Taxation Regulations for Mutual Funds for NRIs in India

Dec 22nd 2023

Mutual Fund

Taxation Regulations for Mutual Funds for NRIs in India, In recent times, mutual funds have emerged as a wonderful investment avenue for people from different walks of life. Be it flexibility, liquidity, ease of investment, affordability, mutual funds overpower all its counterparts in almost every aspect of a fruitful investment tool. No matter how much investment risk you are willing to take, you can always find a suitable mutual fund scheme for your specific needs. Though Indian nationals need not to worry about the taxation part of the investment, NRIs need to be aware of a few taxation specifications while investing in mutual funds.

If you are an NRI and looking to invest in mutual funds, it is necessary that you pay close heed to the taxation part of mutual fund investment for NRIs and make sure you company the same.

In this blog post, we will get into the shades mutual fund taxation for NRIs and help them get the most out of their investments.

When it comes to investing in mutual funds for NRIs, they are permitted to invest under the findings of Foreign Exchange Management Act (FEMA). NRIs are obliged to get a NRE (Non-resident External) or NRO (Non-resident Ordinary) account before proceeding further. Once the KYC and bank account formalities are done by them, they can start invest in the mutual funds in India.

Here, it is important to note that some mutual fund groups have put in place restrictions on investment in their scheme for US and Canada NRIs. This is because of compliance-related restricted associated with the Foreign Account Tax Compliance Act (FATCA). At the same time, there are many fund houses that permit NRIs to invest under clearly-stated conditions and via offline transactions.

When the value of Indian currency goes up in contrast to the currency of their home country, non-resident individuals (NRIs) stand to reap more profits.

Tax Specifications

Below we have well defined the tax implications related to mutual fund investments for NRIs.

Tax Deducted at Source (TDS)

When redeeming mutual funds, NRIs are liable to Tax Deducted at Source (TDS); the exact TDS rate depends on the type of plan (equity or non-equity) and the length of time the funds are held.

Short-term Capital Gains refer to gains that are realized when selling a mutual fund that was held for less than a year.

Long-term Capital gains denote gains that are realized when investors sell a mutual fund that they held for longer than a year.

Details	TDS on Short-term Capital Gains	TDS on Long-term Capital Gains	TDS on Distributed Income under IDCW Option
Equity Mutual Funds	15%	10%	20%
Other than Equity Oriented Fund	30%	Listed - 20% with indexation
		Unlisted - 10% without indexation

The highest rate that is applicable is charged for the TDS. When filing their taxes, NRIs who are in a lower tax bracket are entitled to a refund.

Tax on Capital Gains

The type of plan and length of ownership determine the tax rate on capital gains on mutual funds.

Particulars	Tax on Short-term Capital Gains	Tax on Long-term Capital Gains
Equity Mutual Funds	15%	Gains exceeding Rs. 1 lakh - 10% without indexation benefit
Other than Equity Oriented Fund	Taxed based on the income tax bracket	Listed - 20% with indexation
		Unlisted - 10% without indexation

When filing taxes, NRIs who pay more TDS than their lower tax band are eligible for a rebate. If an NRI's tax slab is smaller than TDS's first income tax deduction at the highest rate, they can recover the additional tax through refunds.

Income Tax Return

If an NRI's whole income is made up only of investment income or long-term capital gains with the proper TDS deductions, they are not obliged to file an income report.

There are advantages to filing returns in India as well. When submitting your taxes, you can claim a refund for the TDS deduction if your income is in a lower tax band.

Dividend Taxation

Dividends from dividend plans, whether they are equity or non-equity, are taxable at the appropriate tax slab rate and are regarded as annual income.

Tax Benefits

The following are some of the main tax advantages that investing in mutual funds can provide for an NRI:

1) Agreement to Avoid Double Taxation (DTAA)

A treaty known as the DTAA was struck by the two nations to stop residents from being taxed twice on the same income. Depending on the specifics of the agreement, gains from investments made in India may only be subject to one country's taxes under the DTAA.

The benefit of taxes and TDS deducted in India can be claimed by non-resident Indians (NRIs) against their tax liability in their home country.

It is possible to claim this deduction by giving the deductor the necessary paperwork, such as a copy of your citizenship or PIO proof and a self-declaration cum indemnity format.

2) Section 80C Deductible

Tax benefits under Section 80C can be obtained by investing in Equity Linked Savings Schemes (ELSS) up to a maximum of Rs 1,50,000.

Common Terms To Know While Decoding Mutual Fund Taxation for NRIs

Here are some of the significant terminologies to take a note of-

Capital Gains Tax - A tax known as capital gains is imposed on the profit made from the sale of specific assets, such as real estate or investments. Depending on how long you retain it, it might be classified as either Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG).

TDS - Through the TDS system, a predetermined proportion of tax is subtracted by the payer from the recipient's payment. It is filed with the government on the recipient's behalf in order to guarantee revenue collection and tax compliance.

LTCG - This is the amount of money made when selling specific assets that were owned for a predetermined amount of time. The length of time to retain an asset varies. Depending on the asset type, it is liable to varying tax rates and perks like indexation.

STCG - It pertains to the profit gained from the sale of assets held for a short duration. It is taxed at a different rate compared to long-term gains.

Indexation – It refers to a method for accounting for inflation in asset acquisition costs. In order to lessen the tax burden on long-term capital gains, it takes inflation into account when determining the asset's initial purchase price.

IDCW - With the IDCW (Income Distribution Cum Capital Withdrawal) dividend payout option in mutual funds, unitholders receive a portion of their invested capital back as well as investment gains, which are also referred to as income distributions, on a regular basis.

Equity-based funds - These are mutual funds or funds that are primarily invested in company stock.

Non-equity-based funds - These mutual funds are those that invest mostly in assets other than stocks, like debt securities.

FAQs

Is moving to other units with the same fund scheme levy tax?

Yes, at present, migrating to other units of the same mutual fund scheme levies capital gains tax when it is done from growth scheme to dividend scheme.

What does section 115BAB state?

According to the first proviso of Section 115BAB, any income that is not related to the manufacturing or production of an item or thing and for which Chapter XII of the Act does not specify a tax rate is subject to a 22% tax rate. Deductions from such income are not permitted.

What is FIRC (Foreign Inward Remittance Certificate)?

If a person made the investments with a demand draft or check, it is necessary to include a Foreign Inward Remittance Certificate (FIRC) as proof of the funding source. A note from the bank verifying the remittance will come in action in lieu of requesting a FIRC.

The Conclusion

Taxation is a major element for NRIs looking to invest in mutual funds in India. This element should always be kept on top priority by them to avoid any unpleasant surprises. In addition, having proper knowledge of tax implication on mutual fund investments tends to help NRIs optimize not only their investment experience but also overall returns.