Tax Implication on NRI investment in Mutual Funds

While many Non-Resident Individuals (NRIs) are located out of India, they might be well aware about the long term growth story of India and the growth prospects of Indian equity markets. Even though they might be willing to benefit by investing a portion of their portfolio in Indian equities, it is highly unpractical for them to be an active investor in Indian equities. One of the hurdles they often face is the time difference, due to which they cannot actively track the developments in the Indian stock holdings in their portfolio, during market hours. Hence they look for a mode where someone sitting in India can do this activity for them, like portfolio management, or investing directly in an active portfolio. Yes there is a cost effective way by which many NRIs use to participate in Indian equity markets; and they do it through holding some of their investment in Indian mutual funds. Even you being an NRI may be taking this route in order to benefit from Indian equity markets in the long term.

Your mutual fund investments are subject to Tax

Before you make your investment in Indian mutual funds, being an NRI, you need to know that the gains that you make on your mutual fund investments are subject to tax. You need to be aware of what tax rate will be applicable on short term as well as long term capitals gains on your investment in equity and non-equity mutual funds?

TDS on your mutual fund investment

Applicable tax rate is a major confusion in the mind of the NRIs as the portfolio managers whom they transact with are supposed to charge TDS at the highest rate applicable even though the tax rate liability is less. Infact there may be a difference between applicable tax rate to an NRI and the TDS rate charged by the portfolio managers on NRI investments. To get back the additional tax deducted, NRIs need to file for an income tax refund. So when you get a tax deducted amount at the time you sell your investment in Indian mutual funds; you will have to file for a refund of your additional tax. For this you need to be aware of the actual tax rate that is applicable on your investments in Indian mutual funds.

Here is a table which shows you the actual tax rate applicable and the corresponding TDS rate applied to Non Resident Individuals for their investment in Indian mutual funds.

Applicable Tax Rates for NRI
Category of Units	Tax Rates under the Act	TDS Rates under the Act
Short Term Capital Gain
Units of Non-equity Oriented Scheme	Taxable at normal rates of taxes applicable to the assesse	30% for Non Resident Individuals
Units of an Equity Oriented Scheme	15% on redemption of units where STT is payable on redemption (u/s 111 A)	15%
Long Term Capital Gain
Listed Units of a Non-Equity Oriented Scheme	10% without Indexation OR 20% with indexation, whichever is lower (u/s 112)	20% for Non Resident Individuals (u/s 195)
Unlisted Units of a Non-Equity Oriented Scheme	10% with no indexation	10% for Non Resident Individuals (u/s 115E/112)
Units of an Equity Oriented Scheme	Exempt in case of redemption of units where STT is payable on redemption (u/s 10(38))	Exempt in case of redemption of units where STT is payable on redemption (u/s 10(38))

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the above table capital gains are divided into 2 parts, short term capital gains and long term capital gains.

Short term capital gains

Units of Non-equity oriented scheme such as debt and money market mutual funds should be taxed as per your income tax slab, but the TDS is deducted at the highest applicable rate of 30%, irrespective of what tax slab you belong to; while the units of Equity oriented mutual funds are taxed @ 15%.

Long term capital gains

Units of Non-equity oriented scheme if listed are taxed at 10% without indexation or 20% with indexation whichever is lower but the portfolio manager will deduct TDS at flat rate of 20% for NRIs.

Units of a non-equity oriented scheme if unlisted are taxed at 10% without indexation while Long Term capital gains on units of an equity oriented scheme are exempt from tax as Securities Transaction Tax is payable on redemption.

Conclusion

Your investment in mutual fund is subject to tax. Considering your status as an NRI, applicable tax on gains will be deducted at the time of your redemption. In any of the above cases if the tax liability on your investment is less than the amount of tax deducted at source then you can file your income tax refund to get refund from income tax department. So by keeping this table handy, you can confidently file for claim of your refund.

PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.