How NRIs gets taxed on mutual funds?
No doubt India is one of the fastest growing emerging markets with further growth potential and that’s why many foreign investors invest their money in Indian stock markets. As in foreign countries there are very few choices of funds that dedicatedly invest in Indian markets. This is the reason why NRIs (Non Resident Indians) invest in Indian mutual funds. So in what ways can NRI invest in India? People often think that NRIs are taxed just as resident Indians are treated. So does it hold true? Let’s find out.
If we talk about taxation on mutual funds for NRI then they are similarly taxed as resident Indians are taxed, but not in the exact same way. So when it comes to taxation there are two factors based on which an individual gets taxed. One being the type of investment i.e. equity or non-equity and the other being the holding period of investments, i.e. long-term and short-term. For equity investments anything above one year is termed as long-term and below one year as short-term and for non-equity investments anything above 3 years is termed as long-term and anything below 3 years is termed as short-term.
| Type of Individual | Equity Investments | Non-Equity Investments |
| Long Term | Short Term | Long Term | Short Term |
| Resident Indian | 10%* | 15% | 20%^ | As per Individual's Income Tax Slab |
| NRI | 10%* | 15% | 20%: Listed^ 10%: Unlisted^^ |
| * 10% on the gains exceeding Rs. 1 Lakh. ^ 20% on the gains based on indexed cost of acquisition. ^^ 10% on the gains. No indexation benefit. |
So if we look at the above table, for resident Indians, the tax implications on long-term equity is 10 per cent on the gains exceeding Rs. 1 Lakh and 15 per cent on short-term capital gains. The same also holds true in the case of NRIs. However, when it comes to tax implications on long-term gains on non-equity investments then things are somewhat different. In case of resident Indians, 20 per cent of tax is levied on the gains after accounting for indexation, but in case of NRIs tax implications further depends on investments made in listed non-equity securities or unlisted non-equity securities. If investments are made in listed non-equity securities, 20 per cent of tax is levied on the gains after accounting for indexation. However, if investments are made in unlisted non-equity securities, 10 per cent of tax is levied without any indexation benefit. Not all mutual funds are listed. Only closed-ended mutual funds are mandatorily listed. For NRIs even TDS (Tax Deducted at Source) is applicable.
Now many NRI investors fear of double taxation. They don’t have to worry if India has signed the Double Taxation Avoidance Treaty (DTAA) with the respective country. For instance, if you have short-term capital gain on equity mutual funds then you would pay tax at the rate of 15 per cent, but the same gain is taxable in say US at 30 per cent. But as you have paid 15 per cent tax in India you only have to pay tax of 15 per cent in US. This holds true only if India has signed the DTAA with the respective country.