Indian mutual funds are a popular investment choice among NRIs. Under Indian tax law, capital gains arising from these investments are generally taxable in India. However, in specific situations, Double Taxation Avoidance Agreements (DTAA)—particularly those signed with UAE and Singapore—may shift the taxing rights entirely to the investor’s country of residence.
Since these countries do not levy capital gains tax, an NRI investor may end up paying no capital gains tax in either country, provided treaty conditions and compliance requirements are fully met.
This article explains the legal basis, practical implementation, and why such benefits were historically difficult to claim.
- Understanding DTAA
A Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty entered into by India with another country to ensure that the same income is not taxed twice—once in India and again in the taxpayer’s country of residence.
Most DTAAs allocate taxing rights between the two countries based on:
- The nature of income
- The residency status of the taxpayer
In several Indian tax treaties, including those with UAE and Singapore, certain capital gains are taxable only in the country of residence, not in the country where the investment is located.
- Indian Tax Law on Mutual Fund Capital Gains
Under Indian domestic tax provisions, capital gains on mutual fund units are taxed as follows:
Equity Mutual Funds
- Long-term capital gains (LTCG): 12.5% on gains exceeding ₹1.25 lakh
- Short-term capital gains (STCG): 20%
Debt Mutual Funds
- Purchased on or before 31 March 2023 and sold on or after 23 July 2024:
- LTCG: 12.5% without indexation
- STCG: Taxed at slab rates
- Purchased on or after 1 April 2023:
- Taxed at slab rates, irrespective of holding period
In addition, mutual fund houses are required to deduct TDS at the time of redemption for NRI investors.
- DTAA vs Domestic Law — The Residual Clause
While Indian tax law provides the general framework for taxation, DTAA provisions override domestic law when they are more beneficial to the taxpayer.
Most Indian tax treaties include a residual clause under the Capital Gains Article. This clause states that capital gains from assets not specifically mentioned in the preceding paragraphs shall be taxable only in the country of residence of the seller.
Crucially, mutual fund units are not expressly covered in those earlier paragraphs of many DTAAs. As a result, gains arising from mutual fund units fall under the residual clause.
If the country of residence does not tax capital gains, the income may remain untaxed in both jurisdictions.
- Position for UAE NRIs
- UAE does not levy personal income tax
- UAE does not tax capital gains
- Article 13 of the India–UAE DTAA contains a residual clause
Under this clause, capital gains from assets not specifically covered elsewhere in the article are taxable only in the country of residence.
Accordingly, if a person qualifies as a UAE tax resident and redeems Indian mutual fund units:
- India does not retain taxing rights under the treaty
- UAE does not tax such gains
- Result: No capital gains tax, subject to compliance
- Position for Singapore NRIs
- Singapore does not tax capital gains
- Article 13(5) of the India–Singapore DTAA includes a similar residual clause
Judicial Clarity
A recent ruling by the Mumbai Income Tax Appellate Tribunal (ITAT) held that:
- Mutual fund units are not treated as shares under the DTAA
- Therefore, capital gains from mutual fund units fall under the residual clause
- As a result, such gains earned by a Singapore tax resident are not taxable in India
The same treaty logic may also apply to NRIs residing in Malaysia, Mauritius, Qatar, Saudi Arabia, and Oman, where similar treaty provisions exist and capital gains are not taxed locally.
- Conditions to Claim DTAA Benefits
Treaty benefits do not apply automatically. To claim exemption or nil taxation, the following steps must be completed:
- Obtain a Tax Residency Certificate (TRC) from the country of residence
- File Form 10F electronically with the Indian income tax authorities
- Submit TRC and Form 10F to mutual fund houses or banks
- Complete additional declarations or KYC documents, if required
- Upon verification, the fund house may apply nil TDS at redemption
- Report the capital gains in the Indian income tax return and claim DTAA relief
- Practical Challenges and Past Experience
If treaty documents are not submitted before redemption, TDS is deducted by default. Although a refund can be claimed later:
- Such returns are more likely to face scrutiny
- The process involves extensive documentation
- Disputes may take several years to resolve
Historically, this position was rarely adopted because:
- Nil TDS approvals were extremely difficult to obtain
- Claims through income tax returns often resulted in prolonged litigation
- The compliance burden outweighed the potential benefit
Recent judicial pronouncements have significantly improved clarity, making treaty-based claims more defensible and practical.
- Important Caution
This outcome arises due to technical gaps in treaty drafting. The core purpose of DTAA is to prevent double taxation—not to allow income to escape taxation entirely.
Given this:
- Authorities may amend treaty language or domestic rules in the future
- Claims should be made only after careful evaluation and proper documentation
Under the current legal framework, however, the benefit is available when treaty conditions are satisfied.
Conclusion
For NRIs residing in UAE and Singapore, capital gains from Indian mutual funds may, under DTAA provisions, be taxable only in the country of residence. Since these jurisdictions do not levy capital gains tax, the result can be zero tax, provided compliance is complete and reporting is accurate.
Due to evolving interpretations and increased scrutiny, professional guidance is advisable before relying on this position.
If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc
