Mutual Funds Tax for NRI

Introduction to Mutual Funds

Mutual funds are investment options that pool money from a large group of investors to invest in a basket of securities, such as stocks, bonds, money market securities, and other assets. A professional money manager oversees this mix and aims to generate capital gains.

Unlike buying individual shares, mutual fund investors own a share of the entire portfolio, which can include stocks, bonds, and other securities. The value of this share is known as the Net Asset Value (NAV), and it reflects the overall performance of the fund.

The prices of mutual funds also don't change throughout the trading day. The NAV is determined and settled at the end of the trading day. This structure allows for a more diverse and managed investment approach for those looking to grow their wealth.

Classification of Mutual Fund Returns in India

Mutual fund returns come in two main ways:

• Dividends: Asset Management Companies (AMCs) of mutual funds share their profits with investors when they have extra funds. These shared profits are called dividends.

• Capital Gains: Capital gains occur when you sell a mutual fund for a higher price than what you initially paid for it. This is the profit earned from the increase in the fund's value over time.

Mutual Fund Taxation for NRI in India

In India, mutual funds are subject to taxation based on guidelines set by the Securities and Exchange Board of India (SEBI). The dividends and capital gains from mutual fund investments are taxed under different tax laws in India.

1. NRI Mutual Fund Taxation Based on Type of Returns

   • Dividend Distribution Tax (DDT):

     Taxes on mutual fund dividends are added to your taxable income and are taxed according to your income tax slab rate. Before the Union Budget 2020, dividends were tax-free, and companies used to pay the Dividend Distribution Tax (DDT) before distributing profits. DDT was applicable on dividends exceeding Rs. 10 lakhs per financial year.

   • Capital Gains Tax:

     Capital gains are taxed differently based on the holding period and the type of mutual fund. Mutual funds are categorized into Hybrid Debt-Oriented Funds, Hybrid Equity-Oriented Funds, Equity Funds, and Debt Funds.

   *All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

2. NRI Mutual Fund Taxation Based on Term of Investment

   Each mutual fund can be classified as either short-term or long-term based on its holding period.

   • Equity Funds and Hybrid Equity-Oriented Funds: Holding for less than 12 months is considered short-term, and 12 months or longer is considered long-term.

   • Debt Funds and Hybrid Debt-Oriented Funds: Holding for less than 36 months is short-term, and 36 months or more is a long-term holding period.

   • Tax on Equity Funds:

     Short-term gains are taxed at 15%, and long-term gains are taxed at 10% for gains above Rs. 1 lakh.

   • Tax on Debt Funds:

     Short-term gains are added to your income and taxed according to your applicable income tax slab. Long-term gains are taxed at 20% with indexation benefits.

3. TDS (Tax Deducted at Source):

   TDS is applicable on capital gains for NRIs. The rates vary for equity and debt funds.

   • Equity Funds: TDS is applicable at 15% on short-term gains.

   • Debt Funds: TDS is applicable at 30% on short-term gains and 20% on long-term gains.

Mutual Fund Tax Exemption for NRI in India

NRIs can claim tax deductions of up to Rs. 1.5 lakhs under Section 80C by investing in Equity Linked Saving Schemes (ELSS). ELSS is a type of equity mutual fund that has a lock-in period of three years.

Double Taxation Avoidance Agreement (DTAA)

NRIs can benefit from DTAA between India and their resident country, which may provide relief from paying taxes on the same income in both countries.

If the country of the NRI's residence has signed a DTAA with India, the NRI may be eligible for relief from double taxation. This means that the NRI may not have to pay tax on the same income in both India and their country of residence. 

Regulations on Mutual Fund Investment for NRI

Non-Resident Indians (NRIs) can invest in mutual funds in India, but they must adhere to certain regulations under the Foreign Exchange Management Act (FEMA). These regulations are designed to ensure that NRI investments are made in a transparent and compliant manner.

Key Regulations for NRI Mutual Fund Investments:

• NRE or NRO Account: NRIs must have an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account to invest in mutual funds. These accounts are specifically designed for NRIs to hold funds in Indian rupees.

• Investment Currency: Investments in mutual funds must be made in Indian rupees only. NRIs cannot use foreign currency to invest in mutual funds.

• KYC Requirements: NRIs must complete the Know Your Customer (KYC) process to invest in mutual funds. This involves submitting KYC documents such as passport copies, address proof, and bank statements to the mutual fund house.

• Repatriation of Returns: NRIs can freely repatriate the returns from their mutual fund investments, including dividends, capital gains, and redemption proceeds.

• Taxation: NRIs are subject to different tax rates for short-term capital gains (STCG) and long-term capital gains (LTCG) from mutual fund investments. They should optimize their tax liabilities before making mutual fund investments in India.

• Appointment of Power of Attorney (POA): If an NRI is unable to manage their mutual fund investments directly, they can appoint a Power of Attorney (POA) to act on their behalf. The POA must be an Indian resident and should be registered with the mutual fund house.

• Compliance with FEMA Regulations: NRIs must ensure that their mutual fund investments are in compliance with FEMA regulations. This includes reporting any changes in their residential status and providing any required documentation to the mutual fund house and relevant authorities.

Summing It Up

Understanding the mutual fund tax implications for Non-Resident Indians (NRIs) is crucial for effective financial planning. NRIs should be mindful of tax regulations in both their home country and India to optimize their investment returns and ensure compliance with relevant tax laws.