For Non-Resident Indians (NRIs), mutual funds in India offer a convenient and effective way to invest in the Indian economy while staying abroad. They are diversified, professionally managed, and accessible. However, one crucial aspect NRIs must pay attention to is taxation on mutual fund gains. Without proper tax planning, a significant portion of returns can be lost to taxes—both in India and the country of residence.

Here’s a detailed look at how NRIs can manage and save tax on mutual fund gains as an NRI legally and efficiently.

Understanding Taxation on Mutual Funds for NRIs

Tax rules for NRIs differ slightly from those applicable to resident Indians, especially in the way TDS (Tax Deducted at Source) is handled. Let’s break it down:

1. Equity Mutual Funds

• Short-Term Capital Gains (STCG): Taxed at 15% if sold within 12 months.

• Long-Term Capital Gains (LTCG): Gains above ₹1 lakh in a financial year are taxed at 10% without indexation.

2. Debt Mutual Funds (Post-April 1, 2023)

• All capital gains are taxed as short-term, irrespective of the holding period. They are added to your total income and taxed at slab rates.

3. TDS on Mutual Fund Gains for NRIs

• Equity STCG: TDS at 15%

• Equity LTCG: TDS at 10%

• Debt Funds (all gains): TDS at 30%

These taxes are deducted at source, and you need to file an Indian income tax return to claim refunds or exemptions, if eligible.

Tax-Saving Strategies for NRIs

1. Make Use of the ₹1 Lakh LTCG Exemption on Equity Funds

Even NRIs are eligible for the ₹1 lakh exemption on long-term capital gains from equity mutual funds. To maximize this benefit:

• Redeem equity mutual fund units such that LTCG does not exceed ₹1 lakh per financial year.

• Consider LTCG harvesting—redeeming units and reinvesting to reset the purchase price.

This strategy can help you earn tax-free gains year after year.

2. File Your Tax Returns in India to Claim Refunds

Since TDS is deducted on all mutual fund gains, you may be eligible for a tax refund if your total Indian income is below the taxable threshold or if you’re eligible for lower tax based on DTAA (Double Taxation Avoidance Agreement) with your resident country.

Example: If you’re in a tax-exempt category or your total income in India is below ₹2.5 lakh, you can claim a full refund of TDS by filing your ITR.

3. Use DTAA Benefits

India has signed Double Taxation Avoidance Agreements with over 90 countries. Under DTAA, you may:

• Be taxed at lower rates on capital gains.

• Claim foreign tax credits in your country of residence for taxes paid in India.

To use DTAA, you must submit a Tax Residency Certificate (TRC) and Form 10F to the fund house. This helps reduce your TDS liability and avoid double taxation.

4. Consider the Growth Option in Mutual Funds

NRIs should choose the “Growth” option instead of the “Dividend” option in mutual funds. Here’s why:

• Dividends are added to your total income and taxed at the highest slab rate (for NRIs, often 30% TDS).

• The growth option defers tax liability until redemption, and if planned well, can help you fall within the LTCG exemption limits.

The growth plan offers tax efficiency and better compounding over the long term.

5. Spread Redemptions Over Multiple Financial Years

If you’re planning to redeem a large sum, do it across two or more financial years to fully utilize the ₹1 lakh LTCG exemption each year. This simple timing strategy can help you avoid the 10% tax on excess gains.

6. Invest Via NRE Account to Repatriate Funds Freely

Always invest through your NRE or FCNR account if you plan to repatriate gains easily and without restriction. This ensures compliance and ease of fund transfer when you redeem your investments.

Important Compliance Tips

• Update your KYC with NRI status.

• Link your PAN and Aadhaar if not already done.

• Appoint a reliable tax consultant in India if you are actively investing and redeeming.

Final Thoughts

Tax planning is as important as choosing the right mutual fund scheme. As an NRI, you can legally minimize your tax burden on mutual fund gains in India through smart investment choices and proactive planning.

To summarize:

• Use the ₹1 lakh LTCG exemption.

• File your ITR to claim TDS refunds.

• Opt for the growth option.

• Time your redemptions strategically.

• Explore DTAA benefits to avoid double taxation.

If you’re unsure about the best route, consult a financial advisor who understands both Indian tax laws and international NRI tax implications.