NRI Mutual Fund Taxation

Taxation rules for NRIs are similar to those for residents of India. For equity mutual funds, investments held for one year or less are subject to a 15% tax under short-term capital gains taxation rules.
EXPLORE FUNDS
NRI Mutual Fund Taxation - Benefits, Compliances and Rates
EXPLORE FUNDS
4 mins
09-September-2024

Mutual funds are a popular investment option for Non-Resident Indians (NRIs) who want to invest in India. However, NRIs need to be aware of the tax implications of investing in mutual funds in India. For NRIs investing in mutual funds, tax compliance involves a TDS rate of 10% for long-term capital gains (LTCG) and 15% for short-term capital gains (STCG) on equity-oriented funds. In this article, we will discuss the various tax implications of mutual funds for NRIs.

Understand taxation of mutual funds for NRIs in India

When investing in mutual funds in India, NRIs must comply with the Income Tax Act, 1961, and pay applicable taxes. Key tax compliances include:

1. Tax Deducted at Source (TDS)

Asset management companies will deduct 20% (plus applicable surcharge and cess) of your IDCW (Income Distribution cum Capital Withdrawal) as TDS.

  • For equity-oriented funds: 10% for LTCG (Long-Term Capital Gains) and 15% for STCG (Short-Term Capital Gains).

  • For non-equity-oriented funds:
    • 20% with indexation for LTCG on listed schemes.
    • 10% without indexation for LTCG on unlisted schemes.
    • As perindividual tax slabs for STCG.

2. Filing of Income Tax Returns

If you earn IDCW or capital gains from your mutual fund investments, you must declare this income and pay taxes. Ensure to file your income tax return before July 31 each year.

Tax Benefits for NRIs Investing in Indian Mutual Funds

1. No Double Taxation

India has entered into Double Tax Avoidance Agreements (DTAAs) with many countries to prevent double taxation. This means if you pay tax on your Indian mutual fund income in your country of residence, you won't have to pay tax on the same income again in India.

2. Deduction under Section 80C

Investing in an Equity Linked Savings Scheme (ELSS) can help reduce your tax liability. You can claim a deduction of up to Rs. 1,50,000 from your total income under Section 80C of the Income Tax Act, 1961.

Taxation for NRI mutual funds

1. Capital gains tax

Capital gains tax is the tax levied on the profit earned from the sale of mutual fund units. For NRIs, capital gains tax is applicable on both equity-oriented and non-equity-oriented funds. The tax rate for LTCG on equity-oriented funds is 10% without indexation benefits over and above the overall exemption limit of Rs. 1 lakh. For STCG on equity-oriented funds, the tax rate is 15%. For non-equity-oriented funds, LTCG is applicable at 20% of the gains with the benefit of indexation, if the investment is held for more than three years. For non-equity mutual funds with less than 35% equity holdings in their overall portfolio, any gains on investment on or after April 1, 2023, and a holding period of less than three years will be classified as STCG, added to the total income of the taxpayer, and taxed as per the income tax slab rate applicable.

2. Tax deducted at source (TDS)

TDS is applicable on capital gains. For NRIs, TDS is deducted at the time of redemption of mutual fund units. The rate of TDS depends on the type of mutual fund and the duration of the investment. For equity-oriented funds, the TDS rate is 10% for long-term capital gains (LTCG) and 15% for short-term capital gains (STCG). For non-equity-oriented funds, the TDS rate is 20% with indexation for LTCG for listed schemes and 10% without indexation for unlisted schemes and as per the income tax slab rate (at 30% assuming that the investor falls under the highest tax slab) for STCG.

3. Tax return of income

NRIs are required to file their tax returns in India Even if the income does not exceed the basic exemption limit, NRIs have to file tax returns in case the investor wants to claim tax refund of the TDS on capital gains.. The basic exemption limit for NRIs is Rs. 2.5 lakh. NRIs can file their tax returns online or offline.

4. Taxation of dividends

Dividends received from mutual funds are taxed in the hands of the investor. TDS on dividend income for NRI is 20% (excluding cess and surcharge).

