NRI Mutual Fund Taxation in India: Key Rules and Guidelines

The taxation landscape for mutual funds held by Non-Resident Indians (NRIs) underwent notable changes in July 2024. The government introduced revisions that significantly impact how NRIs manage their investments in Indian markets. Let us delve into these updated tax regulations and examine their long-term implications for NRI investors.

The tax rate for short term capital gains tax on equity mutual funds has increased from 15% to 20%. Additionally, the long term capital gains tax on equity mutual funds has risen from 10% to 12.5%. The exemption amount has also been increased from Rs. 1 lakh to Rs. 1.25 lakhs in this respect.
 

Moreover, the tax deducted at source or TDS on the sale of listed equity shares and equity mutual fund units has also been revised. For long term holdings, TDS has increased from 10% to 12.5%. For short term holdings, the rate has gone up from 15% to 20%. Knowing these changes ensure you remain compliant with the income tax filing processes in India and avoid any penalties.
 

The long term capital gains tax on unlisted equity shares such as startup investments has been reduced from 20% to 12.5% without the benefit of indexation. This reduction is excellent news for NRIs who want to invest in emerging Indian startups.
 

Similarly, the LTCG tax on real estate has been lowered from 20% with indexation to 12.5% without indexation. The TDS on the selling of property has also seen a reduction from 20% to 12.5% which is a huge relief for NRIs as TDS is usually deducted on the entire value of the sale and not just the capital gains. Certain tax rates, such as STCG on unlisted equity shares and STCG on property, however remain unchanged. The TDS on rental income also stands firm at 30% which ensures that there is not much change for NRIs who earn from rental properties.

• NRIs should prepare for higher short term capital gains tax of 20% on equity mutual funds which could impact frequent traders.
  

• The revised TDS rates require careful record keeping and tax planning for NRIs to ensure compliance with the new Indian tax regulations.

• With the changes in tax rates and structure, NRIs are encouraged to reassess their investment strategies to align with the new tax regime and optimise tax savings.

Yes, NRIs can invest in Indian mutual funds subject to compliance with FEMA regulations. They can invest through NRE (Non-Resident External) or NRO (Non-Resident Ordinary) accounts. Investments can be made on a repatriable or non-repatriable basis, depending on the account used. However, specific mutual fund schemes may have restrictions based on country-specific regulations, such as FATCA compliance for US-based NRIs. Investments can be managed through online platforms or via Power of Attorney (PoA). NRIs must complete the KYC process, which includes submitting relevant documents such as a passport, visa, and proof of overseas address.

An individual qualifies as a Non-Resident Indian (NRI) if they are an Indian citizen residing outside India for more than 182 days in a financial year or meeting other conditions under the Income Tax Act. This includes people who leave India for employment, business, or other purposes leading to a long-term stay abroad. NRIs retain their Indian citizenship but live overseas, distinguishing them from Persons of Indian Origin (PIOs). They are subject to different tax and investment regulations in India, such as provisions under the Foreign Exchange Management Act (FEMA).

Tax Deducted at Source (TDS) applies to NRI income earned in India, such as salaries, interest, capital gains, or rental income. Unlike resident Indians, NRIs face higher TDS rates on their taxable income. For example, short-term capital gains from equity mutual funds are taxed at 15%, while long-term capital gains above Rs. 1 lakh are taxed at 10%. NRIs can claim refunds by filing income tax returns if the TDS exceeds their total tax liability. Double Taxation Avoidance Agreements (DTAAs) between India and other countries may provide relief by reducing TDS rates or eliminating double taxation.

Tax slabs under the old tax regime (FY 2024-25):
 

• Income up to Rs. 2.5 lakh: No tax is payable.
• Income between Rs. 2.5 lakh and Rs. 5 lakh: Taxed at 5%.
• Income between Rs. 5 lakh and Rs. 10 lakh: Taxed at 20%, with a base tax of Rs. 12,500.
• Income above Rs. 10 lakh: Taxed at 30%, with a base tax of Rs. 1,12,500.
   

The new tax regime offers lower tax rates but eliminates most exemptions and deductions, while the old regime allows for exemptions and deductions but has higher tax rates. NRIs can choose the regime that best suits their financial situation.

Tax slabs under the new tax regime (FY 2024-25):

• Income up to Rs. 3 lakh: No tax is payable.
• Income between Rs. 3 lakh and Rs. 7 lakh: Taxed at 5%.
• Income between Rs. 7 lakh and Rs. 10 lakh: Taxed at 10%.
• Income between Rs. 10 lakh and Rs. 12 lakh: Taxed at 15%.
• Income between Rs. 12 lakh and Rs. 15 lakh: Taxed at 20%.

