Mutual Fund: Capital Gains Tax Benefits For NRIs On MF Investments In India

Non-Resident Indians (NRIs) who want to invest in India find mutual funds an attractive option due to their ability to generate high returns, professional management by fund managers and the flexibility of portfolio diversification. In recent years, India is emerging as a favourite investment destination for NRIs due to booming stock markets and a strong macroeconomic environment, among other factors.

However, before investing, it is important for NRIs to understand the tax implications of investing in mutual funds in India.

The mutual fund taxation in India depends on the type of scheme and the duration of the investment. Here are the key details about how an NRI’s investment in mutual funds is taxed in India. 

Equity Mutual Funds

These are mutual funds with at least 65% equity exposure.

• Short-Term Capital Gains (STCG): If units are sold within 12 months, gains are taxed at 20%, with effect from July 23, 2024.
   

• Long-Term Capital Gains (LTCG): If the units are held for more than 12 months, then the returns are taxed at 12.5% without indexation. However, an exemption up to Rs 1.25 lakh on capital gains from mutual fund investments can be claimed in a financial year. Earlier, the exemption limit was Rs 1 lakh. This benefit can only be availed under the old tax regime.

Debt mutual funds need to invest the majority portion of their total investment in bonds, treasury bills and other debt instruments.

As per changes introduced in the Finance Act 2023, debt mutual funds no longer receive indexation benefits for investments made post-April 2023. Irrespective of the holding period, all gains are taxed at the applicable income tax slab rate.

For MF investments made before April 2023, STCG is applicable at slab rates of the taxpayer, while LTCG will be levied at 12.5% for a holding period of more than 2 years.

NRIs from certain countries can claim relief under Double Taxation Avoidance Agreements (DTAAs) if India has a treaty with their country of residence. Countries like Singapore, the UAE, Ireland, Cyprus and Mauritius have DTAAs with India, allowing NRIs to avoid double taxation.

As per a recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT), NRIs in countries with which India has an existing DTAA can be exempt from capital gains taxation. While hearing an appeal filed by a Singapore-based NRI, the ITAT held that mutual fund units are not treated as 'shares' and therefore fall under Article 13(5) of the India-Singapore DTAA.

In such cases, the NRIs will be liable to pay tax only in their country of residence on gains from mutual fund investments in India.  

However, to claim the tax benefit, an NRI should be a resident taxpayer in a country with which India has an existing DTAA.

To conclude, mutual funds offer NRIs growth potential and several tax benefits. Particularly, the Rs 1.25 lakh LTCG exemption for equity funds and DTAA relief are important for NRIs. By understanding tax advantages and aligning investments with financial goals, NRIs can build wealth in India and minimise tax liabilities.