Why NRIs in UAE enjoy tax benefits on MF investments

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₹10,000 every month in an equity mutual fund (MF) for 20 years, they would get around ₹1 crore assuming an annual growth rate of 12%. However, the gains would be subject to 10% long-term capital gains taxation, which would be around ₹7.6 lakh. Debt MFs are taxed at a higher rate based on the investor’s income tax slab rate.

But an NRI from the Emirates is exempt from paying any capital gains tax, thanks to the DTAA signed between India and the UAE in 1992 to avoid double taxation of residents of both countries on the same income. “This treaty alleviates the burden on taxpayers and promotes cross-border economic activities," said Sagar Soman, a chartered accountant (CA) whose practice caters to NRI clients who are mostly high-net-worth individuals. To be eligible for this benefit, investors need to prove that they were present in the UAE for a total of 183 days, continuously or otherwise, in the calendar year concerned.

They also need to furnish a tax residency certificate and file Form 10F online with the tax authorities. Do note that capital gains tax is applicable on the purchase and sale of stocks directly. Earlier, this was exempted.

When the treaty was amended, shares were included to be taxed in India, but there was no specific mention of MFs. Under another clause for capital gains, it is mentioned that gains on assets apart from shares and immovable properties will be taxed in the country of residency, the UAE in this case. Gautam Nayak, a partner at CNK & Associates, a chartered accountancy firm, points out that as per the DTAA, gains on assets such as MFs, corporate bonds or government securities (G-secs) will be taxed only in the country of residence, which is the UAE.