5. Tax benefits

NRIs can avail of tax benefits under Section 80C of the Income Tax Act, 1961, by investing in mutual funds. The maximum deduction allowed under Section 80C is Rs. 1.5 lakh. NRIs can also avail of tax benefits under the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.

6. Double Taxation Avoidance Agreement (DTAA)

DTAA is an agreement between two countries to avoid double taxation of the same income. NRIs can avail of the benefits of DTAA by claiming tax credits in their country of residence for the taxes paid in India.

Essential concepts in mutual funds taxation for Non-Resident Indians

  1. Capital Gains Tax: Capital gains tax is the tax levied on the profit earned from the sale of mutual fund units.
  2. TDS: TDS is a tax that is deducted at the source of income.
  3. LTCG: LTCG is the profit earned from the sale of mutual fund units held for more than one year in case of equity-oriented scheme and 3 years in case of non equity-oriented schemes.
  4. STCG: STCG is the profit earned from the sale of mutual fund units held for less than one year in case of equity-oriented scheme and 3 years in case of non equity-oriented schemes.
  5. Indexation: Indexation is a technique used to adjust the purchase price of an asset for inflation.
  6. IDCW: IDCW stands for Income Distribution Cum withdrawal.
  7. Equity Oriented Funds: Equity-oriented funds are mutual funds that invest at least 65% of their assets in equity shares of domestic companies.
  8. Non-Equity Oriented Funds: Non-equity-oriented funds are mutual funds that invest less than 65% of their assets in equity shares of domestic companies.

Tax benefits of mutual funds for NRI investors

Here are the primary tax advantages accessible to NRIs when investing in Mutual Funds:

Double Taxation Avoidance Agreement (DTAA)

  1. DTAA is an agreement between two nations aimed at preventing double taxation of the same income for residents. Under DTAA, gains from investments in India are taxed solely in one country, based on the agreement's terms.
  2. NRIs can offset taxes and TDS deducted in India against their tax liability in their country of residence.
  3. To claim this deduction, NRIs must furnish specific documents to the deductor, including a self-declaration cum indemnity format and proof of citizenship/PIO. Visit the Income Tax India website for more details on DTAA.

Section 80C Deduction

  1. Investing in ELSS or Equity Linked Saving Schemes allows individuals to claim tax benefits under Section 80C, up to Rs 1,50,000.

How NRIs can invest in mutual funds

  1. Self or direct method: NRIs can invest in mutual funds in India through the self or direct method. They can invest in mutual funds online or offline by opening an NRE or NRO account with a bank in India. They can also invest in mutual funds through the Portfolio Investment Scheme (PIS) route.
  2. Power of attorney method: NRIs can also invest in mutual funds in India through the power of attorney method. They can appoint a resident Indian as their power of attorney holder to invest in mutual funds on their behalf.

Regulations on mutual fund investments for NRIs

  1. KYC: NRIs are required to complete the Know Your Customer (KYC) process before investing in mutual funds in India. The KYC process involves submitting identity proof, address proof, and other relevant documents.
  2. Remittance certificate: NRIs are required to obtain a remittance certificate from a chartered accountant (CA) to prove that the funds invested in mutual funds were remitted from abroad.
  3. Redemption: NRIs can redeem their mutual fund units in India and the redemption proceeds can be credited to their NRE or NRO account. The redemption proceeds can also be remitted abroad after deducting taxes.

Conclusion

In conclusion, understanding the taxation of mutual funds for NRI investors in India is crucial for informed financial decisions. Navigating through the complexities of tax regulations, including the Double Taxation Avoidance Agreement (DTAA) and Section 80C deductions, empowers NRIs to optimise their investment strategies and minimise tax liabilities.

By leveraging available tax benefits and adhering to regulatory requirements, NRIs can enhance the efficiency and effectiveness of their mutual fund investments in India. Ultimately, staying informed about the tax implications ensures that NRI investors can make prudent investment decisions aligned with their financial goals and objectives while maximising returns and minimising tax burdens.
To make an informed choice, you can visit the Bajaj Finserv Mutual Fund Platform and browse through 1000+ mutual fund options. You can also compare different funds and select the fund that best aligns with your goals.

