Investing in mutual funds is a popular choice for many Indian as well as Non-Resident Indians (NRIs), seeking to build wealth and achieve their financial goals. However, one aspect that NRIs must pay close attention to is the taxation of mutual funds in India. The tax implications for NRIs investing in mutual funds differ from those for resident Indians and require a comprehensive understanding to make informed investment decisions.
Before delving into the specifics of NRI mutual funds, let’s initiate by comprehending the taxation structure applied to mutual funds in India. Mutual funds in India adhere to the taxation regulations stipulated by the Securities and Exchange Board of India (SEBI).
The proceeds from mutual funds manifest in two primary forms
- Dividends: Companies, when having surplus funds, often distribute a portion of their profits to their investors, known as dividends.
- Capital Gains: The difference between the selling price and the purchase price of a mutual fund denotes the capital gain.
Both these types of returns are subject to taxation under the framework governing mutual funds in India. As far as capital gains are concerned, the investor earns gains either from the sale of a mutual fund held for one year or less, which is termed as short-term capital gains, or from the sale of a mutual fund held for more than one year, which is termed as long-term capital gains.
On the other hand, the dividends received from dividend schemes, whether they belong to equity or non-equity categories, are treated as income for the year. They are subject to taxation based on the individual’s applicable income tax slab rate.
Mutual Fund Taxation
NRIs investing in mutual funds in India should consider specific tax implications associated with their investments. One crucial aspect is Tax Deducted at Source (TDS), where NRIs face deductions when redeeming mutual funds. The TDS rate depends on the fund type (equity or non-equity) and the duration of holding the funds. For instance, short-term capital gains from the sale of mutual funds held for a year or less are subject to TDS at rates of 15% for equity funds and 30% for non-equity funds. Conversely, long-term capital gains incur TDS at rates of 10% for equity funds and 20% for non-equity funds.
Furthermore, the capital gains tax on mutual funds varies based on the scheme type and holding period. For short-term capital gains, the tax rate stands at 15% for equity mutual funds, while gains above Rs. 1 lakh incur a 10% tax for equity funds without indexation benefit. On the other hand, the tax on long-term capital gains differs, with equity funds taxed at 10% without indexation for unlisted non-equity funds and 20% with indexation for listed non-equity funds. NRIs paying a higher TDS than their actual tax slab can claim refunds when filing their taxes, as TDS initially deducts income tax at the highest rate, allowing for reclamation of excess tax paid due to lower tax slabs.
NRIs investing in Mutual Funds can leverage several tax benefits, notably through the Double Taxation Avoidance Agreement (DTAA). This agreement, established between two countries, aims to prevent the taxation of the same income in both countries where the resident holds assets. Gains earned by NRIs from investments in India are typically taxed in only one country as per the terms outlined in the DTAA.
Under DTAA provisions, NRIs can seek relief by claiming the benefit of taxes and Tax Deducted at Source (TDS) deducted in India against their tax liabilities in their country of residence. To avail of this deduction, NRIs are required to furnish specific documents to the deductor. These documents often include a self-declaration cum indemnity format along with a copy of citizenship or Proof of Identity (PIO). By adhering to these procedures, NRIs can optimize their tax liabilities and avoid being taxed twice on the same income, thus maximizing the benefits of their Mutual Fund investments.