Mutual funds are a popular investment avenue among investors. Similar to Indian residents, NRIs can also explore mutual fund opportunities.
With the right balance of equity mutual funds and debt mutual funds, one can achieve financial goals. However, it is important to know that the capital gains on mutual funds are taxable. Both Indians and NRIs have similar tax implications with slight exceptions for NRIs.
In this blog, we will understand the NRI mutual fund taxation.
NOTE: Tax rules on Mutual funds have been changed after April 1, 2023. Read along to find more details.
Non-resident Indians (NRIs) can invest in Indian mutual funds as long as they follow the Foreign Exchange Management Act (FEMA). A PAN card and KYC via eligible documents allow NRIs to invest in mutual funds, fixed-income securities, or even real estate. However, the tax rules for each investment avenue will be different for NRIs.
Tax on the capital gains earned from mutual funds depends on the type of the fund and the holding period.
1. Short-Term Capital Gains tax will be applicable on investments redeemed before 12 months for equity funds and 36 months for debt funds.
2. Long-Term Capital Gains tax will be applicable on investments redeemed after 12 months for equity funds and 36 months for debt funds.
3. Dividends are considered as income. Hence, the tax implications on dividends earned from mutual funds are different from capital gain taxation.
4. The asset management firm may also deduct TDS (tax deducted at source) on the capital gains.
Now, let’s dive into the tax implications.
Equity Mutual Funds allocate the majority of the assets into the stocks of different companies. There are 7 different types of equity funds that you can explore based on your risk appetite and financial goals.
Tax on capital gains on equity and equity-oriented funds are as follows:
| Short-term capital Gains Tax (STCG) | Short-term capital Gains Tax (STCG) | Tax on Dividend (Income through mutual funds) |
| 15% | 10% above INR 1 Lakh | As per the investor's tax slab |
Non-equity mutual funds are either Debt funds or Hybrid funds with a combination of both equity and debt. Debt funds allocate your money to debt instruments such as government bonds, corporate bonds, T-bills, commercial papers etc. Debt funds have 15 different categories to explore based on the tenure and associated risk.
Funds with less than 35% exposure to equity will also have debt fund taxation. Whereas funds with 35% exposure to equity will have the old taxation rule with indexation.
Taxation on Gains on debt or other than equity funds:
| Mutual Fund Type | Short-Term Capital Gains Tax (STCG) | Long-Term Capital Gains Tax (LTCG) | Tax on Dividend (Income through Mutual Funds) |
| Non-Equity Funds invested before April 1, 2023 | As per the investor’s tax slab | 20% (for listed securities) and 10% above INR 1 Lakh (for unlisted securities) | As per the investor’s tax slab |
| Non-Equity Funds invested on or after April 1, 2023 | As per the investor’s tax slab | As per the investor’s tax slab | As per the investor’s tax slab |
| Funds with 35% exposure to equity | As per the investor’s tax slab | 20% (for listed securities with indexation benefit) 10% above INR 1 Lakh (for unlisted securities) | As per the investor’s tax slab |
Indian residents do not have to pay TDS on capital gains. However, the asset management firm will deduct TDS on capital gains for NRIs.
TDS depends upon the type of the fund and the holding period.
| Mutual Fund Type | TDS on Short-Term Capital Gains | TDS on Long-Term Capital Gains | TDS on Dividend |
| Equity and Equity Oriented Funds | 15% (Holding period less than 12 months) | 10% (Holding period more than 12 months) | 20% |
| Debt Funds or Non-equity Funds (Invested before April 1, 2023) | 30% | 20% with indexation for listed securities. 10% for unlisted securities. | 20% |
| Debt Funds or Non-equity Funds (Invested after April 1, 2023) | 30% | 30% | 20% |
Question 1: Do NRIs have to pay tax in their current residence country after paying capital gains tax in India?
Answer: No. NRIs do not have to pay the double tax if their country falls under Double Tax Avoidance Agreements (DTAA) with India.
Question 2: Can NRIs set off capital gains with losses?
Answer: Yes. NRIs can also set off capital gains with losses. For example, if an NRI gained profit via one mutual fund but made a loss in another, he/she can set off the gains against losses to reduce the overall gains, thereby reducing the tax on it.
Understanding taxation rules is crucial to plan your investments accordingly. If you are a non-resident Indian wanting to invest in the Indian stock market, keep this blog in handy. Taxation rules for mutual funds are pretty much the same for both Indians and NRIs, with TDS as an exception.
If you have any questions regarding mutual funds or its taxation, feel free to reach out to us. DM us on Instagram or LinkedIn.
