NRI Mutual Fund Taxation In India – 2018

As an NRI, you can invest in mutual fund schemes in India but you have to pay tax.

You have to pay taxes on mutual funds based on certain criteria, Keep in mind that tax implications are different for NRIs as compared to Resident Indians.

In this post we are talking about the tax on mutual funds that you have to pay in India – you should remember that you may also have to pay tax in the country where you are staying right now.

You Can Check in this post

  • NRI Equity Mutual Fund Taxation
  • NRI Debt Mutual Fund Taxation
  • TDS for NRIs on Mutual Funds in India
  • Provisions of Set Off for NRIs
  • Few more important points for NRIs

NRI Mutual Fund Taxation India

Let us look at the different types of MF schemes and the tax liability of NRI investors on those –

NRI Equity Mutual Fund Taxation in India

These are funds that have at least 65% invested in equity assets. You can make either short-term gains or long-term gains.  If the holding period is more than one year, then the gains you make are long-term gains. If the holding period is less than one year, then gains are considered as short-term gains.

Tax on Short-Term Gains 15% of the gains is payable.
Tax on Long-Term Gains Gains up to Rs. 1,00,000 per year are exempt from tax. Gains over and above that are subject to 10% tax. (without Indexation)

NRI Debt Mutual Fund Taxation in India

Non-Equity Funds (Debt Funds, Gold Funds, International Funds (including equity), Fund of Funds)

Majority of the portfolio of non-equity funds are invested in assets other than equity – like Government Bonds, deposits, gold etc.  If the holding period is more than three years, then the gains you make are long-term gains. If the holding period is less than three years, then gains are considered as short-term gains.

Tax on Short-Term Gains Based on your tax slab (TDS 30%)
Tax on Long-Term Gains Listed Mutual Funds – 20% applicable (with indexation)

Unlisted Mutual Funds – 10% applicable (without indexation)

Read – Best Investment Options for NRIs

NRI – Taxation on Fixed Maturity Plans (FMPs)

FMPs are closed-end debt funds & they are listed on stock exchange. They have a fixed maturity period – if you want to exit before maturity you have to sell on the stock exchange. They are not available for subscription on a continuous basis.

FMPs typically invest in debt instruments like Corporate Bonds, Certificate of deposits (CDs), money market instruments and other commercial paper.

The fund manager allocates money in instruments that typically match the duration of the scheme.

Tax on Short-Term Gains If the FMP matures in less than 3 years, tax is applicable as per income tax slab of the individual.
Tax on Long-Term Gains 20% with indexation

Indexation – The purchase cost is adjusted for inflation and then deducted from the sale price to arrive at the gains. The tax will, therefore, be less.

Other Charges Applicable

Health and Education Cess @ 4% will be applicable on the aggregate of tax.

Securities Transaction Tax of 0.001% is applicable to purchasers and sellers of Equity Mutual Funds.

TDS for NRI in Mutual Fund

Check – Best time to send money to India

TDS for NRI in Mutual Fund

TDS is applicable for NRIs on Mutual Fund Redemption. The rate depends on the type of scheme and the holding period.

TDS On Short-Term Gains Equity MFs – 15%

Non-Equity MFs – 30%

TDS On Long-Term Gains Equity MFs – 10%

Non-Equity MFs (Listed)  – 20% with Indexation

Non-Equity MFs (Unlisted)  – 10% without Indexation

The TDS is charged at the highest applicable rate. If the NRI falls in a lower tax slab, he is eligible for a refund when he files his returns.

