Mutual funds are a preferred investment option for Non-Resident Indians (NRIs) looking to benefit from India’s growing economy. However, taxation on mutual funds for NRIs differs from that for resident investors, making it essential to understand tax rules before investing. This blog provides a comprehensive overview of NRI mutual fund taxation, including tax rates, TDS implications, and ways to reduce tax liability.
Can NRIs Invest in Mutual Funds in India?
Yes, NRIs can invest in Indian nri mutual fund taxation under the regulations set by the Foreign Exchange Management Act (FEMA). Investments can be made through:
- NRE (Non-Resident External) Account – Repatriable investments with funds freely transferable abroad.
- NRO (Non-Resident Ordinary) Account – Non-repatriable investments where funds remain in India.
Some fund houses have restrictions on investments from NRIs based in the United States and Canada due to FATCA (Foreign Account Tax Compliance Act), but several mutual funds accept investments from these countries with additional compliance procedures.
Taxation on NRI Mutual Fund Investments
The tax treatment of mutual fund investments for NRIs depends on the fund type and holding period.
1. Taxation on Equity Mutual Funds
Equity mutual funds invest at least 65% of their portfolio in equities. The tax structure is as follows:
- Short-Term Capital Gains (STCG): If units are sold within 12 months, a 15% tax applies.
- Long-Term Capital Gains (LTCG): If held for more than 12 months, gains up to ₹1 lakh are tax-free. Beyond ₹1 lakh, a 10% tax applies without indexation.
2. Taxation on Debt Mutual Funds
Debt mutual funds primarily invest in fixed-income securities like bonds and government instruments. The tax structure includes:
- Short-Term Capital Gains (STCG): If sold within 3 years, gains are taxed as per the NRI’s income tax slab.
- Long-Term Capital Gains (LTCG): If held for more than 3 years, gains are taxed at 20% with indexation.
3. Taxation on Hybrid Mutual Funds
- Equity-oriented hybrid funds (more than 65% equity) are taxed like equity funds.
- Debt-oriented hybrid funds (less than 65% equity) are taxed like debt funds.
Tax Deducted at Source (TDS) for NRIs
For NRIs, Tax Deducted at Source (TDS) is applicable at the time of redemption:
| Type of Mutual Fund | Short-Term TDS | Long-Term TDS |
|---|---|---|
| Equity Funds | 15% | 10% (Above ₹1 lakh) |
| Debt Funds | As per tax slab | 20% with indexation |
Since TDS is deducted at the source, NRIs must file income tax returns in India to claim refunds if their tax liability is lower than the deducted TDS.
Taxation Under Double Taxation Avoidance Agreement (DTAA)
NRIs residing in countries that have signed a Double Taxation Avoidance Agreement (DTAA) with India can claim tax credits in their country of residence for the tax paid in India. This helps avoid double taxation and reduces overall tax liability.
How NRIs Can Reduce Tax on Mutual Fund Investments
NRIs can optimize their taxation on mutual funds using these strategies:
- Invest for the Long Term – Holding investments longer helps reduce tax liabilities, especially in debt funds where indexation benefits apply.
- Use DTAA Benefits – Check if your country has a DTAA with India and claim tax relief.
- Choose Equity Funds for Lower Taxation – Equity mutual funds offer lower tax rates than debt funds.
- File Tax Returns in India – If excess TDS is deducted, file an ITR to claim refunds.
Conclusion
For NRIs, mutual funds are a great investment avenue, but taxation rules differ from those applicable to residents. Understanding TDS rates, tax implications, and DTAA benefits is crucial to maximizing returns. NRIs should consider consulting Dinesh Aarjav & Associates for expert tax advice to ensure compliance and effective tax planning.
