As a Non-Resident Indian (NRI), you may find that investing your savings in Indian mutual funds is beneficial owing to their potential for wealth creation and ease of investment. As an NRI, you should understand what NRI mutual fund taxation is and be prepared for future tax liabilities and compliances.
Can NRIs invest in mutual funds in India?
Yes, the Foreign Exchange Management Act (FEMA) allows NRIs to invest in mutual funds in India. However, you need to have an NRO (Non-Resident Ordinary) or NRE (Non-Resident External) Account in India to purchase mutual fund units.
Taxation of gains on mutual funds
You can earn money from mutual funds via dividends and capital appreciation. The basics of mutual fund NRI taxation for these incomes are:
1. Tax on income distribution cum capital withdrawal (IDCW)
The income distribution cum capital withdrawal (IDCW) that you earn from mutual funds in a financial year is added to your annual taxable income and are taxed as per the applicable income tax rate.
2. Tax on capital gains
As time passes, the value of your mutual fund units either increases or drops. When you sell these units, you either make a profit or loss. The profits are taxed under 'capital gains' under the Income Tax Act. These can be short-term capital gains (STCG) or long-term capital gains (LTCG).
Short-Term Capital Gains (STCG) Tax
| Type of schemes |
Equity exposure |
Holding period |
NRI taxation |
| Unit of equity-oriented schemes |
>= 65% |
<12 Months |
15% |
Unit other than unit of equity-
oriented schemes |
35%><=65% |
<36 Months |
Taxed as per individual tax slabs |
| Unit other than unit of equity-oriented schemes (Units acquired prior to April 1, 2023) |
<35% |
<36 Months |
| Units of Specified Mutual Fund (Units acquired post March 31, 2023) |
<35% |
Irrespective of holding period |
Long-Term Capital Gains (STCG) Tax
| Type of schemes |
Equity exposure |
Holding period |
NRI taxation |
| Unit of equity-oriented schemes |
>= 65% |
<12 Months |
10% (over and above the overall exemption limit of Rs 1 lakh per financial year) |
| Unit other than unit of equity-oriented schemes |
35%><=65% |
<36 Months |
20% Listed (With Indexation)
10% Unlisted (Without Indexation) |
| Unit other than unit of equity-oriented schemes (Units acquired prior to April 1, 2023) |
<35% |
<36 Months |
20% Listed (With Indexation)
10% Unlisted (Without Indexation) |
| Units of Specified Mutual Fund (Units acquired post March 31, 2023) |
<35% |
Irrespective of holding period |
Taxed as per individual tax slabs (as applicable for STCG). |
Note: Tax rates mentioned above are base tax rates which will further increase by surcharge and Health and Education cess, as applicable.
Tax compliances for NRIs after investing in mutual funds
Once you invest in mutual funds in India, you will need to pay taxes and ensure compliance with the Income Tax Act, 1961. Tax compliances related to taxation for NRIs in mutual funds include:
1. Tax deducted at source (TDS)
Asset management companies of your mutual funds will deduct 20% (plus surcharge as applicable and other cess) of your IDCW as TDS.
TDS is also applicable on capital gains as follows:
- For equity-oriented funds - the TDS rate is 10% for LTCG and 15% for STCG.
- For non-equity-oriented funds, the TDS rate is –
- 20% with indexation for LTCG for listed schemes
- 10% without indexation for LTCG for unlisted schemes
- As per individual tax slabs for STCG
2. Filing of income tax returns
If you earn IDCW or capital gains from your mutual fund investments, you need to declare your income and pay taxes on it. You must file your income tax return before July 31 every year.
Tax benefits for NRI mutual funds in India
1. No double taxation
If you pay tax on your Indian mutual fund income in your country of residence, you will be paying tax on the same income in two different countries. This is 'double taxation'. India has entered in Double Tax Avoidance Agreements (DTAAs) with many countries to prevent this issue.
2. Deduction under Section 80C
You can get a deduction of up to ₹1,50,000 from your total income under section 80C of Income Tax Act. This deduction is allowed if you invest in an Equity Linked Saving Scheme (ELSS). This investment reduces your tax liability.
Also Read: Can NRIs invest in mutual funds in India?
Conclusion
As an NRI, understanding the tax implications of mutual fund investments in India is important. These insights help you make informed choices, adhere to tax regulations and maximise your returns. Being aware of tax laws, especially the DTAA, is vital for your strategic investment planning.
Note: The information set out above is included for general information purposes only and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, kindly consult your tax consultant with respect to specific tax implications.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
