Do NRIs have to pay tax on mutual funds?
- Kiran S N
- Jun 22
- 4 min read
In this discussion, we delve into the implications of the Mumbai Income Tax Appellate Tribunal (ITAT) ruling concerning the taxation of mutual fund gains for Non-Resident Indians (NRIs). Joining us is Thomas Verghese, founder of Square League Wealth Management, with over 16 years of experience in banking and wealth management. A certified Wealth Manager and Level 2 Investment Advisor, Thomas brings a unique blend of expertise, having held leadership roles in top banks like ICICI, Axis, and HSBC.
Before we delve into the recent developments, could you explain how NRIs were taxed on mutual fund investments in India prior to this ruling?
Certainly. Before this recent ruling, Non-Resident Indians (NRIs) investing in Indian mutual funds faced a distinct set of capital gains tax rules, which largely depended on the type of fund and the holding period of their investment.
For those investing in equity-oriented mutual funds...essentially, funds that primarily invest in stocks – the taxation was as follows:
If you held these investments for less than 12 months, any gains were considered Short-Term Capital Gains (STCG) and and were taxed at 20%.
For investments held for 12 months or longer, the gains were classified as Long-Term Capital Gains (LTCG). These gains exceeding ₹1.25 lakh were taxed at 12.5%, but notably, NRIs did not receive the benefit of indexation. Indexation is a mechanism that adjusts the cost of acquisition for inflation, which typically reduces the taxable gain for resident investors.
Now, when it came to debt-oriented funds – those primarily investing in bonds and other fixed-income instruments – the rules were a bit different, the gains were simply added to the NRI's total income and taxed according to their individual income tax slab rates, just like regular income.
Could you shed light on the confusion surrounding the taxation of mutual fund units for NRIs, particularly in the context of the Anushka Sanjay Shah case?
The taxation of mutual fund units for NRIs has historically caused confusion, sharply highlighted by Ms. Anushka Sanjay Shah's case.
Ms. Shah, a Singapore-based NRI, earned ₹1.35 crore in short-term capital gains from selling equity and debt mutual fund units in AY 2022–23. She argued these gains weren't taxable in India under Article 13(4) of the India-Singapore DTAA, which covers capital gains. However, the Indian Assessing Officer contended that mutual fund units are akin to shares, thus taxable in India.
The Income Tax Appellate Tribunal (ITAT) ruled in Ms. Shah's favor. They clarified that mutual fund units are distinct from shares. Without specific DTAA provisions deeming them as shares or explicitly making their gains taxable in India, they cannot be taxed under the same article as shares. This decision provided crucial clarity on the DTAA's interpretation for mutual fund unit taxation.
Although it's been a month since the ruling, for those who might have missed it, what are its implications? Is this applicable only to NRIs in Singapore, or does it extend to those in Gulf countries, Australia, the UK, the USA, and Canada?
While this significant ruling primarily involves the India-Singapore DTAA, its principles could certainly ripple out to NRIs in other countries with similar tax treaties. So, if you're an NRI in places like the UAE, Mauritius, or the Netherlands, you might find similar benefits depending on the specific wording of your DTAA with India. However, it's not a universal pass; NRIs in the USA and Canada, for instance, still face additional hurdles due to regulations like FATCA, requiring more documentation. Ultimately, the big takeaway is that every DTAA is unique, so it's always crucial for NRIs to personally check the specific provisions of the tax treaty between India and their country of residence to understand how this ruling might apply to their individual situation.
Are there specific considerations NRIs should keep in mind when availing of this exemption?
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