Quick Summary:
- Capital gains tax rates do not differ between NRIs and residents, but in the case of NRIs, tax is withheld at source.
- Specified debt fund units bought on or after 1 April 2023 are taxed at the rates applicable to the investor’s income slab.
- Tax payable in India can be lowered under a DTAA when the necessary documents are provided.
- Any excess TDS can be recovered as a refund by filing an income tax return in India.
Taxability of Mutual Fund Gains for NRIs
Mutual fund units issued in India are classified as capital assets located in India. Gains earned on their redemption are therefore usually subject to tax in India, wherever the investor lives, unless the relevant DTAA offers relief.
Tax Rules Across Equity, Debt and Hybrid Funds
The tax payable is shaped by the fund type and how long the units are held. In equity-oriented funds, gains on units held for 12 months or less are short-term and taxed at 20 per cent, while long-term gains above ₹1.25 lakh in a financial year attract tax at 12.5 per cent.
When it comes to tax on debt mutual funds, where the fund house allocates more than 65 per cent of assets todebt and money market instruments, are taxed at slab rates for units purchased on or after 1 April 2023.Debt fund units acquired before this date and held for over 24 months are typically taxed at 12.5 per cent, without the benefit of indexation. Hybrid funds are taxed according to their equity-debt composition.
Withholding Tax on Redemption Under Sections 195 and 393(2)
Fund houses withhold tax from the redemption amount payable to NRIs before crediting it. This withholding falls under section 195 of the Income-tax Act, 1961 and, with effect from 1 April 2026, under section 393(2) of the Income-tax Act, 2025.The usual TDS rates are 20 per cent on short-term equity fund gains, 12.5 per cent on long-term equityfund gains and 30 per cent on specified debt fund gains, with surcharge and cess added as applicable.
Treaty Benefits Under DTAA: Article 13, TRC and Form 10F
India’s treaties with countries such as Singapore and the UAE allow gains from assets other than shares and immovable property to be taxed exclusively in the investor’s country of residence.
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In Anushka Sanjay Shah v. ITO (March 2025), the ITAT Mumbai held that mutual fund units cannot be treated as shares under the India-Singapore DTAA, making gains of around ₹1.35 crore taxable only in Singapore.
Tribunal decisions are fact-specific, so a similar outcome cannot be assumed in every case. Before redemption, investors claiming treaty relief are generally expected to submit a Tax Residency Certificate (TRC), Form 10F and a self-declaration to the fund house.
When TDS Exceeds the Final Tax Due
The TDS may be higher than the tax ultimately payable. This is because the ₹1.25 lakh exemption is calculated on total gains for the year rather than on each redemption, gains taxed at slab rates may have an effective rate below 30 per cent, and treaty benefits not applied during deduction can be claimed only when filing the return.
Criteria for Determining Residential Status
The number of days spent in India during a financial year determines an individual’s residential status. A person is generally considereda resident if they stay in India for 182 days or more, or for at least 60 days in the year together with 365 days or more over the previousfour years. For Indian citizens who leave Indiato take up employment abroad, and for Indian citizens or persons of Indian origin visiting India, the 60-day criterion is typically replaced by 182 days. Where such visitors earn Indian income of more than₹15 lakh, the threshold becomes120 days.
Filing Returns and Recovering Excess TDS
An NRI must generally file an income tax return if their taxable income in India is above the basic exemption limit. A return is also needed to claim a refund of excess TDS or to obtain treaty benefits. Capital gains should be disclosed in the applicable schedule of the return.
Pitfalls NRIs Should Avoid
- Expecting long-term capital gains treatment on debt fund units purchased on or after 1 April 2023.
- Providing treaty documents only once units have already been redeemed.
- Regarding the tax deducted at source as the final amount payable.
- Missing out on eligible refunds by not filing a return.
Conclusion
For NRIs, the mutual fund taxation applies at the same rates as residents, although the tax is deducted when units are redeemed. The actual liability is settled through the Indian income tax return, which also enables NRIs to claim refunds of excess TDS and apply eligible treaty benefits. Consulting a qualified tax adviser can support accurate and timely compliance.
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