NRI Mutual Fund Taxation in India: Capital Gains, TDS and DTAA Explained
This guide breaks down how much tax you owe as an NRI when selling mutual funds in India, how TDS applies, and how you can claim tax refunds or credits in your home country.
This guide breaks down how much tax you owe as an NRI when selling mutual funds in India, how TDS applies, and how you can claim tax refunds or credits in your home country.
India taxes mutual funds when you sell them. This tax is called capital gains tax since mutual funds, like shares and property, are capital assets.
There is no tax on mutual funds when their prices increase unlike the PFIC taxation rules in the US which taxes notional gains on foreign assets like mutual funds and ETFs.
NRIs can invest in mutual funds in India from their NRO or NRE accounts. NRIs cannot hold resident bank accounts in India as per FEMA guidelines.
To comply with the Foreign Exchange Management Act (FEMA) rules, an NRI cannot have regular savings accounts in India. Therefore, you must convert existing accounts to NRO accounts and excess accounts must be closed. This step is important once your status changes from resident Indian to NRI and can be done either online, for selected banks, or during your next visit to India.
Feature | NRO Account | NRE Account | FCNR(B) Account | RFC Account |
---|---|---|---|---|
Income Source | Indian income (including capital gains) |
Primarily foreign income, some taxable Indian income |
Foreign currency deposits | Funds held in foreign currency by returned NRIs |
Repatriation | Allowed with Forms 15CA/15CB, up to $1 million/year |
Fully repatriable (for foreign income and taxable Indian income) |
Fully repatriable | Fully repatriable |
Limits | Unlimited when deposited; $1 million/year on repatriation |
No limits on deposits/withdrawals | No limits on deposits/withdrawals | Generally no specific limits defined, but related to funds brought back upon return or received from specific sources |
Capital Gains | Can receive proceeds from sale of assets | Cannot receive proceeds from sale of assets directly. Proceeds must go to NRO |
Cannot receive proceeds from sale of assets | Can receive proceeds from sale of foreign assets held before returning |
Taxation | TDS applies to Indian income | Generally no tax on foreign income, tax applies to specific Indian income |
Interest earned is tax-free in India | Interest is taxable at slab in India |
Currency | INR and Foreign currency | Foreign currency | Foreign currency | Foreign currency |
An NRE account can be opened only once you are an NRI as a fresh account. Old accounts, which existed when you were a resident Indian, must be converted into NRO accounts, not NRE accounts. You can check your NRI status here: Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts.
This account is used to send money to India. The features and uses are:
This account is used for any income and investments in India. The features and uses are:
Note: FCNR(A) accounts were discontinued in 1993 and used to have exchange rate guarantee from the RBI. Now only FCNR(B) accounts, without exchange rate guarantees, exist.
Resident Foreign Currency (RFC) are for NRIs who have returned to India and used to store foreign currency, say in USD, GBP and EUR
This table summarises these account types for every type of tax status:
Account Type | NRI | RNOR | Resident (ROR) |
---|---|---|---|
Account Type | NRI | RNOR | Resident (ROR) |
NRE | Open & Operate | Can Continue (if not yet reclassified) New not allowed |
Must be converted to Resident Account |
NRO | Open & Operate | Continue as-is | Continue as-is |
RFC | Cannot open | Can Open & Operate | Can Continue / No tax benefits |
FCNR (B) | Open & Operate | Cannot open new Continue till maturity |
No new deposits Continue till maturity → must convert |
Tax Deducted at Source (TDS) applies whenever an NRI sells mutual funds in India. This TDS is offset against the capital gain tax that is due on the sale and can be claimed as a part of total income tax while filing tax returns in India.
Income Source | Rate | Section | Who Deducts? |
---|---|---|---|
Shares (LTCG - Section 112A) | 12.5% (above 1.25 lakh) | 112A | Brokerage firms/Companies |
Bonds (corporate/gilt/state) | Varies (check specific bonds) | 195 | Company/Issuer |
Company FD | As per applicable income tax slab rates or 30%, whichever is applicable. | 195 | Company/Issuer |
Equity-oriented mutual funds (LTCG - 112A) | 12.5% (above 1.25 lakh) | 112A | Asset Management Company (AMC) |
Business Trusts (REITs/InvITs) - LTCG | 12.5% (above 1.25 lakh) | 112A | Company distributing the income |
Short-term Capital Gains (Section 111A) | 15% | 111A | AMC/Company/Brokerage Firms |
Debt-oriented mutual funds | As per applicable slab rates | 195 | AMC |
Any other LTCG | 20% | 195 | Buyer |
Coupon from bonds | 30% | 195 | Company/Issuer |
NRO Interest | 30% | 195 | Bank |
NRO FD maturity (interest portion) | 30% | 195 | Bank |
Dividends from stocks/REITs | As per applicable slab rates. | 195 | Company |
Dividends from Mutual Funds | As per applicable slab rates. | 195 | AMC |
Property Sale (short-term) | As per applicable slab rates. | 195 | Buyer |
Property Sale (long-term) | 12.5% without indexation (as per finance bill 2024.) | 195 | Buyer |
Rent | 30% | 195 | Tenant |
Other income | As per applicable slab rates. | 195 | Payer |
These TDS rates are designed in a way that they are the same or higher than the actual tax due. A cess of 4% applies to all TDS figures.
