Shantanu is an NRI based out of Singapore. He has been investing in Mutual Funds in India. Capital Gain tax has undergone a sea of changes in the recent past and he is wondering if he should continue to invest in MF schemes in India.
TAXATION OF MF INVESTMENTS BY NRI:
Equity oriented mutual funds in India are taxed at 20% on short term capital gains and 12.5% on long term capital gains. Debt mutual funds purchased after 01-Apr-2024 are taxed at slab rates on short term capital gains while the long term gains on these are taxed at 12.5%.
Considering the high tax rates, as an NRI, one may hesitate to invest in Indian mutual funds. But tax rates alone must not be looked at in isolation for making investment decisions. One must look at the respective DTAA provisions as well.
DOUBLE TAXATION AVOIDANCE AGREEMENTS (DTAA):
DTAA is an agreement between two countries to avoid or mitigate double taxation of income or financial transaction. India has signed DTAAs with a majority of the countries. DTAAs with some countries allows the capital gains to be taxed only in the investor’s country of residence.
RULING BY MUMBAI INCOMETAX APPELLANT TRIBUNAL (ITAT):
A recent ruling clarified application of this exemption. NRI Assessee had claimed exemption of short term capital gains arising on sale of MF units under Article 13 of the India – Singapore DTAA. Assessing Officer had disagreed with the claim and attempted to tax the gains arguing that the mutual fund units derived value from Indian Assets. Mumbai ITAT ruled in favour of the assessee and clarified that capital gains from transfer of mutual fund should fall under Article 13(5), which covers “property other than shares”, not Article 13(4) that deals with shares of an Indian entity.
This distinction is crucial as effectively exempts such gains from India under the India – Singapore DTAA. While this exemption was always available, many NRIs were not aware of this. This ruling helps clarify its applicability and confirms that NRIs from certain countries can rightfully claim relief.
HOW CAN AN NRI CLAIM EXEMPTION OF CAPITAL GAINS ON INVESTMENT IN MF IN INDIA?
1. The NRI must be a resident of a country that has a DTAA – Obtain a Tax Residency Certificate (TRC) to prove this.
2. Analyse the DTAA clauses to claim the foreign tax credit.
With proper planning and guidance, NRIs can legitimately reduce their tax liability on mutual fund investments in India
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NRI and related tax issues
In spite of shifting base to different geographies, many Indians keep in touch with their roots, tradition, culture and rituals as that has been the way our DNAs are made!
Income tax as a subject by itself undergoes numerous changes every year and it could be quite cumbersome to keep a tab on the innumerable changes. Recent changes to the Income Tax Act changed the way NRIs are taxed in India. With the introduction of the term “deemed resident”, it becomes all the more important to review the residential status every year. The Income Tax law is more stringent now and has more tools to track and tap information to enable effective taxing of the NRIs.
Being an NRI, you have to deal not with one but with at least two country’s tax laws. We understand your needs and can be of tremendous support in keeping tax compliance in India on track. Our NRI services can help you save time and effort, while also minimizing the risk of penalties and legal issues arising from non-compliance with tax laws.
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