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NRIs: No Capital Gains Tax in India on Mutual Fund Sales

A Major Relief for NRI Investors Under India’s Tax Treaties

In a notable advancement for Non-Resident Indian (NRI) investors, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) decided that capital gains from the sale of mutual fund units by NRIs cannot be subjected to taxation in India if the applicable Double Taxation Avoidance Agreement (DTAA) is in place. These gains are only liable to tax in the country where the investor resides.

Case Study: The Singapore NRI Ruling

In the financial year 2021-22, a non-resident Indian living in Singapore declared capital gains of approximately ₹1.35 crore from Indian mutual funds. She sought tax exemption in India based on Article 13’s residual clause, referencing the India-Singapore tax treaty.

The Income Tax Officer initially rejected her claim, arguing that mutual fund units gain value from Indian assets and should therefore be taxed in India. Nevertheless, the ITAT ruled that Indian mutual fund units are issued by trusts rather than companies, and thus do not qualify as “shares” under Indian tax laws. Consequently, the tribunal ruled in favor of the taxpayer.

Understanding the Residual Clause in Tax Treaties

Numerous tax treaties that India has, including those with Singapore, the UAE, Mauritius, the Netherlands, Spain, and Portugal, feature a residual clause in Article 13.

This clause stipulates that capital gains from assets besides immovable property are taxable solely in the country where the NRI is a resident.

Why This Matters for NRI Investors

For NRIs currently investing or looking to invest in Indian mutual funds, this ruling could directly affect your tax obligations. Capital gains might only be taxed in the country where you reside.