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From the perspective of India’s foreign exchange regulations, remittances from its vast diaspora – 32 billion, according to official data – are generally treated as “foreign investment”. Over the years, these regulations have been eased, a major factor behind the inflows rising each year that has made India the top recipient of foreign remittances.For instance, in 2022, India received remittances to the tune of $100 billion from abroad, the first country to reach the landmark figure, which representeda 12% year-on-year increase. But while theseare private fundssent to family and friends back home, Indians living abroadalso investfor themselves in the country’s throbbing financial markets. Facilitating them is the easing of rules from time to time.SEBI, on its part, has allowed investments in mutual funds from Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Persons of Indian Origin (PIOs). They can mutual funds on a full repatriation and non-repatriation basis. However, theyare allowed to invest in mutual funds only through Systematic Investment Plans (SIPs).But there are other rules and regulations relating to taxes in place for NRI investments. So, if you are an NRI planning to invest in Indian mutual fund schemes, here are four important taxation rules that you should be aware of to plan your investment decisions better.
1. Tax on capital gains
Tax on gains from mutual fund investment for NRIs is on lines similar tothat for resident Indians. Capital gains are divided into two types: LTCG (Long Term Capital Gains) and STCG (Short Term Capital Gains For gains that are realised from equity funds within a year of investment, STCG will be applicable and the gains taxed at a flat rate of 15%. For a holdingperiodmore than a year, LTCG will be applicable and taxed at 10% without indexation benefits over and above the overall exemption limit of Rs. 1 lakhFor investment made before April 1, 2023 in mutual funds other than equity funds,LTCG will be applicable at 20% of the gains with the benefit of indexation, ifthe investment is held for more than three years.For non-equity mutual funds with less than 35% equity holdings in their overall portfolio, any gains on investment on or after April 1, 2023,and a holding period of less than three yearswill be classified as STCG, added to the total income of the taxpayer,and taxed as per the income tax slab rate applicable.Please note that the Finance Bill of 2023 has removed the benefit of LTCG and indexation benefits on investments mutual funds that have less than 35% of their portfolio in equity assets from April 1, 2023.This means that all gains made from investments made on or after that day will be considered as STCG and taxed accordingly.Here is a summary of tax rates classified on the basis of the type of mutual fund.
| Applicable Tax Rates on Capital Gains on Mutual Funds for NRIs | ||
| Type of Mutual Fund | STCG Rate | LTCG Rate |
| Equity Funds | 15% | 10%* |
| Non-Equity Funds (invested before April 1, 2023) | As per the applicable Income tax slab rate | Listed Securities 20%** Unlisted Securities 10% |
| Non-Equity Funds (invested on or after April 1, 2023) | As per the applicable Income tax slab rate | As per the applicable Income tax slab rate |
*10% over and above the overall exempted amount of Rs. 1 lakh **20% tax on gains with indexation benefits
2. Tax deducted at source (TDS)
One crucial factor that differentiates between NRIs and resident Indians when it comes to taxation on mutual funds is the TDS. Resident Indians are not subjected to TDS when they redeem their MF investments. This is not so for NRIs, with the TDS on their redemption amounts depending on the fund type and the holding period.If NRIs redeem their investments in equity-based mutual funds after a year, LTCG will be applicable, and TDS equal to the 10% of LTCG levied on the total redemption amount. If the redemption is before a year, then STCG will be come into play, with TDS equal to 15% of the STCG applied.On the other hand, for non-equity debt or other mutual funds with less than 35% equity assets in their overall portfolio, any gains on investment on or after April 1, 2023, and a holding period of less than three years will be classified as STCG, and the redemption amount subject to a 30% TDS for those belonging to the highest income tax bracket.For investments made before April 1, 2023 and those having a holding period of more than three years, gains will be classified as LTCG, with a 20% TDS on gains with indexation benefits will be play for the redemption amount.For investments made on or after April 1, 2023, all the gains will be classified as STCG, irrespective of the holding period, andthe redeemed amount subjected to a TDS of 30% for those belonging to the highest income tax bracket; people falling in the lower tax bracket is can claim a refund.Below is a table that summarizes the TDS on gains for NRIs on their mutual fund investments as per fund types and holding period.
| Applicable TDS Rates on Capital Gains on Mutual Funds for NRIs | ||
| Type of Mutual Fund | TDS on STCG | TDS on LTCG |
| Equity Funds | 15% | 10% |
| Non-Equity Funds (invested before April 1, 2023) | 30^ | Listed Securities 20%** Unlisted Securities 10% |
| Non-Equity Funds (invested on or after April 1, 2023) | 30^ | 30^ |
**20% tax on gains with indexation^TDS is deducted at 30% assuming the assesseebelongs to the highest income tax bracket.
3. Double taxation rules
Many NRIs may wonder if they need to pay taxes again in their home country if they have done so in India for gains made from their Indian mutual fund investments.
The answer is, no, they don’t need to pay taxes on the same gains twice if their adopted country is among the 86 nations that have activeDouble Tax Avoidance Agreements (DTAA) with India.But even if the adopted countrydoes not have such a fully-exempt agreement, NRIs from there can still avoid paying higher taxes if they pay tax in India on gains from theirIndian investment.
4. Provisions for Set-Offs
NRIs can also set off their capital gains with their capital losses as per the provisions under the Income Tax Act. This is similar to what is applicable to resident Indians as well.Let us assume an NRI has made capital gains from investments in equity mutual funds ,but a capital loss on other investments. In that case, the individual concerned is allowed to use the gains to set off the losses to arrive at a lower gain, thereby reducing the taxable gains.If the capital gains are less than the capital losses, it can be carriedit forward for the next eight assessment years as well.Incidentally, long-term capital losses can only be set off against long-term capital gains, while short-term capital losses can be set off against both short-term and long-term capital gains.
Conclusion
Like any other investment, it is essential that an investor understands the taxation rules on mutual fund investments. It is especially so for NRIs, as the taxation aspect for them is slightly different from that of resident Indians.By understanding them thoroughly, NRIs can make proper use of the available deductions and other tax benefits to increase their net returns on their investments.
FAQS - FREQUENTLY ASKED QUESTIONS
How are gains from mutual fund investments taxed for NRIs ?
Gains from the mutual fund investments done by NRIs are taxed in India just like they are taxed for resident Indians. Gains are classified into LTCG and STCG as per the applicable rules and are taxed according to the provisions of the Income Tax Act. However, unlike resident Indians, TDS is applied on the redemption amount of mutual fund investments made by NRIs.
Is the interest on NRE funds taxable in India ?
No, the interest on NRE funds is not taxable in India. It is taxable in the country where the NRI resides.
Is SIP tax-free for NRIs ?
Investments made through SIP in a mutual fund are not taxable at the time of investment. However, if the gains were made while redeeming the investment, then tax will be applicable. The gains made are not fully tax-free but subject to certain exemptions and benefits, one can reduce their tax liability.
Can I set off my business loss with capital gains made in the same financial year ?
The gains/losses recognised under the head "Capital Gains" cannot be set off with gains/losses from the other head/s during a given assessment year. If you have made capital losses during a given year, you can carry forward such losses up to the next eight assessment years.
What happens to my mutual fund investments when I become an NRI ?
If you are a resident Indian with investments in mutual funds moving abroad, your residential status will change but your mutual fund investments in India will stay as it is, with no restrictions laid out on your investments. You just need to update your residential status with your mutual fund house and follow the required procedure so that you can easily continue investing.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
