NRIs Don’t Have to Pay Tax in India on Mutual Fund Gains: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has announced that in India, short-term capital gains up to Rs. 1.35 crore from redeeming mutual fund units are not taxable, as per the India-Singapore tax treaty. This has come out as a significant relief for a Non-Resident Indian (NRI) investor.

According to an expert, by this rule, the NRIs who were investing in india will get to know the other side of the India-Singapore tax treaty (and more identical tax treaties), which they aren’t aware of. Through the advantage of the tax treaty, capital gains that took place because of the sale of mutual fund units are taxable only in the country in which the NRIs are residents of and not in India.

An Expert also explained that the advantage of not paying tax in India on the capital gains from selling mutual fund units also applies to tax treaties with other countries that have identical rules as well. Some of these countries are UAE, Mauritius, Netherlands, Spain, and Portugal. As per these treaties, if the asset is neither land nor company shares, it will come under a general rule that is known as the ‘residual clause.’ The profit is only taxed in the country where they live, as per the rule.

In the case heard by the ITAT, a tax resident of Singapore had announced that he made capital gains of Rs. 88.75 lakhs from debt mutual funds and Rs. 46.91 lakhs from equity mutual funds in the financial year 2021-22.

In the Income tax return, the tax resident of Singapore claimed deductions from these capital gains in the residual provision of Article 13 of the tax treaty, which allows that the gains should be taxed only in their resident country and not in India.

The IT officer rejected the claim and taxed the capital gains by saying that the mutual fund units gained a major value from assets of India and, as a result, would be subject to tax in India.