NRIs Gain Big: Mutual Fund Capital Gains May Be Tax-Free Under DTAA

India is currently one of the fastest-growing major economies and is seen as a strong investment destination globally. Many Non-Resident Indians (NRIs) are now investing in India for better wealth creation opportunities.

Why NRIs Prefer Mutual Funds

Mutual funds are popular among NRIs because they offer diversification, are cost-effective, and come in various types, catering to different investment goals. Most investments are coming from NRIs living in countries like the UAE, Bahrain, Qatar, Singapore, Mauritius, Hong Kong, and the UK. However, NRIs from the USA and Canada face stricter rules due to FATCA regulations and may need to provide extra documents. Not all mutual fund houses currently accept investments from these regions.

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Capital Gains Tax on Mutual Funds for NRIs

Taxes play a major role in investment decisions. For mutual funds, tax depends on the fund type (equity or debt) and how long the investment is held.

• Short-Term Capital Gains (STCG):
  • Equity funds sold before July 23, 2024: taxed at 15%

  • Sold on or after July 23, 2024: taxed at 20%

  • Debt funds: taxed as per the investor’s income slab

• Long-Term Capital Gains (LTCG):
  • Equity funds sold before July 23, 2024: taxed at 10%

  • Sold on or after July 23, 2024: taxed at 12.5%

  • Debt funds: not applicable

NRIs are also subject to Tax Deducted at Source (TDS):

• 20% on STCG from equity funds

• 12.5% on LTCG from equity funds

• 30% on gains from debt funds

Dividends Are Also Taxable

If you choose the IDCW (Income Distribution cum Capital Withdrawal) option, dividends received are taxed as per your income slab. TDS is applicable at 20% or the DTAA rate—whichever is lower.

Double Taxation Avoidance Agreement (DTAA) Benefits

India has signed tax treaties (DTAAs) with about 90 countries. This helps NRIs avoid paying tax twice—once in India and once in their resident country. Under DTAA, NRIs can claim tax credits in India on mutual fund earnings if such a treaty exists with their home country.

Major Ruling: Capital Gains May Not Be Taxable

Recently, the Mumbai Income Tax Appellate Tribunal (ITAT) ruled in favor of an NRI investor from Singapore, stating that capital gains on mutual fund units are not taxable in India under the India-Singapore DTAA. The case involved Ms. Anushka Sanjay Shah, who had earned ₹1.35 crore in short-term capital gains. The tribunal clarified that mutual fund units are not considered shares under Indian law and should not be taxed as such.

What This Means for NRIs

This decision could boost investor confidence among NRIs, especially from countries like Singapore, Mauritius, UAE, UK, France, and others with DTAAs in place. It may also lead to more investments in Indian mutual funds and help grow the industry’s Assets Under Management (AUM).

Important Reminder

To claim DTAA benefits, ensure you have a valid Tax Residency Certificate (TRC) for your country of residence. This certificate must meet DTAA requirements, not just local tax rules.

Conclusion

The recent ITAT ruling has opened a promising door for NRIs looking to invest in Indian mutual funds without the burden of double taxation. With the right documentation, especially a valid TRC—NRIs can now potentially enjoy higher post-tax returns and explore India’s vibrant investment opportunities with renewed confidence.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.                   

Investments in securities market are subject to market risks, read all the related documents carefully before investing.