Zero Capital Gain Tax On NRI Mutual Funds - The ITAT Rule

There was a groundbreaking decision at the Income Tax Appellate Tribunal (ITAT) Mumbai branch, which ruled that NRIs are not required to pay taxes on the sale of mutual funds. In particular, this is due to the tax treaty, also known as a DTAA (Double Taxation Avoidance Agreement), between India and other countries. 

With respect to DTAA, such tax treaties have always existed to help NRIs avoid paying taxes twice on the same source of income. For years, NRIs have ended up paying taxes in India on the gains they have made from selling their mutual fund investments. 

However, this overlooked issue was recently addressed by an NRI living in Singapore. This blog focuses on the game-changing ruling and how it can benefit you as an NRI with mutual fund investments in India. 

What Does DTAA Mean for NRIs?

DTAA stands for Double Taxation Avoidance Agreement. It is a tax treaty between two countries, ensuring that businesses and individuals from those countries are not taxed twice on the same source of income. 

Talking specifically about NRIs, India has signed DTAA with 100 major countries, such as 

• United Arab Emirates
• Singapore
• Muritius
• Kuwait
• Qatar
• United Kingdom
• Canada 
• Australia

The core idea behind this is simple. Which means that if you have already paid tax on the income in one country, you should not pay tax on the same income in another country. And this is how NRIs have been legally avoiding taxes under the International tax allowance. 

How Much Tax Will You Pay As An NRI On Mutual Fund Gains?

Before we discuss the ITAT ruling, we shall first understand how taxes apply to NRI mutual fund gains. This rule is basic, which is that as an NRI, you are taxed on the gains of mutual funds depending on where you live. If you are an Indian living abroad, your gains will be taxed under the tax laws of your country of residence and not necessarily India's. 

In countries like Singapore, the UAE, and Mauritius, you have to pay 0 taxes on capital gains from Indian mutual funds just because these countries do not impose any kind of Capital Gains Tax. 

Let us understand this entire scene with an example. Assume you have made Rs 1 crore in profit by selling your mutual funds in India. Now, depending on your county of residence, your taxes might look different. The following table demonstrates the differences between India and foreign countries. 

With respect to the above-mentioned table, it is evident that Indian residents are required to pay up to Rs 12.5 lakh in long-term capital gains tax or Rs 20 lakh in short-term capital gains tax. But if you are a non-resident Indian living or residing in any of the countries mentioned in the table, you are liable to pay zero tax on your income of Rs 1 crore. 

What Does The ITAT Ruling Mean for NRI Investors

If we talk about the recent case, Ms. Anushka Sanjay Shah is an NRI based in Singapore. She has earned Rs 1.35 crore from the sale of her equity and debt mutual funds in India. Now, while filing her ITR, she claimed that this income (gains from the sale of mutual funds) must be exempt from tax in India under Article 13(5) of the DTAA between India and Singapore. 

She further claimed that, as an NRI living in Singapore, she is a tax resident of Singapore and that Singapore does not tax capital gains from India, so she should not have to pay any taxes in India. In contrast to her claim, the Income Tax Department of India thinks otherwise. The assessing officer said that since the mutual funds in India are linked to assets situated in India, the capital gains in India are also taxable. 

Ms Shah heard the ITD side and raised a matter appeal to the Income Tax Appellate Tribunal (ITAT), and this is where things started to go as she wanted. The ITAT proceedings rule in her favor. The ITAT further said that, as per Article 13(5) of the India-Singapore DTAA, only the NRI's country of residence has the right to tax such capital gains.

Singapore does not impose any capital gains tax for NRIs on mutual fund gains in India. The Income Tax Appellate Tribunal also rejects the tax officer's argument, holding that mutual funds are treated as shares in India. They are not; mutual funds are issued each year and are certainly different in nature, so they will not be taxed as shares. 

How Does the ITAT Ruling Help NRIs?

As a non-resident Indian investing in mutual funds in India, the ITAT ruling in the case of Ms. Shah is a huge win for all. For countries that have DTAA with Indian states that impose capital gains tax, capital gains from the sale of mutual funds in India shall be taxed in the resident country, and you are not required to pay tax on the sale of mutual funds in India. 

Furthermore, in countries such as Singapore, Kuwait, and the UAE, where capital gains are not taxed on tax residents, NRIs might as well not pay tax on foreign assets. This means that an Indian resident would pay Rs 20 lakhs on the STCG of 1 crore capital gain, but as an NRI, you pay nothing and retain the gains. 

Is the ITAT Ruling Applicable For Stock Gains Too?

No, the Income Tax Appellate Tribunal ruling does not apply to capital gains stocks. The benefits of the ruling apply only to mutual funds, as they are structured as trusts, which are all quite outside the scope of capital gains tax under the DTAAs.

The Bottom Line

Differently, this ruling served as a growth opportunity for NRIs. The change not to pay the taxes means you get to keep more of the profit just for yourself. Hence, you can use this opportunity to reinvest and further grow your investment portfolio. It is safe to say that this ruling sets an example for other NRI investors to plan their taxes better. 

As an NRI, if you are seeking expertise in investing in mutual funds in India, then Savetaxs is the name to trust. We help our clients with client advisory, portfolio management, regulatory, tax compliance, transaction execution, KYC, onboarding, and more, ensuring your mutual fund investment in India is compliant.

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