What NRIs Should Know About MF Taxation In India

DTAAs may exempt NRIs from Indian capital gains tax if taxed in their home country

- JIGAR MANSATTA

India's tax laws under the Income Tax Act, 1961, define how mutual fund investments by non-resident Indians (NRIs) are taxed. For equity-oriented mutual funds, NRIs are subject to a 20% tax on short-term capital gains (STCG) and a 12.5% tax on long-term capital gains (LTCG). Taxation differs for debt mutual funds purchased on or after 1 April 2024, which are considered short-term and taxed according to the investor's income slab. For other mutual fund categories, STCG is taxed at the investor's slab rate, while LTCG is taxed at 12.5%. If debt mutual funds were acquired before 1 April 2024, gains are taxed under the same STCG and LTCG framework. Given these high tax rates, NRIs may hesitate before investing in Indian mutual funds. However, tax liability should not be viewed in isolation. India has signed DTAAs with several countries, which in some cases allow capital gains to be taxed only in the investor's country of residence.

Under certain DTAAs, the "residual clause" becomes critical. This clause provides exclusive taxing rights to the country where the seller resides—offering an exemption from capital gains tax in India, so long as the asset is not classified as immovable property or shares of an Indian company.

Case study: Singapore resident gets relief