The DTAA Secret: How NRIs Can Save Taxes on Indian Mutual Funds

Having worked with NRIs for more than a decade, I’ve seen a disturbing trend: the majority of Non-Resident Indians end up paying too much or too little tax on their Indian mutual fund investments just because they have no idea how Double Taxation Avoidance Agreements (DTAAs) function. A lot of people assume that just because India has a DTAA with their resident country, they simply have no tax liability there, little do they know. Let’s demystify this complicated subject and assist you in optimizing your tax situation according to your resident nation.

What Is DTAA and Why Should NRIs Care?

Double Taxation Avoidance Agreement (DTAA) is a two-way agreement between two nations with the aim of avoiding double taxation of the same income. India has entered into these agreements with many nations globally, with clauses that change drastically from treaty to treaty. DTAAs have recently come into focus following the ruling by the Income Tax Appellate Tribunal (ITAT) in Mumbai that the capital gains on redemptions of mutual fund by NRI investors are not subject to taxation in India under Article 13(5) of the India-Singapore DTAA. This milestone ruling has far-reaching consequences for NRIs of most countries—possibly avoiding thousands in tax charges. Each DTAA contains specific articles that outline how different types of income will be taxed, which country has primary taxing rights, and what relief can be claimed. For mutual fund investments, the relevant provisions are typically found in the articles addressing “capital gains” or “alienation of property.” Fun fact: Even within the same DTAA, the tax treatment can differ dramatically depending on whether your mutual fund is equity-oriented or debt-oriented!

Country-Specific DTAA Provisions for Mutual Fund Taxation

Let’s see how DTAA provisions influence mutual fund taxation for NRIs in various countries: United States If you’re a resident taxpayer in the US, the news is not very good. Article 13 of the India-US DTAA makes capital gains on Indian mutual funds taxable in India under Indian tax law. That means you’ll be required to pay the relevant short-term or long-term capital gains tax in India upon redemption of your units.

1. UAE, Saudi Arabia, Kuwait, Oman, and Qatar NRIs living in these Gulf nations have a huge plus point! According to Article 13(5) of the respective DTAAs of these countries with India, capital gains by Indian mutual funds are not taxable in India. Instead, they’re only subject to tax in your country of domicile—and as these nations do not have income tax for individuals, your capital gains may well be tax-free! Fun fact: This favorable tax treatment can result in up to 15% higher returns compared to NRIs from countries like the US, purely from tax savings!
2. Singapore and Other Asian Countries Singapore has been under the limelight after the recent ITAT ruling. As a tax resident of Singapore, Singapore mutual fund capital gains should not be taxable in India. Do watch out for the “Limitation of Relief” clause that might apply in some instances—seeking advice from a tax consultant is recommended to ensure you comply with all requirements. For residents of Hong Kong, the scenario is the same as the US—Indian capital gains from mutual funds are taxable in India. Malaysia and Philippines residents enjoy special treatment like Singapore, with capital gains generally not taxable in India under their DTAs.
3. European Countries and Canada NRI residents in the United Kingdom enjoy the same terms as US residents—capital gains on Indian mutual funds are taxable in India under Article 14 of the India-UK DTAA. In the case of Canadian tax residents, there is a peculiar scenario. Capital gains from Indian mutual funds could be subject to taxation in both nations as per Article 13 of the DTAA. Yet, you could be entitled to tax credit relief in Canada to counterbalance the tax paid in India and avoid double taxation.
4. Germany and Italy nationals are treated well capital gains on Indian mutual funds are not to be taxed in India under their respective DTAAs. Interesting fact: The particular articles under which mutual fund taxation can be different ranging from Article 13 to Article 14 or even Article 22 in some DTAAs. Always check the precise article number applicable to your nation’s treaty! Effectively Claiming DTAA Benefits

To avail of these DTAA advantages, do the following crucial steps:

Ensure your tax residency status at once This is the key to all DTAA advantages.

