NRIs Get Tax Relief on Mutual Fund Gains Under ITAT Ruling

The Mumbai Income Tax Appellate Tribunal (ITAT) has delivered a significant judgment that offers tax relief to non-resident Indians (NRIs) residing in Singapore. It ruled that capital gains earned from Indian mutual fund units by such NRIs will not be taxed in India. 

This decision is based on the India-Singapore Double Taxation Avoidance Agreement (DTAA), providing clarity and potential savings for global Indian investors.

Details of the ITAT’s Ruling

The ruling stems from the case of Anushka Sanjay Shah, an NRI residing in Singapore. During the assessment year 2022–23, Shah earned ₹1.35 crore in short-term capital gains from the sale of equity and debt mutual fund units. She claimed that, being a Singapore tax resident, the capital gains should not be taxable in India under Article 13(5) of the DTAA.

However, the Assessing Officer (AO) rejected her claim, treating mutual fund units as equivalent to shares of Indian companies and attempted to tax the entire amount.

ITAT Ruling Resolves Core Dispute of Shares vs Mutual Fund Units

At the heart of the issue was whether mutual fund units could be classified as “shares” under the tax treaty. Article 13(5) of the DTAA allows India to tax capital gains only if they arise from shares in an Indian company. The AO contended that mutual fund units should be treated similarly, making them taxable.

But the ITAT rejected this view, emphasising that mutual funds in India are created as trusts and not companies under SEBI regulations. Since the term “share” is not defined in the DTAA, and mutual fund units are not treated as shares under the Companies Act, they cannot be taxed under Article 13(5)(b).

Broader Implications

This judgment not only impacts NRIs in Singapore but could also influence similar cases involving NRIs in countries like Switzerland and the UAE with DTAAs in place. The ruling reinforces the distinction between mutual fund units and equity shares in tax treatment.

Conclusion

The ITAT’s decision brings clarity and relief for NRIs investing in Indian mutual funds, shielding them from double taxation. However, gains from Indian equities remain taxable. This ruling may also prompt policymakers to review treaty terms to prevent misuse while maintaining fair tax practices.

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