As an NRI, you can invest in India’s mutual fund schemes, but you must pay taxes on your mutual fund investments. You must pay tax on mutual funds in India based on certain criteria. Keep in mind that the tax implications for NRIs and Resident Indians are distinct.
1. Capital Gains Tax
Your gains from mutual fund investment will be taxed like Resident Indians. Gains of above ₹1lakh from equity funds attract LTCG (Long-Term Capital Gainal tax at 10% without indexation benefit if the investment is redeemed after a year. STCG (Short-Term Capital Gains) tax at 15% is applicable for redemption within 1 year.
LTCG tax is applicable at 20% with indexation benefit if the investment is rodeemed after three years for debt and other types of funds. STCG tax at 30% is applicable if you belong to the highest income tax slab and redeem the investment before three years.
2. Double Taxation
India has DTAA (Double Taxation Avoidance Agreement) with more than 90 countries across the world. If you currently reside in a country with which India has a DTAA, you can protect yourself from double-taxation. In other words, if you’ve already paid taxes on your mutual fund investment in India, you will not be required to pay taxes on the same again or pay taxes at a lower rate in the country where you are currently residing.
3. Tax Deductions
Unlike resident investors, mutual fund investments made by NRIs are subject to TDS deductions in India. If you’ve invested in equity funds, TDS will be deducted from your LTCG at 10%. The same for debt and other non-equity funds is 20%.
Note that TDS is deducted, assuming that you belong to the highest income tax bracket. In case if your tax liabilities are lower, you can claim a tax refund by filing yearly returns.
4. Setting-off Gains With Capital Losses
Another vital aspect of NRI mutual fund taxation is setting-off capital gains with losses. NRIs are allowed to set-off their capital gains made in a financial year with the losses made in the year. For instance, you can use gains from equity funds for setting-off losses from debt funds and vice-versa.
However, you can only set-off long-term losses with LTCG. STCG and LTCG can be used for setting-off short-term losses. Note that TDS is deducted, assuming that you belong to the highest income tax bracket. In case if your tax liabilities are lower, you can claim a tax refund by filing yearly returns.
Mutual Fund Tax for NRIs in India
1) NRI Equity Mutual Fund Taxation India
These are funds with at least a 65 % allocation to equity assets. You can generate either short-term or long-term profits. If the holding period exceeds a year, then the gains are long-term gains. Gains are regarded short-term when the holding period is less than one year.
Taxes on Short-Term Gains – 15% of the benefits are payable.
Taxes on Long-Term Gains – Annual gains up to Rs. 1,00,000 are exempt from taxation. Gains in excess of this threshold are subject to a 10% tax. (without Indexation)
2) NRI Debt Taxation in India for Mutual Funds
Non-Equity Funds (Debt Funds, Gold Funds, International Funds (including Equity Funds), and Fund of Funds)
The majority of non-equity funds’ portfolios are invested in non-equity assets, such as government bonds, deposits, gold, etc. If the holding period exceeds three years, then the resulting gains are long-term gains. Gains are termed short-term when the holding period is less than three years.
Taxes on Short-Term Gains – Determined by Your Tax Bracket (30% TDS)
Taxes on Long-Term Gains – Listed mutual funds are subject to a 20% tax (with indexation). Unlisted mutual funds are subject to a 10% tax (no indexation).
3) NRI – Fixed Maturity Plans (FMPs) Taxation
FMPs are closed-end debt funds that are publicly traded. They have a fixed maturity period; if you wish to sell before maturity, you must do so on an exchange. They are not continuously available for subscription.
FMPs invest typically in debt instruments such as Corporate Bonds, Certificates of Deposit (CDs), money market instruments, and other commercial documents.
The fund manager invests money in instruments that typically correspond to the scheme’s duration.
Taxes on Short-Term Gains – If the FMP matures in less than three years, the individual’s income tax bracket applies. Taxes on Long-Term Gains – 20% with Indexation
Indexation – Adjustment of the purchase price for inflation.
Other Charges Applicable
Health and Education Cess at 4% will be applied to the total tax amount.
Securities Transaction Tax of 0.001% applies to Equity Mutual Fund buyers and sellers.
4) TDS for NRI Investing in Mutual Funds
TDS is applicable for Non-resident Indians redeeming mutual funds. The rate is dependent on the scheme category and retention period.
1. TDS On Short-Term Gains –
Equity Mutual Funds – 15%
Non-Equity Mutual Funds – 30%
2. TDS On Long-Term Gains –
Equity Mutual Funds – 10%
Non-Equity Mutual Funds (Listed) – 20% with Indexation
Non-Equity (Unlisted) Mutual Funds – 10% without Indexation
The TDS is assessed at the maximum rate allowed. When filing tax returns, the NRI is eligible for a refund if he falls into a lower tax bracket.
5) Provisions of Set-Off for NRIs
1. Short-term capital losses may be deducted against other short-term losses or longterm losses.
2. Only long-term losses can be deducted against long-term gains to reduce tax liability.
3. NRIs can carry forward losses for eight years, but they must file a tax return to do so.
4. Capital gains from mutual funds can be offset against the base tax exemption limit of Rs 2,500,000.
Equity Mutual Funds
Short-Term – NOT AVAILABLE to NRIs
Long-Term – Exemption limit of 1 Lakh is Available
Debt Mutual Funds
Short-Term – ALLOWED for NRIs
Long-Term – NOT AVAILABLE to NRIs
5. Sec 80 C Deduction – You can also lower your tax obligation by investing in PPF, ELSS, etc. Only in case of Short-term Gains in Debt Mutual Funds.