your Tax Residency Certificate (TRC) from the UAE and complete Form 10F while filing your tax returns in India. This ensures that any taxes withheld are refunded to you.

3. Ease of Investment Management: Mutual funds offer professional fund management, meaning you don’t have to manage your investments personally. Fund managers with expertise handle your money, making decisions based on market conditions, helping you grow your wealth with minimal effort.

How to Invest in Indian Mutual Funds as a UAE-Based NRI?

Now that you understand the tax advantages, let’s walk through the steps to start investing in mutual funds in India.

1. Open an NRE or NRO Account

To invest in mutual funds in India, you’ll first need an Indian bank account. There are two types of accounts you can open as an NRI:

• NRE (Non-Resident External) Account: This account is designed for NRIs who wish to transfer funds from abroad to India. It allows for easy repatriation of funds back to the UAE, and the interest and returns on the account are tax-free in India.

• NRO (Non-Resident Ordinary) Account: If you’re earning income in India, such as rental income or dividends, an NRO account is a good choice. However, the returns on this account are taxable in India, so it’s often used for specific types of income.

2. Complete the KYC Process

The Know Your Customer (KYC) process is mandatory for investing in mutual funds in India. You can easily complete this process online by submitting a few documents, such as:

• A valid passport copy

• Proof of overseas address (like a utility bill or bank statement)

• A PAN card (Permanent Account Number)

• A passport-sized photograph

3. Choose the Right Mutual Fund Scheme

Choosing the right mutual fund is crucial for achieving your financial goals. Here are a few types of funds to consider:

Equity Funds

These are ideal for investors looking for higher returns, albeit with higher risk. They invest primarily in stocks and have the potential for significant growth over time. Some well-known equity funds are Aditya Birla Sun Life Focused Equity Fund, SBI Long Term Equity Fund, and ICICI Prudential Midcap Fund.

Aditya Birla Sun Life Focused Equity Fund

• 3-Year CAGR: ~12.63 %

• 5-Year CAGR: ~16.32 %

SBI Long Term Equity Fund

• 3-Year CAGR: ~24.1%

• 5-Year CAGR: ~24.37%

ICICI Prudential Midcap Fund

• 3-Year CAGR: ~20.23%

• 5-Year CAGR: ~24.54%

Note - All data noted above is dated at 31st December 2024.

Debt Funds

These are lower-risk funds that invest in government bonds, corporate bonds, and other fixed-income securities. They offer more stability and moderate returns. Aditya Birla SL Medium Term Plan, Bank of India Credit Risk Fund, and UTI Dynamic Bond Fund are examples of popular debt funds.

Aditya Birla SL Medium Term Plan

• 3-Year CAGR: ~14.18 %

• 5-Year CAGR: ~11.32 %

Bank of India Credit Risk Fund

• 3-Year CAGR: ~39.6 %

• 5-Year CAGR: ~10.5 %

UTI Dynamic Bond Fund

• 3-Year CAGR: ~9.63%

• 5-Year CAGR: ~9.47%

Note - All data noted above is dated at 31st December 2024.

Hybrid Funds

These funds combine both equity and debt, offering a balanced approach to investment. They provide a mix of risk and stability. Some common hybrid funds are Aditya Birla Sun Life Balanced Advantage Fund, SBI Equity Hybrid Fund, and ICICI Prudential Equity & Debt Fund.

Aditya Birla Sun Life Balanced Advantage Fund

• 3-Year CAGR: ~10.53%

• 5-Year CAGR: ~12.29%

SBI Equity Hybrid Fund

• 3-Year CAGR: ~10.62%

• 5-Year CAGR: ~13.43%

ICICI Prudential Equity & Debt Fund

• 3-Year CAGR: ~18.82%

• 5-Year CAGR: ~20.95%

Note - All data noted above is dated at 31st December 2024.

4. Invest and Monitor Your Portfolio

Once you’ve chosen a mutual fund, you can start investing through a Systematic Investment Plan (SIP). SIP allows you to invest a fixed amount regularly, benefiting from compounding over time. 

Rupeeflo simplifies the process by providing a platform to complete the KYC process and easily buy or sell mutual funds. The platform also filters eligible AMCs for UAE-based NRIs, so they only need to choose from the funds they can invest in, making the selection process easier and more efficient.

Conclusion

In conclusion, UAE-based NRIs have a unique advantage when it comes to investing in mutual funds in India. With no capital gains tax in the UAE, along with the tax exemptions available through the DTAA, investing in Indian mutual funds becomes an attractive and tax-efficient way to grow your wealth.