In a groundbreaking decision, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) ruled that NRIs should not pay tax in India on capital gains from the sale of Mutual Funds. This is due to the tax treaty, also known as DTAA, between India and several other foreign countries.
Although the DTAA (Double Taxation Avoidance Agreement) has always existed to help NRIs avoid paying double taxes. For years, NRIs ended up paying taxes in India on the gains they made from selling their mutual fund investments.
This overlooked discrepancy was recently challenged by an NRI in Singapore. In this blog, let’s explore this game-changing ruling, how it impacts you as an NRI and let’s understand how this can benefit your investments as an NRI.
What Does DTAA Mean?
DTAA stands for Double Tax Avoidance Agreement. It’s a tax treaty signed between two countries to ensure that individuals and companies don’t get taxed on the same income twice. India has signed 94 DTAAs with several countries, some of which include Australia, Austria, Bulgaria, Canada, the UK, Sri Lanka, etc.
How Much Tax Will You Pay As An NRI?
Before diving into the ITAT ruling, let’s first understand how taxes work for NRIs regarding mutual fund gains. The basic rule is that your tax liability depends on where you live.
If you're an Indian living abroad, any gain from mutual funds will be taxed as per the tax laws of the residing country. So, for countries like the UAE, Singapore, or Mauritius, you may have to pay 0 tax on capital gains from Indian mutual funds, simply because these countries don’t levy capital gains tax.
Let’s understand with an example: Say you made ₹1 crore in profit from selling mutual funds. Depending on your country of residence, your tax could look very different. Here's how it compares between India and some foreign countries.
| Applicable Tax Rate | Tax Payable | ||||
| Country of residence | Gains | LTCG | STCG | LTCG | STCG |
| India | 10,000,000 | 12.50% | 20% | 1,250,000 | 2,000,000 |
| United Arab Emirates | 0% | 0% | Zero | Zero | |
| Singapore | |||||
| Mauritius | |||||
| Kuwait | |||||
| Qatar | |||||
As you can see, Indian residents would have to pay up to ₹12.5 lakh in long-term capital gains tax or ₹20 lakh if it’s short-term. But if you are an Indian living in any of the countries listed above and qualify as an NRI, you pay zero tax on your income of ₹1 crore.
Who Classifies As An NRI?
An Indian Resident who lived outside India for more than 182 days in the financial year is deemed a Non-Resident Individual.
The ITAT Ruling: What It Means For NRI Investors
In a recent case, Ms. Anushka Sanjay Shah, an NRI based out of Singapore, earned ₹1.35 crore from the sale of debt and equity mutual funds in India. While filing her ITR, she claimed that this income should be exempt from tax in India as per Article 13(5) of the DTAA between India and Singapore.
She claimed that since she’s a tax resident of Singapore, and Singapore doesn’t tax capital gains, she shouldn’t have to pay tax in India either. But the Income Tax department in India thought otherwise. The assessing officer said that since mutual funds are linked to assets situated in India, the capital gains are also taxable in India.
Ms. Shah raised the matter to the Income Tax Appellate Tribunal (ITAT), and this is where things took a turn. The ITAT ruled in her favour. It said that as per Article 13(5) of the India-Singapore DTAA, only the country of residence (Singapore) has the right to tax such capital gains.
Since Singapore does not charge tax on capital gains, Ms. Shah didn’t have to pay any tax on her ₹1.35 crore gains. The ITAT also rejected the tax officer’s argument that mutual funds are like shares. It was clarified that mutual funds are issued by trusts, and are different in nature, so they can't be taxed the same way.
How Does This Ruling Help NRI?
If you are a non-resident individual investing in Mutual Funds, this ruling is a huge win for you. For countries that have a DTAA with India state that taxes on capital gains shall be taxed in the country of residence, and you do not have to pay tax on the sale of mutual funds in India.
Moreover, for countries like Singapore, Kuwait, UAE, where capital gains are not charged, an NRI benefits by paying zero taxes. Which means while Indian residents would pay ₹20 lakhs tax on a short-term capital gain of 1 crore as an NRI, you can pay nothing and reinvest the gains.
Does This Apply To Stock Gains Too?
No, this ruling does not apply to gains from stocks. This benefit is only for mutual funds, as they are structured as trusts, which fall outside the scope of capital gains tax under DTAAs.
Final Thoughts
For NRIs, this is a growth opportunity. The chance to not pay taxes means more of your profits stay with you. You can use this opportunity to reinvest and grow your portfolio further. For years, NRIs have unknowingly paid taxes in India. This ruling has set an example for other NRI investors to plan their taxes better.