Is mutual funds taxation different in case of NRIs? Is not the capital gain tax on mutual funds for Non-residents same as of resident Indians?
The answer is both Yes & NO.
This is a common understanding that the Non-residents are treated at par with Residents in case of Mutual fund investments. But actually, this is not the case.
Then how is it different for NRIs? This is the question which today we will find the answer of. But before looking at how it is different, we first try to understand how mutual funds taxation actually works
Mutual Funds Taxation – Factors to consider
Capital gain tax on mutual funds depends on 2 major factors – Type of fund and the holding period of the investments.
Broadly there are 2 types of funds if we look at it from taxation angle:
Equity and Non-Equity
Equity funds are those funds where the composition of equity and equity related instruments in the portfolio is 65% and above.
Non-Equity funds are all those funds which do not satisfy the above-mentioned condition. Means all categories of Debt mutual funds, Hybrid funds with less than 65% equity exposure, Gold funds etc all are Non-Equity funds.
Besides the Type of fund, the Holding period of the scheme in your portfolio, also determines Mutual funds taxation. Based on Holding period there are 2 segments in capital gain taxation.
Long term and Short term.
In case of Equity mutual funds, if the holding period is more than 1 year, then it falls under Long-term capital gain taxation otherwise it remains short term. Whereas,
In Non-Equity Mutual funds, if the holding period is more than 3 years, then it falls under Long-term capital gain taxation otherwise it remains short term.
Capital Gains Tax on Mutual funds – Tax rates
The below table shows the rate of capital gains tax in case of different holding periods and also the type of funds.
Mutual funds taxation – How is it different for Non-Residents?
Residential status also impacts the capital gains tax on mutual funds. Yes, commonly it is known that capital gains tax on mutual funds works same with Residents and Non-residents. But that is not completely true.
While Long-term capital gains tax in case of equity fund both Residents and non-residents have to pay 10% (w.e.f. 01.04.2018), in the case of Non-Equity funds the rules are different.
NRIs are not allowed to take Indexation benefit in case of Unlisted debt Securities.
As per Income tax rules, in the case of Long-term capital gains in Non-Equity schemes, NRIs are subject to 20% tax rate after Indexation in case of Listed schemes; and 10% without Indexation in case of Unlisted schemes. (Read: What is indexation and how to calculate Indexed cost of acquisition?)
So, if we take a look at the listing status of different mutual fund schemes, then only Close-ended schemes get mandatorily listed on stock exchange and Rest all Open-ended schemes remain unlisted.
This means that if an NRI books a Long-term capital gain from a Non-Equity Mutual fund which is not listed on the stock exchange then he/she will have to pay 10% of the gains as capital gains tax, whereas if the scheme is listed on the exchange (like a Fixed Maturity Plan) then the tax rate would be 20% after adjusting for indexation.
This is not all, unlike Residents, in the case of capital gains tax on mutual funds NRIs are subject to TDS on the Capital gains. In fact, not only in mutual funds, NRIs are subject to TDS in almost all the investments they make in India.
It is always important to be on the right side of the law. Sometimes what is commonly known may not be true and Ignorance can never be an excuse in legal issues.
The advantage with NRIs in case of Mutual funds taxation is the TDS which gets deducted at applicable tax rates. This may be construed as a disadvantage too when you do not have any other income in India.
That is why being aware of the tax laws is important so you should pay only what you are liable to and claim the refund of what has been deducted extra from your Income.
Hope you find the article on Capital gains tax on mutual funds useful. You may ask your queries if any in the comments section below.