Mutual Fund Investments for NRIs - Capital Gains Tax Exemption Under DTAA

· Capital Gains Tax Exemption Under DTAA

Under Article 13(5) of the DTAA between India and UAE/Singapore, capital gains arising from the sale of mutual fund units are taxable only in the country of residence. Since UAE and Singapore do not impose a capital gains tax, NRIs residing in these countries do not have to pay any tax on their capital gains in India.

· DTAA Exemption Across Key Jurisdictions

According to the Double Taxation Avoidance Agreement (DTAA), capital gains earned by NRIs from Indian mutual funds are not taxable in India if they are residents of certain countries. For instance, NRIs residing in the UAE, Saudi Arabia, and Singapore are not subject to tax in India under Article 13(5) of the DTAA, although in Singapore’s case, the exemption applies only if the gains are remitted to a Singapore bank account. Similarly, NRIs from Kenya, Malaysia, Qatar, and Kuwait benefit from tax exemption under Article 13(6), while those in Oman are exempt under Article 15(5). Thus, capital gains are completely tax-free for NRIs in countries like UAE and Singapore, provided the remittance condition for Singapore is met.

• UAE:

  • Not taxable in India

  • DTAA Clause: Article 13(5)

• Saudi Arabia:

  • Not taxable in India

  • DTAA Clause: Article 13(5)

• Singapore:

  • Not taxable in India (only if gains are remitted to a Singapore bank account)

  • DTAA Clause: Article 13(5)

• Kenya:

  • Not taxable in India

  • DTAA Clause: Article 13(6)

• Malaysia:

  • Not taxable in India

  • DTAA Clause: Article 13(6)

• Oman:

  • Not taxable in India

  • DTAA Clause: Article 15(5)

• Qatar:

  • Not taxable in India

  • DTAA Clause: Article 13(6)

• Kuwait:

  • Not taxable in India

  • DTAA Clause: Article 13(6)

Note:
For NRIs in UAE and Singapore, capital gains from Indian mutual funds are completely tax-free. However, Singapore-based NRIs must ensure the gains are remitted to a Singapore bank account to claim this exemption.

· Key Case Laws Supporting Capital Gains Exemption

The judiciary has upheld the capital gains tax exemption under DTAA in multiple rulings:

1. Anushka Sanjay Shah vs. ITO – ITAT Mumbai (2025) ITA.174/MUM/2025

ITAT Held:

✅ Mutual fund units are not shares (per Companies Act & SEBI rules)
✅ Article 13(4) applies only to shares in Indian companies
✅ Article 13(5) applies to all other property – includes MF units

Key Takeaway:

Capital gains from sale of mutual fund units by a Singapore resident are exempt from Indian tax under Article 13(5) of the India–Singapore DTAA.

2. Deputy Commissioner of Income-tax (International Taxation), Kochi vs. K.E. Faizal [2019] 108 taxmann.com 545 (Cochin - Trib.)
   Since Article 13(4) of India-UAE Tax Treaty covers within its purview capital gains arising from transfer of 'shares', it could not be applied to units of mutual funds sold by assessee unless same qualify as shares for purpose of Tax Treaty

3. Saket Kanoi vs. DCIT - [2024] 168 taxmann.com 418 (Delhi-Trib.)
   Right to Tax in UAE Sufficient to Claim Benefit of India-UAE DTAA; No Need to Prove Actual Payment of Tax.

4. Blackstone Capital Partners (Singapore) vs. ACIT - Delhi HC
   Court is of the view that the respondent-revenue cannot go behind the TRC issued by the other tax jurisdiction as the same is sufficient evidence to claim treaty eligibility, residence status, legal ownership and accordingly there is no capital gain earned by the petitioner liable to tax in India.

5. ITAT Mumbai ruling in Vanguard Emerging Markets Stock Index Fund v. ACIT (ITA No. 4657/Mum/2023, dated 18 March 2025)
   Right to Tax the Rights Entitlement (RE) lies with resident country only

· Documents Required for Claiming DTAA Benefits

To avail of the capital gains exemption, NRIs must submit:

• Tax Residency Certificate (TRC) from their country of residence.

• Form 10F on the Indian Income Tax portal.

• Declaration of beneficial ownership and remittance proof (for Singapore-based NRIs).

· TDS Rules for NRIs Investing in Mutual Funds

While capital gains are exempt, TDS (Tax Deducted at Source) is still applicable on certain types of income:

• Equity Mutual Funds: 12.50% TDS on Long-Term Capital Gains (LTCG) above ₹12.50 lakh (adjustable with Tax Liability, if DTAA applies).

• Debt Mutual Funds: 20% TDS on Long-Term Capital Gains (adjustable with Tax Liability, if DTAA applies).

• Dividend Income: Taxed at 10% + surcharge + cess.

NRIs can reach out their particular AMCs before the redemption so that they will not deduct the TDS on the said transaction. However, NRIs can even file a refund claim or adjust it with their Tax Liability for the deducted TDS by applying for DTAA benefits while filing their Income Tax Return (ITR) in India.

· Remittance Rules for NRIs

• Repatriation Allowed: Mutual fund redemption proceeds can be credited to an NRE account, making the funds freely repatriable.

• No Limit on Repatriation: As per RBI guidelines, NRIs can repatriate principal and capital gains without restrictions. However, there’s a limit of USD 1 Mn, if repatriated through NRO Account.

· Conclusion

For NRIs in UAE, Singapore and other above-mentioned countries, investing in Indian mutual funds comes with a major advantage – tax-free capital gains. With proper documentation, they can fully optimize their investments under DTAA provisions. It is advisable for NRIs to consult tax experts to ensure compliance and maximize benefits.