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Tata Capital > Blog > Wealth Services > Taxation of Mutual Funds for NRI in India

Wealth Services

Taxation of Mutual Funds for NRI in India

Taxation of Mutual Funds for NRI in India

Mutual funds (MFs) are attractive investment options for novice and experienced investors, offering diversification benefits and significant potential for wealth creation. For NRIs, too, mutual funds present compelling opportunities due to their market potential, accessibility, and professional management. 

However, NRIs who wish to invest in mutual funds in India must navigate tax regulations carefully. This ensures compliance with legal requirements and enables them to make well-informed investment decisions. This article explores how NRI mutual fund taxation works and the essential terms they need to know. 

Mutual Fund Tax Implications to Consider

NRIs investing in mutual funds in India must have a clear understanding of the following tax implications:

1. Tax Deducted at Source (TDS) 

NRIs have to pay TDS when redeeming mutual funds. The NRI capital gains tax on mutual funds depends on the type of scheme you have invested in and the duration for which you hold the funds. If you fall in the lower tax slabs, you can claim a deduction when filing your tax returns. The duration of holding can be split into two categories- short-term and long-term capital gains. 

Here’s how NRI MF taxation for TDS works:

TDS on Short-Term Capital GainsTDS on Long-Term Capital GainsTDS on Distributed Income under IDCW Option
Equity MF15%10%20%
Non-equity MF30%20% with indexation (Listed)
10% without indexation (Unlisted) 		20%

2. Capital Gains Tax

The government levies capital gains tax on the profit earned from selling assets like stocks, bonds, and other investments. For NRIs, capital gains tax on mutual funds is levied based on their income slab and holding period:

– Short-Term Capital Gains (STCG)

The holding period for short-term capital gains is 0 to 24 months. If you sell your equity mutual fund units within this period, you’ll have to pay an STCG tax of 20%. However, gains on debt funds will be taxed as per your applicable tax slab.

– Long-Term Capital Gains (LTCG)

For long-term capital gains, the holding period is longer than 24 months. The LTCG tax rate for NRIs is 12.5% without indexation for gains exceeding Rs. 1.25 lakhs. 

3. Income Tax Return

If an NRI’s total income only consists of investment returns or long-term capital gains (with the required TDS deductions), they don’t need to file income tax returns. 

4. Taxation of Dividends

Any dividends received from equity or non-equity dividend schemes will be added to your total annual income and taxed depending on your applicable tax slab. 

Mutual Fund Tax Benefits for NRIs

1. Double Tax Avoidance Agreement 

The Double Tax Avoidance Agreement (DTAA) is an agreement India has with several countries, including Canada, Australia, the UK, the US, and more. It prevents NRIs from being taxed for the same income in two countries. Under the DTAA, if an NRI has paid taxes in India for an income stream, they can claim a deduction in their country of residence. 

2. Section 80C

Under Section 80C of the Income Tax Act, NRIs can claim tax benefits on certain investments up to Rs. 1.5 lakhs. This can help them optimize their returns and reduce their tax liabilities. 

Wrapping Up

Mutual funds are attractive investment avenues for NRIs due to their diversification, accessibility, security, and tax benefits. However, it is crucial to comply with government regulations and clearly understand taxation for NIRs in mutual funds to make informed investment decisions. 

Start your mutual fund investment journey in India with Tata Capital Wealth. Explore a wide range of options to select a scheme that aligns with your risk tolerance and financial goals. To learn more, visit the Tata Capital Wealth website today!

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