The revised TDS rates that apply to NRIs on various transactions from July 2024 are as follows:

These changes are set to simplify the process of tax planning but may increase the tax burden on some NRIs. The increase in short term capital gains tax from 15% to 20% primarily targets traders and short term speculators. On the other hand, the increase in the long term capital gains exemption to Rs. 1.25 lakh should protect long term retail investors from higher tax liabilities. However, the removal of the indexation benefit for real estate has led to debates. Besides, although the tax rate has been reduced to 12.5%, gains are now calculated based on the purchase price and not the indexed value. This means NRIs may be required to pay higher taxes on real estate transactions than before.

Short-term capital gains (STCG) are profits earned from the sale of assets held for a short duration, typically less than three years for most investments. In India, these gains are taxed at a higher rate to encourage long-term investment. For equity-oriented mutual funds, STCG is taxed at 15%, while for debt-oriented mutual funds, it is taxed according to the individual's income tax slab, which can go up to 30%. The higher tax rate on STCG serves as a deterrent against speculative trading and promotes more stable, long-term investments. This is particularly relevant for NRIs, as the tax implications on their capital gains depend on the type of mutual funds they hold and the duration of their investments. NRIs are also subject to a TDS (Tax Deducted at Source) rate of 15% on their STCG from equity mutual funds. However, for NRIs holding debt mutual funds, the tax is deducted based on their applicable income tax slab, which may be higher than the rates applicable to residents. As such, NRIs must be strategic about their investment horizon and consider the impact of taxes on short-term profits, especially if the aim is to avoid excessive tax liabilities.

In India, long-term capital gains (LTCG) arise when assets, including mutual funds, are held for more than three years before being sold. Since 2018, the government has implemented a uniform LTCG tax rate for both equity and debt mutual funds. The LTCG on equity-oriented mutual funds is taxed at a rate of 10% on gains exceeding Rs. 1 lakh in a financial year, without any benefit of indexation. For debt-oriented mutual funds, the tax rate is 20% with the benefit of indexation. The uniformity in the taxation of LTCG simplifies the tax process for investors. For Non-Resident Indians (NRIs), LTCG is applicable on both types of mutual funds, and the same tax rates apply as for residents. However, NRIs are also eligible to avail of Double Taxation Avoidance Agreements (DTAAs) between India and their resident countries, which may lower their tax liabilities. NRIs must also be mindful of TDS provisions; for example, a TDS of 10% is levied on LTCG arising from equity mutual fund sales. This uniform taxation structure helps provide clarity to NRI investors, allowing them to plan their investments better and avoid unexpected tax obligations upon the sale of their long-term holdings.

The abolition of Angel Tax for all investor categories is another welcome change for NRI investors who are currently invested in the Indian markets. This change is expected to boost investments in India’s thriving startup ecosystem by freeing up more capital for growth. Additionally, the government has also closed the loophole that allowed NRIs to report rental income as business income. From FY 2024-25, all rental income must be reported under the ‘Income from House Property’ option that limits the deductions available for the reduction of your taxable income.

1. If an NRI holds equity-oriented mutual fund units

When an NRI invests in equity-oriented mutual funds, their tax treatment depends on the holding period. If the units are sold within three years, the gains are classified as short-term capital gains (STCG) and taxed at 15%. If the units are held for more than three years, the gains are treated as long-term capital gains (LTCG) and taxed at 10% on gains exceeding Rs. 1 lakh in a financial year. The tax is deducted at source (TDS) on these gains. NRIs can also benefit from the provisions of Double Taxation Avoidance Agreements (DTAAs), which may help reduce tax liabilities depending on their country of residence.
 

2. If an NRI holds debt-oriented mutual fund units

For debt-oriented mutual fund units, NRIs are subject to taxation based on the holding period as well. Short-term capital gains (STCG) apply if the units are sold within three years and are taxed according to the NRI's income tax slab, which can be as high as 30%. Long-term capital gains (LTCG) from debt funds are taxed at 20% with indexation benefits, which helps reduce the taxable amount by adjusting for inflation. TDS of 30% is applicable on both STCG and LTCG for NRIs. However, the effective tax rate can vary depending on the NRI's country of residence and any applicable DTAA benefits.

With the new income tax regime, TDS and capital gains tax rules, NRIs need to plan their investments carefully. In this regard, start by reviewing your financial goals and investment portfolios to align with the new tax structure, stay updated about deductions under the old tax regime to minimise liabilities, monitor your TDS deductions to claim refunds if necessary,and file tax returns correctly to avoid any penalties. While these tax changes may seem daunting at first, proper planning can help NRIs manage their investments effectively and optimise tax savings for the long run.
 

Visit the Bajaj Finance mutual fund platform and discover 1000+ mutual fund schemes to invest in. Use the Mutual Fund Calculator, compare mutual funds, and more. This is recommended if you want to make the most of investing in mutual funds and other assets.