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One of our readers wrote to us with a query:
I have recently gone through an article in which I read that NRIs are exempted from Capital Gains Tax in mutual funds. Can you elaborate about this exemption? Also, does this exemption apply to PMS?
Name withheld on request
Dear MFD,
All NRIs are not exempted from capital gains tax in India. Only NRIs residing in a country having Double Taxation Avoidance Agreements (DTAAs) with India are exempted from paying capital gains tax in India.
This rule has always been there but a recent verdict by the Income Tax Appellate Tribunal (ITAT) in Mumbai clarified that capital gains from mutual fund units, which are structured as trusts, fall under the ‘residual clause’ of many DTAAs. This clause offers taxing rights to the country of residence of an investor.
Simply put, capital gains are taxable only in the investor's country of residence, not in India. Hence, there is no need to pay any short-term or long-term capital gains tax in India.
For example, an NRI residing in Dubai (UAE has a DTAA with India) will not be liable to pay capital gains tax in India on mutual fund redemptions or dividends. However, NRIs must provide a valid Tax Residency Certificate (TRC) from their country of residence to avail of DTAA benefits.
Currently, India has DTAAs with many countries like Singapore, UAE, Mauritius and Netherlands. These agreements aim to prevent double taxation for NRIs.
Further, some of these countries are tax havens, like Singapore and UAE. Since these countries do not impose any taxes on capital gains, the income from mutual funds for NRIs residing in these two countries is completely tax-free in the hands of investors, making Indian mutual funds attractive for them.
However, NRIs are subject to tax deducted at source (TDS) from mutual funds, which is levied at 20% on dividend income and redemption amounts. NRIs can claim this amount by filing tax returns in India if they belong to a country with a DTAA with India.
On your second query, this exemption is only applicable to mutual funds, as according to the tribunal, mutual funds are ‘property other than shares’.
On the other hand, there is no such exemption applicable to direct stocks or PMS. PMS buys stocks directly from the markets and does not offer a unit-holding structure. For NRIs, they will have to pay capital gains taxes in PMS irrespective of their country of residence. Such clients can get tax exemption only if they come through the GIFT City route.
Regards,
Team Cafemutual
