The mutual fund taxation rules are almost similar for both NRIs and resident Indians. They mostly depend on the type of fund and the holding period. However, as an NRI, you may have to abide by specific rules regarding TDS, DTAA, etc.
Of late, mutual funds have become one of the most popular investment vehicles owing to their potential for wealth creation and diversification benefits. They pool money from investors with common investment objectives and invest them in stocks, bonds, and other money-market2 instruments. Asset Management Companies (AMCs) offer mutual fund schemes in India, and professional fund managers are assigned to manage them.
Those who wish to expose their investments to equity markets but do not have the required market knowledge can choose the alternative route to invest in mutual funds. Instead of buying multiple stocks, they can invest in one or more mutual fund schemes to grow their wealth. Depending on the Net Asset Value (NAV), they will purchase a specific quantity of mutual fund units. The NAV of a mutual fund unit can rise or fall, depending on the performance of the underlying assets.
Mutual funds are available to all types of investors, including Non-Resident Indians (NRIs) or those who are Indian citizens but living abroad for some reason. However, understanding the intricacies of the NRI’s mutual funds taxation* is crucial to ensure compliance with the tax laws of their residence country as well as India. Not doing so may result in severe legal and financial hassles.
This article discusses in length the MF taxation for NRIs, exploring the applicable rules, exemptions, and considerations that govern their tax liabilities in India. Keep reading.
Benefits of Investing in Mutual Funds for NRIs
As long as they comply with the regulations outlined in the Foreign Exchange and Management Act (FEMA), NRIs can invest in mutual funds in India. However, it is worth noting that certain AMCs may not process mutual fund applications from NRIs based in the United States and America (USA) and Canada.
Nevertheless, let us explore the benefits of investing in mutual funds in India for NRIs:
An Option to Invest Online at Any Time and from Anywhere
Mutual funds allow NRIs to invest hassle-free at any time and from anywhere in the world. They can open their investor accounts with a brokerage firm and start investing in a mutual fund scheme online, eliminating the need for their physical presence in India. Online investment platforms and mobile apps make it convenient for NRIs to track their portfolios, monitor the performance of funds, and make informed decisions.
Additionally, they can withdraw their mutual fund investments online and repatriate the funds to their foreign bank accounts. Most AMCs in India also send Consolidated Account Statements (CAS) through emails to keep their investors informed.
Become a Part of India’s Economic Expansion
By investing in mutual funds, NRIs can become a part of the economic growth of their motherland. India has consistently ranked among the top developing economies in the world for a decade.
Despite most developed countries struggling with slowdowns after the COVID-19 pandemic, the Indian economy continues to boom at an unprecedented rate.
Mutual fund investments in India can help NRIs put their money to good use and reap excellent rewards. The average returns provided by all equity-diversified mutual funds in India for the last 10 years stand at 15.3% against the global returns of 12.39%.
Diversification and Risk Mitigation
Another reason for NRIs to invest in mutual funds in India is that it allows them to invest as per their risk profile and investment objectives. Mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, and other securities.
This diversification helps NRIs spread their risk across various assets, reducing the impact of a poor-performing investment on the entire portfolio.
Additionally, they can choose between equity, debt, and hybrid mutual funds. It is particularly advantageous for NRIs as it allows them to invest in multiple sectors within the Indian markets without getting into extensive research and analysis.
Professional Management of Funds
One of the key advantages of mutual funds is that they are managed by professional fund managers who make investment decisions on behalf of the investors. These professionals analyse market trends, conduct research, and make well-informed decisions to maximise returns for investors.
NRIs, typically residing in different time zones, can benefit from the expertise of these fund managers who actively manage their mutual funds.
They ensure that the investments are in line with market conditions, and thus, eliminate the need to appoint someone to monitor them in India.
NRI Mutual Funds Tax
Like resident Indians, NRIs are required to pay taxes on capital gains and dividends received from their mutual fund investments. However, the taxation rules may vary depending on the type of fund and the period of holding. For example, the rules for equity and debt funds’ taxation for NRIs are different.
Tax on Short Term Capital Gains (STCG)
If an NRI holds equity mutual funds for less than 12 months, the returns from them are known as Short Term Capital Gains (STCG). They are taxed at a 15% rate without indexation benefits.
Similarly, if an NRI holds debt mutual funds for less than 36 months, the returns from them are categorised as STCG. In this case, the returns are added to the investor’s annual taxable income and are taxed as per the applicable income tax slab rate.
Tax on Long Term Capital Gains (LTCG)
In case the investments in equity mutual funds are held for more than 12 months, the returns from them are categorised as Long Term Capital Gains (LTCG). LTCG up to ₹1 lakh in a financial year is tax-free.
However, if they exceed ₹1 lakh, they are taxed at a 10% rate without indexation benefits. In the case of debt mutual funds, returns from investments held for more than 36 months are categorised as LTCG and are taxed at a 20% rate with indexation benefits.
Tax on Dividends for NRIs
Until 2020, dividends received from mutual funds in India were tax-free in the hands of investors. However, in the Union Budget 2020, the government proposed to recognise dividends as a part of the annual income of the investors and bring them under the ambit of income tax rules.
The total dividends received in a financial year are added to the investor’s annual taxable income and are taxed as per the applicable income tax slab rate.
Mutual Fund TDS for NRIs
NRIs are liable to Tax Deduction at Source (TDS) upon the redemption of their mutual fund investments. However, the TDS is charged at the highest applicable rate.
The AMC deducts the TDS amount before crediting the dividend to the NRI investor’s bank account. Investors can claim a refund of the TDS while filing their income tax returns.
Mutual Fund Tax Benefits for NRIs
Mutual funds are considered one of the best tax-saving investment options for NRIs. They can avail of specific tax benefits in the following ways:
LTCG up to ₹1 lakh is tax-free
LTCG gains up to ₹1 lakh in a financial year are tax-free in the hands of investors. NRIs can plan their investments accordingly to reduce their tax outgo.
Avail of the DTAA benefits
NRIs can claim the benefits of Double Taxation Avoidance Agreements (DTAA) to reduce their taxes on mutual fund returns. It is a treaty signed between India and different nations to protect NRI taxpayers from paying double taxes on their income in India as well as their residence countries.
Obtain a Lower or Nil TDS Certificate
NRIs can apply for a lower or Nil TDS certificate with the Income Tax Department of India to reduce or avoid the deduction of TDS on their income. This certificate is provided under section 197 to NRIs whose total income in India is below the tax exemption limit.
To Conclude
Mutual funds are one of the most popular tax-saving investment options for NRIs. They allow them to diversify their investment portfolios and benefit from India’s economic growth. However, NRIs must stay informed of the NRI mutual funds taxation rules.
Seeking professional advice from tax and investment experts can help them ensure compliance with tax regulations and maximise their mutual fund returns.
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