Listen to this article
One of our readers wrote to us with this query:
Dear Team,
I am a regular reader of Cafemutual and truly appreciate the valuable insights you provide to mutual fund distributors. Thank you for your consistent and informative content.
I read your article today on capital gains taxation for NRI clients in mutual funds. I would like to seek further clarity on this topic—specifically regarding the capital gains taxation applicable to NRIs residing in the USA, Canada, and Australia.
Could you please share detailed information or guidelines related to this?
I look forward to your response.
Warm regards,
Murali Krishna
Dear Murali Krishna
Thanks for writing to us
Yes, India has Double Taxation Avoidance Agreements (DTAAs) with over 80 countries including the US, Canada and Australia.
Under these agreements, NRIs from these countries are exempted from paying capital gains taxes arising out of mutual funds in India. They will have to pay capital gains taxes in their country of residence (if any).
However, to avail of DTAA benefits, NRIs must provide a valid Tax Residency Certificate (TRC) from their country of residence. Also, a few AMCs insist on the NRIs providing PAN, OCI/POI card, copy of passport and overseas address proof along with duly filled Form 10 F.
Further, obtaining a TRC can be a tedious process in some jurisdictions such as the US.
Although India has a DTAA with the US, it often makes little sense for US citizens to invest in Indian mutual funds and AIFs due to the Passive Foreign Investment Company (PFIC) rules.
Under PFIC regulations, US citizens are required to pay taxes on notional (unrealized) gains each year. PFIC tax rates can approach or exceed 50%, making such investments very costly.
Currently, mutual funds, ETFs, Category I and Category III AIFs, and REITs fall under the PFIC classification.
On the other hand, direct investments in Indian equities and PMS are not classified as PFIC. However, these direct investments do not enjoy DTAA tax benefits.
Regardless of DTAA or PFIC implications, NRIs across the world are subject to Tax Deducted at Source (TDS) in India on mutual fund investments. TDS is levied at 20% on dividend income on equity and debt funds. Further, they have to pay 20% equity STCG and 12.50% on equity LTCG. On debt, AMCs will have to deduct 30% on any gains.
NRIs can claim a refund of this TDS by filing tax returns in India, provided their country of residence has a DTAA with India.