NRI Capital Gains Tax On Mutual Funds – Example

Let us look at some examples to understand the taxation structure better –

Transaction Details Purchase Price Sale Price  Type of Gain Capital Gains Tax Payable
Equity Fund purchased in January 2018 and sold in August 2018 Rs. 2,00,000 Rs. 2,07,000 Short Term

 

Rs. 7,000 15.6% of Rs. 7,000 = Rs. 1,092
Equity Fund purchased in January 2015 and sold in August 2018 Rs. 2,00,000 Rs. 2,35,000 Long Term Rs. 35,000 10.4% of Rs. 35,000 = Rs. 3,640
Debt Fund purchased in January 2018 and sold in August 2018 Rs. 2,00,000 Rs. 2,05,000 Short Term Rs. 5,000 30% of Rs. 5,000 = Rs. 1500

(assuming investor is in the highest tax bracket)

Debt Fund purchased in January 2015 and sold in August 2018 Rs. 2,00,000 Rs. 2,20,000 Long Term Rs. 20,000 20% of Rs. 20,000 = Rs. 4000

(assuming investor is in the highest tax bracket)

FMP subscribed to in January 2015 and maturity  is in July 2018

(CII of 2015-16 =  254

(CII of 2018-19 = 280

Rs. 2,00,000 Rs. 2,25,000 Long Term Rs. 25,000

 

Indexed Gains = 4530 (Rs. 225,000-Rs. 2,20,470)

20% of Rs. 4530 = Rs. 906

 

(Savings of Rs. 4094 (5000-906))

 

Provisions of Set Off for NRIs

  • Short-term capital losses can be set off against short-term loss or against long-term loss
  • Long-term losses against only long-term gains to reduce tax liability.
  • NRIs can carry forward losses for 8 years but for this, they have to file the tax return.
  • Set off of Mutual Fund capital gain against basic tax exemption limit of Rs 2.5 Lakh
    • Equity Mutual Funds
      • Short-Term – Not Available to NRIs
      • Long Term – Only 1 Lakh exemption limit is Available
    • Debt Mutual Funds
      • Short-Term – PERMITTED to NRIs
      • Long-Term – Not Available to NRIs
  • Sec 80 C Deduction – Only in the case of Short-term Gains in debt mutual funds – you can also reduce your tax liability by investing in PPF, ELSS etc.

NRIs income tax liability may not be over by paying tax in India. You may have to pay the additional tax in your country of residence. You may get credit for taxes paid in India based on DTAA.

wiseNRI

Read – Tax Rates for NRIs on Indian Income

Important Points to Note for NRIs

  • You can get the capital Gains statement from the Mutual Fund or from either Registrar and Transfer (R&T) agents – Karvy or Computer Age Management Services.
  • You have to show the short term and long term gains in Schedule Capital Gain in the Income Tax Return.
  • The units that are purchased first are assumed to be sold first. (FIFO)

Do not be under the impression that you do not have to file returns if you are an NRI. You will be liable for the penalty. File your returns considering your capital gains. Ensure that you get your refund in case you have paid more than required.

Note – Please talk to your CA or Financial Planner before taking any action based on this post. The individual circumstance of NRI can play a big role in the actual tax that he needs to pay.

If you have any questions on Mutual Fund Taxations for NRIs in India or if you would like to share your experience - feel free to add in the comment section.

About the Author

Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice in 2009 & is among the first generation of financial planners in India. He also authored Bestseller book "Financial Life Planning".

  • Shyam says:

    Dear Hemant Ji,

    I was told that Set off of Mutual Fund capital gain against basic tax exemption limit is also available on short term equity gains & long term debt gains.Please guide?

  • Suresh says:

    Dear Hemantji

    Apperantly there is a mistake below

    ————————————————————————————————————————
    Majority of the portfolio of non-equity funds are invested in assets other than equity – like Government Bonds, deposits, gold etc. If the holding period is more than three years, then the gains you make are long-term gains. If the holding period is less than three years, then gains are considered as short-term gains.

    Tax on Short-Term Gains 30% of the gains is payable.

    _________________________________________________________________________
    Fact is

    For debt funds sold within 3 years the gain shall be added to other income (if any ) and short term tax is charged at rate etc applicable to such income and not at flat 30% to all NRI

    Please comment

    Suresh

    • Dear Suresh Ji,
      Thanks for bringing that to my notice – that was a typo, I have corrected that.
      TDS is 30% but tax is based on the tax slab – which I mentioned in the set-off part in the article.

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