Taxation of Mutual Funds for NRIs in India

NRIs may invest in the Indian Mutual Funds under the guidance of FEMA (Foreign Exchange Management Act).

A non-resident external (NRE) or non-resident ordinary (NRO) account must have to be opened. However, they must follow the guidelines under KYC regulations. After fulfilling their KYC procedure and holding an active bank account, NRIs can invest in mutual funds in India.

Some Mutual Fund firms may impose limits on NRIs from the United States and Canada because of compliance requirements related to the Foreign Account Tax Compliance Act (FATCA). specified fund firms, however, enable these NRIs to invest under specified conditions and through offline transactions.

NRIs might get benefitted from the currency appreciation when the Indian rupee value rises in proportion to the currency of their home country.

Introduction:

Understanding the complexities, of NRI taxation,of mutual funds in India is crucial for optimisation returns and complying with the home country and Indian taxation rules.

We will delve into the aspects of NRI taxation of mutual funds in this blog, providing insights and assistance to help NRIs make informed investment decisions while also ensuring tax compliance.

Mutual funds are a popular investment option for both residents and non-resident Indians (NRIs) due to their potential for wealth generation and diversification. NRIs, on the other hand, must be mindful of the taxes restrictions that apply to their investments in Indian mutual funds.

In this blog, we will look at how mutual funds are taxed in India for NRIs, concentrating on major issues including Capital Gains tax, holding duration, systematic transfer or withdrawals, tax implications and more.

The overall view, regarding the mutual funds investing by NRIs is both easy and encouraging. In India, NRIs do participate in investing and participating in both equity and debt mutual funds.

This allows the NRIs to participate in India’s financial markets and reap the advantages for their investment whole residing overseas.

Define Mutual Funds:

A mutual fund is a collection of money from multiple that is invested in various bonds, equities , assets and other money market tools.

A market investor is a professional money manager that distributes funds to multiple markets and/or securities in order to maximise capital gains.

Tax Implications:

Most of the NRIs are investing in Mutual funds in India, they need to keep some of the points in mind. The points are to be considered are given below:

Tax Deduction at Source (TDS):

When redeeming mutual funds, NRIs are liable to Tax Deducted at Source (TDS), with the specific TDS rate defined by the scheme type (equity or non-equity) and the duration of holding the funds.

Short-term Capital Gains:

The profit earned from the selling of the mutual fund with the holding period of one year or less.

Long-term Captial Gains:

The profit earned from the selling of the mutual fund with the holding period of more than a year.

Particulars	Tax Deduction at Source in short-term Captial Gains	Tax Deduction at Source in Long-term Captial Gains	Tax Deduction at Source on Distributed Income under IDCW Option
Equity Mutual Funds	15%	10%	20%
Other than Equity	30%	Listed – 20% with indexation Unlisted – 10% without indexation	20%

The fund house is liable for deducting TDS from NRI capital gains. TDS rates vary depending on the type of gain:

TDS deducted, at a rate of 15% on STCG on equity funds.

TDS deducted, at a rate of 10% on STCG on equity funds.

TDS rates STCG and LTCG are 30% and 20%, respectively for debt funds.

Capital Gains Tax:

Coming to the tax rate of capital gain up on the mutual fund it totally depends on the mutual fund and the holding period.

Particulars	Tax on Short-term Capital Gains	Tax on Long-term Capital Gains
Equity Mutual Funds	15%	If gain exceeds Rs 1 lakh -10% without indexation benefit
Other than Equity Oriented Fund	Taxed based on the income tax bracket	Listed – 20% with indexation Unlisted – 10% without indexation

Short-Term Capital Gains (STCG): Gains are considered short-term if an NRI sells mutual fund units within one year of purchase. These gains are taxed at a fixed 15% rate plus any relevant surcharges and cess.

Long-Term Capital Gains (LTCG): Gains are deemed long-term if the holding period exceeds one year. LTCG on equity-oriented funds exceed Rs 1 lakh is taxed at 10% without indexation benefit.