Gifts from resident Indian accounts to NRO accounts are TDS-free since it is not an income.
Note: See page 117 of Finance Bill 2024 for details of changing the TDS for property sales by NRIS from 20% to 12.5% under Section 195.
Remember: NRE FDs are tax-free in India and do not have TDS.
There are no lower thresholds for these TDS limits for NRIs unlike, say, real estate where TDS (that too only 1%) kicks in only if the property is more expensive than 50 lakhs. If tenants and real estate buyers don’t declare and deposit TDS on the income tax website, they will face interest and penalties.
Capital gains tax paid in India is eligible for foreign tax credit under DTAA when filing tax returns in your home country.
Union Budget 2024 and 2025 made considerable changes to mutual fund taxation rules, making the taxation unreasonably complicated.
This table summarises the tax due on the various types of mutual funds for this financial year based on the purchase date and holding period.
Tax Treatment for selling mutual funds during FY2025-26
Fund category | Purchase date | STCG Rate | LTCG After | LTCG Rate |
---|---|---|---|---|
Debt Funds | Bought Before 1 Apr 2023 |
Slab | 2Y | 12.5% |
Debt Funds | Bought After 31 Mar 2023 |
Slab | NA | Slab |
Equity Funds | Bought Anytime | 20% | 1Y | 12.5% (above 1.25L) w Jan18 exemption |
Hybrid Funds | Bought Anytime | 20% | 1Y | 12.5% (above 1.25L) w Jan18 exemption |
Dynamic Hybrid Funds (Equity Taxation) |
Bought Anytime | Slab | 2Y | 12.5% |
Dynamic Hybrid Funds (Debt Taxation) |
Bought Before 1 Apr 2023 |
Slab | 2Y | 12.5% |
Dynamic Hybrid Funds (Debt Taxation) |
Bought After 31 Mar 2023 |
Slab | NA | Slab |
Dynamic Hybrid Funds (Specified Taxation) |
Bought Anytime | Slab | NA | Slab |
Multi Asset Hybrid Funds (Equity Taxation) |
Bought Anytime | 20% | 1Y | 12.5% (above 1.25L) w Jan18 exemption |
Multi Asset Hybrid Funds (Debt Taxation) |
Bought Before 1 Apr 2023 |
Slab | 2Y | 12.5% |
Multi Asset Hybrid Funds (Debt Taxation) |
Bought After 31 Mar 2023 |
Slab | NA | Slab |
Multi Asset Hybrid Funds (Specified Taxation) |
Bought Before 1 Apr 2023 |
Slab | 2Y | 12.5% |
Multi Asset Hybrid Funds (Specified Taxation) |
Bought After 31 Mar 2023 |
Slab | NA | Slab |
FoF with 90%+ in domestic stocks |
Bought Anytime | 20% | 1Y | 12.5% (above 1.25L) w Jan18 exemption |
FoF in Equity Funds | Bought Anytime | 20% | 1Y | 12.5% (above 1.25L) w Jan18 exemption |
FoF in Debt ETFs | Bought Before 1 Apr 2023 |
Slab | 2Y | 12.5% |
FoF in Debt ETFs | Bought After 31 Mar 2023 |
Slab | NA | Slab |
Gold Funds | Bought Anytime | Slab | 2Y | 12.5% |
FoFs (Specified Taxation) |
Bought Anytime | Slab | NA | Slab |
FoF other than above |
Bought Anytime | Slab | 2Y | 12.5% |
Gold ETFs | Bought Anytime | Slab | 1Y | 12.5% |
Index Funds Domestic Equity |
Bought Anytime | 20% | 1Y | 12.5% (above 1.25L) w Jan18 exemption |
Index Funds Domestic Debt |
Bought Anytime | Slab | NA | Slab |
Index Funds Other |
Bought Anytime | Slab | NA | Slab |
ETFs with Equity Taxation | Bought Anytime | 20% | 1Y | 12.5% (above 1.25L) w Jan18 exemption |
Silver ETFs | Bought Anytime | Slab | 1Y | 12.5% |
ETFs investing in Foreign Stocks |
Bought Anytime | Slab | 1Y | 12.5% |
ETFs investing in domestic bonds |
Bought Before 1 Apr 2023 |
Slab | 2Y | 12.5% |
ETFs investing in domestic bonds |
Bought After 31 Mar 2023 |
Slab | NA | Slab |
ETFs (Specified Taxation) |
Bought Anytime | Slab | NA | Slab |
Solution Funds | Bought Anytime | Slab | NA | Slab |
Important considerations for using this table:
In India, you need to pay income tax on the sale. Since TDS will be deducted, you will need to pay whatever income tax is due (from this and other sources of income) minus this TDS.