• Get your Tax Residency Certificate (TRC) and Form 10F in advance. Do not delay until you prepare to redeem your investments. Prepare these documents ahead of time to avoid last-minute hassles.
• Consider DTAA implications prior to investing in new mutual funds. Your tax domicile must shape your investment decisions and timing.
• Keep in mind your plans for future residency. If you’re relocating from a less tax-friendly jurisdiction (such as the US) to a more tax-friendly one (such as Singapore or UAE), it could be wise to hold back redemption of your Indian mutual funds until you’ve acquired tax residency in your new nation.

Strategic Tax Planning for NRIs

Your tax residency country has a profound effect on your investment returns, not only through performance but also through tax efficiency. This presents opportunities for tax planning that few financial planners or banks will mention to you. For instance, if you’re already a US resident but set to relocate to the UAE or Singapore soon, waiting to redeem your Indian mutual funds until after becoming tax resident in the new nation may save you considerable tax charges. Similarly, if you’re a resident of a country with favorable DTAA provisions, you might want to prioritize Indian mutual fund investments over other investment vehicles that don’t receive the same tax benefits.

Conclusion

Knowing how DTAAs affect your Indian mutual fund investments can result in much greater after-tax returns and help you avoid unnecessary tax compliance issues. The key lies in understanding exactly which provisions apply to your country of residence and ensuring you have the right documentation in place to claim these benefits. Whether you’re already investing in Indian mutual funds or planning to do so in the future, incorporating DTAA considerations into your investment strategy is essential. As a trusted financial advisor for NRI clients, Prime Wealth is here to help you navigate these complex cross-border tax implications with clarity and confidence. For personalized advice, contact us at office@primewealth.co.in or visit www.primewealth.co.in. Stay informed, plan wisely, and maximize the tax-saving benefits available to you as an NRI investor.

FAQs

1. What documents do I need to claim DTAA benefits for my mutual fund investments?
   Ans- A Tax Residency Certificate (TRC) from your country of residence and Form 10F are essential; additional documents may be required based on your specific situation.
2. Can I claim DTAA benefits retroactively for mutual fund redemptions in previous years?
   Ans-  Yes, but it’s complicated; you may need to file revised returns within the permissible timeframe and provide supporting documentation.
3. Do DTAA benefits apply to dividends from Indian mutual funds as well?
   Ans- Yes, but the applicable article and tax rates for dividends differ from capital gains; typically found under the “Dividends” article in your DTAA.
4. How does the Finance Act 2023 impact DTAA benefits for NRIs?
   Ans- Recent amendments haven’t fundamentally altered DTAA provisions, but always consult the latest updates as tax laws evolve.
5. If I’m a dual tax resident, which DTAA applies to my mutual fund investments?
   Ans- The tie-breaker rules in the relevant DTAAs would determine your fiscal domicile for tax purposes.
6. Do I need to file an income tax return in India even if my mutual fund gains aren’t taxable under DTAA?
   Ans- Yes, if your Indian income exceeds the basic exemption limit, you still need to file a return and claim the DTAA benefit explicitly.
7. How do I determine if my mutual fund is classified as equity-oriented or debt-oriented for DTAA purposes?
   Ans- A mutual fund with more than 65% invested in Indian equity shares is considered equity-oriented; otherwise, it’s classified as debt-oriented.
8. Can my bank or mutual fund company handle DTAA compliance for me?
   Ans- No, they can only apply TDS based on standard rates; claiming DTAA benefits is your responsibility when filing your tax return.
9. Does DTAA cover indexation benefits for long-term capital gains?
   Ans- DTAA determines where the income is taxed, while indexation is a calculation method under Indian tax law applied if India has the right to tax.
10. If I change my country of residence mid-year, which DTAA applies to my mutual fund redemptions?
    Ans- The DTAA of your country of tax residence at the time of redemption generally applies, making timing strategic for tax planning.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.