Taxation of mutual funds for NRIs in India

Diversification is one of the most potent investment strategies as it lowers risk and offers your money more exposure to different market opportunities. You can invest in multiple asset classes, market capitalisation as well as geographies. Non-Resident Indians (NRIs) may choose to invest in Indian mutual funds for geographical diversification. Mutual funds provide a way to tap into the potential of the Indian market. However, navigating NRI mutual fund taxation rules is crucial. Let's find out more about this.  

NRI mutual fund taxation for equity funds

Similar to Indian investors, NRIs also pay tax on their mutual fund profits. These taxes are primarily divided into two categories - Short Term Capital Gains (STCG) tax and Long Term Capital Gains (LTCG) tax. In the context of equity funds, STCG tax applies to profits from funds held for a year or less, while LTCG refers to gains from funds held for over a year.

Here’s how NRIs are taxed on their gains from equity funds:

In addition to this, NRIs pay tax on distributed income under the dividend option at their applicable tax slab. They are also required to pay Tax Deducted at Source (TDS) at 15% on STCG and 10% on LTCG. In the case of Income Distribution cum Capital Withdrawal (IDCW) option in mutual funds, NRIs pay TDS of 20%.

NRI mutual fund taxation for funds other than equity

Here’s how NRIs are taxed on profits earned from non-equity funds:

As per income tax slabs for Specified Mutual Fund on any type of gain (35% or less in equity)

Other than Specified Mutual Fund not being Equity Fund:

They are also required to pay TDS at 30% on STCG, 20% on listed units, and 10% on unlisted units in the case of LTCG. They also pay 20% TDS in the case of IDCW.

NRI mutual fund taxation for hybrid funds

NRI mutual fund taxation rules for hybrid funds depend on the fund's investments. If the fund mainly invests in equity, it is taxed as an equity fund. Similarly, if the majority of investments are not in equity, it is taxed as a non-equity fund.

Tax benefits for NRIs on mutual funds

The greatest tax benefit for NRIs comes from the Double Tax Avoidance Agreement (DTAA). NRIs may worry about being taxed twice on the same income – once in India and again in their home country. However, DTAA eliminates double taxation. DTAA is an agreement that India has signed with several countries, including the United States (US), United Kingdom (UK), Canada, Australia, and others.

As per DTAA, if you have already paid tax on your mutual fund returns in India, you can claim a tax deduction for the same income in your home country. This ensures you do not end up paying taxes twice for the same money.

Now that you know how tax laws work, here are some key things to keep in mind when investing in Indian mutual fund schemes as an NRI.

Things to remember about mutual funds taxation for NRIs

1. Tax laws change, so stay informed about the latest regulations to ensure compliance with current rules and regulations.
2. Verify if your host country has signed the DTAA with India. If not, understand the tax implications on your investments to avoid double taxation.
3. Understand tax planning strategies to maximise your returns. Remember, proper planning can significantly impact your overall earnings from mutual funds.
4. Consider tax diversification as a strategy to balance your returns. Diversifying your investments across different tax categories can help reduce your tax outgo and optimise your overall returns.

To sum it up

For NRIs interested in capitalising on the Indian market, mutual funds are a popular choice. However, they must understand the nuances of different taxes and tax agreements of their home country with India to make the most of their investments. It is also necessary to stay updated with the latest regulations as tax laws tend to change with time.

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