Under the Double Taxation Avoidance Agreement (DTAA) between India and your home country, the tax paid in India can be offset as a foreign tax credit (FTC).
📕 What is Double Taxation Avoidance Agreement (DTAA)?
Income Distribution cum Capital Withdrawal (IDCW) plans are a type of mutual funds that declare dividends from time to time. This return is not free money since the NAV of the fund reduces by the dividend amount whenever the dividend is declared and paid out.
IDCW or dividends are considered income, and not capital gains, and is taxed at slab rates after the same amount of TDS. In the new tax regime introduced after Budget 2025, ₹12 lakhs in dividend income (and no other income) is tax-free in India.
Here, we take a simplified example that explains tax paid in India, TDS and income tax in your home country with FTC benefits.
Particulars | Amount (₹ lakhs) | Remarks |
---|---|---|
Total Sale Value | 50L | Proceeds from selling mutual funds |
Capital Gains | 20L | Profits from the sale |
Capital Gains Tax in India | 2.5L | 12.5% of ₹20L |
TDS Deducted in India | 6L | 30% of ₹20L |
Assumption: | No other income in India | |
Refund Claimable in India | 3.5L | Tax refund = TDS - Actual Tax due since here TDS is more than CG Tax |
Tax in Home Country | 6L |
30% of ₹20L |
Assumption: | Tax at 30% in foreign country |
All numbers in ₹ for convenience |
Foreign Tax Credit (FTC) | 2.5L | With DTAA the capital gains tax paid in India (₹2.5L) can be deducted from the tax liability in the home country |
Net Tax Payable in Home Country | 3.5L | ₹6L - ₹2.5L (FTC) |
Note: The sale (or rather the tax to be paid in India) should be in the same financial year as your home country so that you can get the full FTC. For example, US tax year is Jan-Dec while for India it is Apr-Mar. The sale should be in Apr-Dec to ensure you get the full FTC benefit.
Country | Local Tax Year | Basis of Taxation | Ideal Sale Window (Indian FY) | FTC Note |
---|---|---|---|---|
USA | Jan 1 - Dec 31 | Calendar year | Apr 1 - Dec 15 | Ensures Indian TDS is paid within same calendar year; align for FTC |
Canada | Jan 1 - Dec 31 | Calendar year | Apr 1 - Dec 15 | Similar to US; FTC allowed for foreign taxes paid in same calendar year |
UK | Apr 6 - Apr 5 (next year) | Fiscal year | Apr 1 - Mar 31 | UK’s tax year overlaps Indian FY; timing less sensitive for FTC |
UAE | Jan 1 - Dec 31 (from 2024 for corp. tax) |
Calendar year | Apr 1 - Dec 15 | No personal income tax; FTC not relevant for individuals |
Singapore | Jan 1 - Dec 31 | Calendar year | Apr 1 - Dec 15 | FTC relevant only if income is remitted; aligns for calendar year |
Germany | Jan 1 - Dec 31 | Calendar year | Apr 1 - Dec 15 | Must match year of foreign tax payment with income recognition |
France | Jan 1 - Dec 31 | Calendar year | Apr 1 - Dec 15 | FTC claimable in same year tax is paid; similar to Germany |
Netherlands | Jan 1 - Dec 31 | Calendar year | Apr 1 - Dec 15 | Double taxation relief aligned to calendar year |
Australia | July 1 - June 30 | Fiscal year | Apr 1 - June 30 | Indian sale in Apr-Jun matches Aussie tax year; clean FTC alignment |
If you do not sell, there is no tax in India.
Hope this article is helpful in clarifying taxation on Indian mutual funds.
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This post titled NRI Mutual Fund Taxation in India: Capital Gains, TDS and DTAA Explained first appeared on 04 Apr 2025 at https://arthgyaan.com