Key Decision: India Cannot Tax NRIs on Mutual Fund Gains Under Tax Treaties
In a landmark judgment, the Mumbai Income Tax Appellate Tribunal (ITAT) has ruled that Non-Resident Indians (NRIs) cannot be taxed in India on capital gains from mutual funds if their home country has a Double Taxation Avoidance Agreement (DTAA) with India. This ruling came in a case involving an NRI from Singapore who earned ₹1.35 crore in short-term capital gains from selling mutual fund units.
What Does This ITAT Ruling Mean?
✅ No Tax on Mutual Fund Gains for NRIs – If India has a DTAA with the NRI’s resident country (e.g., Singapore, UAE, Mauritius), capital gains from Indian mutual funds cannot be taxed in India.
✅ Mutual Fund Units ≠ Shares – ITAT clarified that mutual funds are trusts (not companies), so their units do not qualify as “shares” under tax treaties.
✅ Global Impact – This benefits NRIs from Singapore, UAE, Mauritius, UK, USA, Australia, France, Germany, and other DTAA countries investing in Indian mutual funds.
✅ Tax Residency Certificate (TRC) Mandatory – NRIs must submit a TRC from their home country to claim DTAA benefits.
Capital Gains Tax Rules for NRIs (Before ITAT Ruling)
| Type of Gain | Tax Rate in India (For Residents) | Now for NRIs (Under DTAA) |
|---|---|---|
| Short-Term Capital Gains (STCG) | 20% + Cess + Surcharge | Not Taxable (If DTAA applies) |
| Long-Term Capital Gains (LTCG) | 12.5% + Cess + Surcharge | Not Taxable (If DTAA applies) |
Which Countries’ NRIs Benefit from This Ruling?
NRIs from these DTAA countries can now avoid capital gains tax on Indian mutual funds:
✔ Singapore
✔ UAE
✔ Mauritius
✔ USA
✔ UK
✔ Australia
✔ Canada
✔ Germany
✔ France
✔ Portugal
✔ Hong Kong
(Check India’s full DTAA list here)
FAQs: NRI Mutual Fund Taxation After ITAT Ruling
1. Does this mean NRIs don’t have to pay any tax on mutual funds?
- Yes, if their home country has a DTAA with India and they hold a Tax Residency Certificate (TRC).
2. What if my country does NOT have a DTAA with India?
- Normal Indian capital gains tax rates apply (20% for STCG, 12.5% for LTCG).
3. Do NRIs need to file ITR in India for mutual fund gains?
- No, if exempt under DTAA. But they must report foreign income in their resident country.
4. Does this apply to both equity and debt mutual funds?
- Yes, since the ruling covers all mutual funds (trust-based).
5. What is a Tax Residency Certificate (TRC)?
- A document issued by the NRI’s home country proving tax residency. Mandatory for DTAA benefits.
6. Can Resident Indians claim this benefit?
- No, this applies only to NRIs under DTAA.
7. Will this impact past mutual fund investments?
- Likely only for future sales, but consult a tax expert for older transactions.
8. How can NRIs claim DTAA benefits?
- Submit TRC + Form 10F to the mutual fund house while redeeming units.
Who is Considered an NRI for Tax Purposes?
An individual is a Non-Resident Indian (NRI) if:
✔ Stays in India <182 days in a financial year, OR
✔ Stays <60 days in a year + <365 days in last 4 years
Relaxation for NRIs working abroad:
- If employed overseas, the 60-day rule extends to 182 days.
Key Takeaway
This ITAT ruling is a major relief for NRIs investing in Indian mutual funds. If your country has a DTAA with India, you may not owe any capital gains tax in India. However, always:
🔹 Check your country’s DTAA terms
🔹 Obtain a Tax Residency Certificate (TRC)
🔹 Consult a tax advisor for complex cases
For Official ITAT Order Details: Income Tax India Portal
📢 Last Updated: May 30, 2025 | Source: ITAT Mumbai Bench
