NRI taxation: Do you need to file a return in India for mutual fund capital gains?

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Non-Resident Indians have to be taxed in India on capital gains on income from Indian assets, i.e., units of a mutual fund. Whether the gains are long-term or short-term depends on the tenure of holding. Units of equity funds which are encashed within a one-year period are treated as short-term and are taxed at 15 percent. Gains which are held for over one year are treated as long-term and are taxed at 10 percent if they are over ₹1 lakh in a financial year.

Debt funds and hybrid funds

The regulations of taxation differ between debt mutual fund and hybrid mutual fund. Gains are short-term and attracted at the rate of income tax bracket of the investor if sold within a period of three years. If sold beyond a period of three years, the gains are long-term and attracted at 20 percent with indexation benefit. The regulations are the same for both resident investors and NRIs and therefore need to be monitored in terms of the time span of investment.

TDS on NRI capital gains

Although residents do not have TDS withheld at source on capital gains from mutual funds, NRIs are taxed at source for the same. TDS is automatically withheld by the fund houses at the redemption proceeds repayment time. For equity schemes, it is 15 percent for short-term and 10 percent for long-term. For debt funds, short-term is 30 percent and long-term is 20 percent indexation. There is more tax compliance as NRIs are not allowed to postpone reporting tax.

Filing requirements for NRIs

While tax is deducted at source, NRIs are also needed to file an ITR in India. They are needed to do so if they possess other income in India, claim withholding TDS overpayment in excess, or seek carry forward of capital losses. It becomes necessary if the aggregate income is over the basic exemption level before set-off of TDS. Failure to file returns in this case invites notices from the taxman.

The relevance of double taxation treaties

NRIs should also consider the double taxation avoidance agreement between the residence country and India. Tax paid in India could, in certain situations, be offset against tax payable outside the country. The filing of an ITR allows the credit to be availed and double taxation to be prevented. Filing a return is not merely a compliance process but also a means to reduce the total tax outgo.

Balancing planning and compliance

For NRIs, investment in Indian mutual funds triggers tax liability but may be managed with careful planning. Verification of capital gains, awareness of deductibility of TDS, and filing of returns wherever required prevents penalties and is compliance with law. With effective use of treaties and exemptions, double taxation can also be prevented and returns saved from undesired erosion.

FAQs

Are NRIs required to file a tax return in India on mutual fund income at all times?

No. As long as TDS takes care of the entire liability and you have no other income, it is not required. Returns need to be filed in case you are in need of availing refund or carry forward losses.

Are NRIs eligible to take indexation benefit on investment in debt funds?

Yes, where it is for over three years, long-term capital gains are taxed 20 percent with indexation relief which lowers the tax payable.

What if the home country of an NRI taxes mutual fund gains as well?

Then relief is available under double taxation avoidance agreement signed between India and the resident country. Return filing in India allows proper credit to be claimed overseas.