Tax Benefits of Mutual Funds for NRI Investors

Equity and debt mutual fund investments in India by NRIs are taxed differently

Many NRIs look for the best investment plans in India. One of the options is to invest in mutual funds. Mutual fund investment plans in India make sense because India is an emerging economy. Equity mutual funds have the potential to deliver high returns over time. Even for the risk-averse, mutual funds are one of the best investment plans in India. Returns in the Indian debt market are higher than in many developed countries. 

Taxation on mutual fund investments

While investing, one needs to consider taxes. The consideration remains equally important when NRIs make investments in mutual funds. An NRI can invest in both equity and debt mutual funds. Taxation however, depends on the type of fund and its holding period.

Taxation for equity mutual funds: For equity mutual funds, a holding period of less than one year is short term. A tax of 15 per cent on short-term capital gains is applicable. Capital gains are long term if held for more than one year. Earlier long-term capital gains (LTCG) were tax-free. After April 1, 2018, long-term gains attract tax at 10 per cent if capital gains are more than Rs 1 lakh during a year. 

Taxation on debt mutual funds: Debt mutual funds have a different taxation rule. Debt mutual funds held for less than three years are considered short term. In this case, capital gains are added to the income of the NRI. It is then taxed at 30 per cent. When held for more than three years, they become long term. The tax on long term capital gains is 20 per cent with indexation. The other option is to tax it at 10 per cent without indexation benefits; it gives debt funds a taxation benefit. 

DTAA method of taxation: NRIs may fear that they have to pay tax twice on the same income. NRIs earn income in their country. They may also earn an income in India. Income earned in India is taxed in India. That income may also attract tax in their resident country. This would mean that an NRI has to pay tax twice on the same income. Under the Double Tax Avoidance Agreement (DTAA), NRIs can avoid paying taxes twice. India has a DTAA agreement with several countries like US, UK, Canada, Australia and others. Let us see what the DTAA agreement means. Let’s suppose you have paid tax in India on a particular income. You can claim a deduction in the other country for the same. This means that you do not pay tax twice for the same income. 

Understanding the taxation aspect helps you choose the best investment plan in India. 

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