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Mutual Funds Taxation for NRIs In India

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27 Oct 2023

Introduction

Investing in mutual funds is a popular choice for Non-Resident Indians (NRIs) looking to grow their wealth and secure their financial future. Mutual funds offer diversification, professional management, and the potential for significant returns. However, it's essential for NRIs to be aware of the tax implications of their investments in India.

In this blog, we'll explore the taxation rules and considerations that NRIs should keep in mind when investing in Indian mutual funds.

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Residential Status 

Before delving into mutual fund taxation, it's crucial to understand the concept of residential status for NRIs. The Indian Income Tax Act categorises individuals into three main residential statuses:

  1. Resident: A person who resides in India for more than 182 days in a financial year. 
  2. Non-Resident: A person who resides outside India or has been in India for less than 182 days in a financial year.
  3. Resident but Not Ordinarily Resident (RNOR): This category is for individuals who have shifted their base to India but still qualify as non-residents under specific conditions.

Taxation of Mutual Fund Gains for NRIs

For NRIs, the tax implications of investing in Indian mutual funds are mainly related to capital gains tax. There are two types of capital gains in mutual funds:

  1. Short-Term Capital Gains:  If an NRI holds mutual fund units for less than 1 year, any profit earned is considered a short-term capital gain.
  2. Long-Term Capital Gains:  If an NRI holds mutual fund units for 1 year or more, the profit is categorized as a long-term capital gain.

The tax rates are as follows:

Equity Mutual Funds:

  • STCG: NRIs are taxed at a flat rate of 15%.
  • LTCG: NRIs are taxed at 10% without indexation benefit if the gains exceed Rs. 1 lakh.

Other than Equity Oriented Funds:

  • STCG: NRIs are taxed as per their applicable income tax slab.
  • LTCG: NRIs are taxed at 20% with indexation benefits if the gains exceed Rs. 1 lakh.

Tax Deducted at Source (TDS):

One key aspect of mutual fund taxation for NRIs is Tax Deducted at Source (TDS). When an NRI earns capital gains from mutual funds, the Asset Management Company (AMC) is obligated to deduct TDS at the applicable rate. However, the rate depends on the type of investment and the capital gains:

Type of Mutual Fund TDS on Short-term Capital Gains TDS on Long-term Capital Gains TDS on Distributed Income under IDCW Option
Equity Mutual Funds 15% 10% 20%
Other than Equity Oriented Fund 30% Listed - 20% with indexation 20%
Unlisted -10% without Indexation

The TDS is charged at the highest rate. If the NRI falls in a lower tax slab, they are eligible for a refund while filing their ITR. To avail a lower TDS rate, NRIs can apply for a Tax Residency Certificate (TRC) from their home country and provide it to the mutual fund company.

Exemptions and Tax Benefits

NRIs can also take advantage of certain exemptions and benefits when it comes to mutual fund taxation:

1. Section 80C Deductions: NRIs can claim deductions under Section 80C for investments in specified mutual fund schemes like Equity-Linked Savings Schemes (ELSS). The deduction limit under this section is Rs. 1.5 lakh.

2. Benefit of Double Taxation Avoidance Agreements (DTAA): India has signed DTAA agreements with many countries to prevent double taxation of income. NRIs can take advantage of these agreements to reduce the tax liability on their mutual fund investments.

Tax Reporting and Compliance

NRIs are required to fulfil specific tax reporting and compliance obligations when investing in Indian mutual funds. They need to file income tax returns in India if their taxable income exceeds  Rs 2,50,000. NRIs also need to report their foreign income in their home country. 

Additionally, they should be vigilant about providing the necessary documentation, such as the Tax Residency Certificate, to ensure that they receive the applicable tax benefits.

In conclusion, Investing in Indian mutual funds can be a lucrative endeavour for NRIs, but it comes with specific tax considerations. It's crucial for NRIs to understand the tax implications, TDS requirements, and potential exemptions to optimise their returns. 

Consulting with a financial advisor or tax expert with expertise in international taxation is advisable to ensure compliance with tax laws and make informed investment decisions. By staying informed and adhering to the taxation rules, NRIs can make the most of their mutual fund investments in India while managing their tax liabilities effectively.

 

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