NRIs can cut tax on mutual fund gains using DTAA — here’s how

Subscribe to enjoy similar stories. Non-Resident Indians (NRIs) have long looked to India’s mutual funds for wealth creation — but taxation on capital gains remained a grey area. Recent rulings by the Income Tax Appellate Tribunal (ITAT) have now brought meaningful clarity: NRIs in countries with favourable Double Taxation Avoidance Agreements (DTAAs) may be taxed only in their country of residence, not in India.

They can choose whichever is more beneficial — domestic tax rules or DTAA provisions. Under the Income-tax Act, 1961, capital gains on mutual funds are taxed as follows: long-term gains on equity funds held over 12 months are taxed at 12.5% (above ₹1.25 lakh), while short-term gains are taxed at 20%. Fund houses deduct tax at source (TDS) before disbursing proceeds.

But a DTAA can override domestic tax, especially if the treaty grants exclusive taxing rights to the country of residence. That means India cannot levy tax on capital gains in such cases. Two recent ITAT decisions reinforce this.

In Saket Kanoi (UAE) vs. DCIT [2024] (Delhi ITAT, 23 October 2024), the tribunal held that capital gains on Indian mutual funds for a UAE-based NRI are non-taxable in India, as Article 13 (read with residual clause under Article 13(5)) of the India-UAE DTAA assigns taxing rights solely to the country of residence. Similarly, in Anushka Sanjay Shah (Singapore) vs. ITO (Mumbai ITAT, 26 March 2025), mutual fund units were recognized as movable capital assets, and Article 13 of the India-Singapore DTAA grants Singapore exclusive taxing rights.