Recently, the Mumbai Income Tax Appellate Tribunal (ITAT) set a precedent by ruling that capital gains earned from mutual funds in India by NRIs will not be taxed in India. The ruling was given while assessing a case of Singapore based NRI who had earned short term capital gains by selling equity and debt mutual funds. The NRI appealed to claim exemption on the capital gains in India under Article 13 of the India-Singapore Double Tax Avoidance Agreement (DTAA). Notably, such exemption is available only on mutual funds and not on shares or immovable property.
DTAA is a treaty signed between two or more countries to avoid taxing the same income twice.
This ruling impacts NRIs with similar cases in other countries like UAE, Netherlands, Switzerland who have signed DTAA with India. This is beneficial for NRIs particularly residing in such countries as they do not impose capital gains tax at all.
To avail exemption, an NRI must:
- Be a tax resident of a country that has DTAA with India
- The country of residence does not levy tax on capital gains from mutual funds.
However, regardless of treaty applicability, mutual funds typically deduct TDS on capital gains from NRIs based on applicable rates. For equity mutual funds, NRIs are subject to 20 per cent tax on short term capital gains and 12.5 per cent tax on long term capital gains. Capital gains on debt mutual funds bought after April 1, 2024 are taxed at the investor’s slab rate.
The DTAA benefits are not automatically granted and NRIs need to properly claim tax refunds and complete exemption by establishing their NRI status through tax residency certificate (TRC) and maintain proper transaction records of mutual funds.
It is to be noted that there is no guarantee that such similar cases may not be challenged by tax authorities going ahead and future rulings could reverse this precedent. It is hence prudent to consult a professional tax advisor to avail tax benefits under DTAA.