Are you an NRI? Here is a step-by-step process to save tax on your investments.

Transcript from our recent conversation with CA Varghese, where he breaks down and simplifies NRI taxation.

Thomas Verghese: Welcome back. If you are an NRI watching this video, we are going to discuss something very relevant to you. Is it true that certain NRIs don't have to pay tax on the profits made from mutual fund investments? To talk about how this works practically, we have Chartered Accountant Varghese with us today. Welcome back to the channel, sir. Our previous discussions have been very productive, and I believe today's episode will be as well. As a CA, do you often get questions about NRIs not having to pay tax on mutual funds?

CA Varghese: I wouldn't say that is completely true across the board; we need some classification to understand this. First, we must understand residential status. The Income Tax Act defines this based on the number of days spent in the country—generally, if you are outside the country for more than 182 days in a financial year, you are an NRI.

The second area is taxation, specifically TDS (Tax Deducted at Source). For non-residents, Section 195 of the current Act governs this, though a new Income Tax Act is expected to roll out from April 1, 2025. The third and most relevant area is the DTAA (Double Taxation Avoidance Agreement), which is a treaty between India and other countries to provide tax benefits to non-residents and clarify where certain income is taxable.

Thomas Verghese: How does the DTAA apply specifically to mutual funds?

CA Varghese: DTAA articles define various types of income like business income, capital gains, royalties, etc. While mutual fund gains are generally taxable in India, many people miss the specific provisions of the DTAA. For example, in many Middle Eastern countries like the UAE, Qatar, Saudi Arabia, and even Malaysia, the DTAA provisions are silent on mutual funds. They specifically mention "capital gains arising from the sale of shares of a company," but a mutual fund is technically different.

This was highlighted in a March 2025 verdict regarding Anushka Sanjay, where she claimed a tax exemption on a gain of 1.35 crore! based on the India-Singapore DTAA. The tribunal ruled in her favor because, under article 13(4), gains from the transfer of shares are taxable in India, but other residency provisions apply to other types of gains. Since mutual funds are not equivalent to shares—as mutual funds are governed by trusts and shares by companies—the gains were ruled taxable only in the state of residence (Singapore).

Thomas Verghese: That is a significant win. So, what are the requirements for an NRI to claim this benefit?

CA Varghese: There are two main pre-conditions. First, you must obtain a Tax Residency Certificate (TRC) from the tax authorities of the country where you reside. This isn't automatic; you must apply for it, and it usually requires proof of employment, business, or a work permit in that country. Second, you must file Form 10F on the Indian Income Tax portal before filing your return.

The TRC must be renewed every year to prove your continued residency status to the department. Without these documents, an assessing officer can reject the exemption claim.

Thomas Verghese: Does this benefit apply to all NRIs globally?

CA Varghese: No. It primarily benefits NRIs in the Middle East and the Far East. For NRIs in the US, UK, Australia, and Canada, the treaties clearly state that these gains are taxable in India.

Thomas Verghese: Who should an NRI approach to facilitate this?

CA Varghese: They should approach a Chartered Accountant who handles income tax filings. While the NRI must obtain the TRC themselves from their country of residence, a professional should handle the complex legal filings in India.

Thomas Verghese: Are there any other risks or things NRIs should be careful about?

CA Varghese: Yes, it is crucial to disclose all foreign assets and income, such as pension funds, bank accounts, crypto, or ESOPs. The department is receiving more data on these now, and omitting them can lead to issues.

Furthermore, you must have the right intention. If someone intentionally maintains an NRI status solely as a loophole to save crores in tax while having all their roots and connections in India, it could be viewed as an economic offense. If your residential status changes—for example, if you invest as an NRI but redeem the funds after returning to India and becoming a resident—you may no longer be eligible for these benefits because the status at the time of redemption matters.

Thomas Verghese: Thank you, sir, for this detailed explanation. For the NRIs watching, if you found this beneficial, please share it with others.

Disclaimer: This content is for educational purposes only; please conduct personal research and consult a qualified investment advisor before making any investment decisions.

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