It’s worth noting that LTCG on debt-oriented products is taxed at 20% with indexation.

Income Tax Returns:

If a NRIs total income consists only of investment income or long term capital gains after deduction of TDS, they are not required to file an income tax return.

If the income falls under the lower tax category, you are entitled to a refund of the TDS deduction , while filing your returns.

Dividend Taxation:

Dividends from both stock and non-equity dividend programmes will be taxed at the appropriate tax slab rate for the year.

Advantages of NRIs Mutual Funds Investment:

Diversification and Growth Enhancement: Mutual Fund provides diversification across asset classes, potentially leading to balanced growth and risk management.
It helps to maintain professionalism over the seas, and utilizing their expertise to form a decision.
Mutual funds help to enable the liquidity buy and sell the mutual fund units to achieve financial goals.
Depending on your country of residence and Double Taxation Avoidance Agreement (DTAA), you might be eligible for enjoying the favorable tax treatment on capital gains.

A Perfect Guide for NRIs Mutual fund Investment:

Step1. Pick your Fund type:

Make a choice between equity, debt, or hybrid funds based on your risk taking and financial goals.

Step2: Pick a Fund House:

Look for established fund firms with a great track record of performance and transparent operations. For further security, an NRI in the UK can look at fund institutions with a global presence.

Step3: Complete your KYC:

After doing the first two steps just move forward to the third step which is completing the KYC procedures, complete the KYC details such as PAN card, Passport, Overseas Address etc.

Step4: Open A NRO/NRE account:

Moving forward, the fourth step will be opening a NRO/NRE account with an authorized Indian bank for effortless fund transfer.

Step5:Choose your Investment modes:

NRIs can invest through example, SIPs,lump sump investment and man more.

Tax Benefits:

Here are some of the tax benefits that an NRI can avail when investing in Mutual funds in India:

Double Taxation Avoidance Agreement (DTAA):

The Double Taxation Avoidance Agreement is a treaty signed in between the two countries to prevent residents from being taxed twice on the same income. Under DTAA, gain from the investment in India are taxed only one country, depends on the norms, terms and conditions.
NRIs can deduct taxes and TDS incurred in India against their tax burden in their place of residence.
This deduction can be claimed by submitting the deductor with specified documentation, such as a self-declaration cum indemnification format and a copy of citizenship/ PIO proof.

Section 80C Deduction:

Tax benefits can be saved upto rs 1,50,000 can be availed under the Section of 80c deduction by investing in ELSS, or Equity Linked Saving Schems.

The Bottomline:

Understanding the way of taxation of mutual funds for NRIs for making informed investment decisions and ensuring compliance with tax rules and laws.

It is very important to stay updated with the taxation slab regarding mutual fund in India every financial year because of some amendments, DTAA’s provisions and benefits in order to maximise investment returns and properly meet tax responsibilities.

Knowing the tax implications allows you to confidently navigate the investment landscape and maximise financial outcomes.

Mostly Asked Questions:

1. What will be the TDS for Mutual funds for NRIs in India?

Ans: 20% for NRIs income from Investment.

2. Is NRO account income taxable in India?

Ans: Earnings from your NRO account are taxable at 30% plus any surcharges and cess.

3. What is the new NRI tax regime?

Ans: According to the 2023 Budget, both NRIs and residents are excluded from filing income tax returns if their total income for the year is less than Rs. 3,000,000. Income up to Rs. 3,00,000 is exempt from income tax under the new regime.

4. What are the rules and regulations for NRIs while investing in Mutual fund in India?

Ans: NRIs can invest in mutual funds in India on a full repatriation or non-repatriation basis. However, before investing, NRIs must meet all the regulatory requirements or criteria, such as KYC.

5. Is it possible for a NRI claim TDS exemption?

Ans: NRIs can easily claim a TDS refund on income earned in India. Under Section 195 of the Income Tax Act, TDS deductions for NRIs apply to all types of income.