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Frequently asked questions

Are NRI mutual fund investors taxed?

Yes, NRIs are taxed on their mutual fund investments in India, depending on the type, duration, and amount of the investment.

How are gains from mutual fund investments taxed for NRIs?

Gains from mutual fund investments are taxed as short-term or long-term capital gains, depending on the holding period and the type of fund (equity or non-equity).

Is the interest on NRE funds taxable in India?

No, the interest earned on NRE (Non-resident External) and FCNR (Foreign Currency Non-resident) accounts is exempt from tax in India. However, the interest earned on NRO (Non-resident Ordinary) accounts is taxable in India.

Are SIPs tax-free for NRIs?

No, SIPs (Systematic Investment Plans) are not tax-free for NRIs. They are taxed as per the capital gains tax rules applicable to the type and duration of the mutual fund scheme.

Can I set off my business loss with capital gains made in the same financial year?

Yes, you can set off your business loss with capital gains made in the same financial year, subject to certain conditions and limitations. For example, you can set off a short-term capital loss against any capital gain (short-term or long-term), but you can set off a long-term capital loss only against a long-term capital gain.

What happens to my mutual fund investments when I become an NRI?

When you become an NRI, you need to inform your mutual fund house and change your residential status in your KYC (Know Your Customer) details. You also need to update your bank account details and comply with the tax regulations of both India and your resident country.

Can NRIs claim a TDS refund on mutual funds?

Yes, NRIs can claim a TDS (Tax Deducted at Source) refund on mutual funds if the TDS amount is higher than their actual tax liability. They need to file an income tax return in India and claim the refund.

How taxable are mutual funds for NRIs?

Mutual funds are taxable for NRIs as per the capital gains tax rules mentioned above. Additionally, NRIs are also subject to TDS on their mutual fund redemptions, which is deducted at the highest applicable rate. NRIs can claim a refund if the TDS amount is more than their actual tax liability.

Is TDS applicable to capital gains on mutual funds for NRIs?

Yes, TDS is applicable to capital gains on mutual funds for NRIs.

What are the KYC documents required from NRIs for investing in mutual funds?

The KYC documents required from NRIs for investing in mutual funds are:

  • Passport
  • PAN card
  • Overseas address proof (such as utility bill, bank statement, etc.)
  • Indian address proof (if any)
  • A recent passport-sized photograph
  • A FATCA declaration is mandatory for all investors whether they are resident individuals or NRIs

How are mutual funds taxed for NRIs?

Taxation rules for NRIs are similar to those for residents. Short-term capital gains on equity funds are taxed at 15%, and long-term capital gains at 10% for gains exceeding Rs 1 lakh.

What are the tax implications for non-equity mutual funds?

Short-term capital gains on non-equity funds are taxed at 30%, while long-term gains are taxed at 20% with indexation benefits.

What is the DTAA and how does it affect NRI taxation?

The Double Tax Avoidance Agreement (DTAA) helps NRIs avoid paying taxes in both their country of residence and India. India has signed DTAA with several countries, including the USA.

How is the redemption amount handled for NRIs?

The redeemed amount, after applicable tax deductions, can be credited to the NRO/NRE account or sent via cheque, depending on the AMC's policies.

What are some recommended mutual funds for NRIs?

Some potentially good mutual funds include SBI Equity Fund, ICICI Prudential Credit Risk Fund, Parag Parikh Long Term Equity Fund, and others like Aditya Birla Sun Life Liquid Fund and L&T Arbitrage Opportunities Fund.

Should NRIs consult a financial advisor before investing?

Yes, it is recommended for NRIs to seek personal discretion or consult a financial advisor before choosing a mutual fund for investment.

Are there any special considerations for NRIs from the US and Canada?

Yes, NRIs from the US and Canada might face additional paperwork due to FATCA and may be required to transact offline with certain fund houses.

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