How NRIs Can Cut Tax on Mutual Fund Gains; Without Breaking a Single Rule

An NRI in Dubai and their cousin in Delhi invest in the same equity mutual fund, on the same day, for the same amount. Ten years later, both redeem at an identical profit. One walks away with noticeably less. That gap isn't bad luck - it's how Indian tax law treats non-residents differently, and it's largely avoidable once you understand the rules.

The taxes NRIs actually pay on mutual funds

NRIs investing in Indian mutual funds face three layers of tax. First, capital gains tax - short-term or long-term depending on holding period and fund type. Since the July 2024 Budget changes, equity mutual funds held over 12 months are taxed as long-term at 12.5% on gains above ₹1.25 lakh a year, while anything held less than 12 months is short-term at 20%. Debt and other non-equity funds no longer get indexation benefits and are taxed at slab rates. Second, dividend income (for dividend-payout plans) attracts tax too. Third - and this is the part that trips up most NRIs - Tax Deducted at Source (TDS) under Section 195, which is deducted automatically by the fund house before the money ever reaches an NRO account.

Is NRI taxation different from a resident Indian's?

The tax rates on capital gains are now largely the same for residents and NRIs - 12.5% long-term and 20% short-term on equity funds, for instance. The real difference is in how that tax is collected. A resident Indian's capital gains from mutual funds are usually not subject to TDS at redemption; they're reported and paid through self-assessment or advance tax when filing returns. An NRI, on the other hand, has TDS deducted at the full applicable rate on every single redemption, regardless of the amount - there's no minimum threshold. Dividend TDS is steeper too: 20% for NRIs from the first rupee, versus 10% for residents only after ₹10,000 in a year.

In short: NRIs don't necessarily pay a higher tax rate - they pay it upfront, in full, immediately, with the burden of claiming any refund later through an Indian tax return.

The double taxation risk NRIs face

India taxes mutual fund gains because the investment sits on Indian soil - it doesn't matter where the investor lives. But most NRIs' country of residence (the US, UK, Canada, Australia and others) also taxes its residents on worldwide income. Without a safeguard, the same rupee of profit could be taxed twice - once by India via TDS, and again by the country where the NRI actually lives. This is precisely the gap that Double Taxation Avoidance Agreements are designed to close.

A 10-year example: same fund, same profit, different outcomes

₹10 lakh invested in an equity mutual fund for 10 years, growing to ₹35 lakh (₹25 lakh profit)

Resident Indian: No TDS is deducted at redemption. LTCG tax of 12.5% applies on gains above ₹1.25 lakh - roughly ₹2.97 lakh in tax, paid via self-assessment while filing ITR. The full ₹35 lakh minus this liability is available to the investor almost immediately, with cash flow largely undisturbed until filing season.

NRI (say, based in the US, no DTAA relief claimed): The fund house deducts TDS at 12.5% (plus applicable surcharge and cess) on the entire eligible gain at the time of redemption - before the money is credited. The NRI receives a reduced amount instantly, must then file an Indian ITR to reconcile the actual liability, and separately report the same gain in their US tax return. Without proactively claiming a foreign tax credit or DTAA benefit, part of that ₹25 lakh profit risks being taxed twice - once via Indian TDS, once via US capital gains tax.

Same fund. Same 10 years. Same ₹25 lakh profit. The NRI's cash flow is hit harder upfront, and without action, their effective tax rate can end up meaningfully higher than the resident's.

What is a Double Taxation Avoidance Agreement (DTAA)?

A DTAA is a bilateral treaty between India and another country that decides which of the two gets the primary right to tax a specific type of income - and, where both can tax it, provides a mechanism (usually a foreign tax credit) so the same income isn't taxed twice.

India has such agreements with roughly 90 countries, including the US, UK, UAE, Singapore, Canada and Australia. For mutual fund capital gains specifically, some treaties (like India-Singapore, under certain conditions) give exclusive taxing rights to the country of residence, while others simply allow a tax credit for whatever was paid in India. Recent tribunal rulings have also reinforced that UAE-resident NRIs can claim exemption on Indian mutual fund capital gains under the India-UAE DTAA, provided the right paperwork is filed.

How NRIs can save tax at the time of withdrawal

File Form 10F and get a Tax Residency Certificate (TRC) from your country of residence before redemption - this is the document that unlocks DTAA benefits and can stop excess TDS at source rather than forcing a refund claim later.

Apply for a Lower/Nil Deduction Certificate (Form 13) from the Indian tax department if your actual liability is lower than the standard TDS rate.

Stagger redemptions across financial years to make full use of the ₹1.25 lakh annual LTCG exemption on equity funds each year, rather than booking one large gain.

Prefer growth plans over dividend plans - tax is triggered only on redemption, not annually on payouts, giving more control over timing.

Reinvest gains under Sections 54EC/54F where eligible, and always file an Indian ITR even when TDS is deducted, since it's usually the only route to a refund of excess tax withheld.

The bottom line

NRIs aren't taxed at dramatically higher rates than resident Indians on mutual fund gains anymore - but they are taxed upfront, in full, with the onus on them to claim relief. A TRC, Form 10F, the right lower-deduction certificate, and awareness of the DTAA with your country of residence can be the difference between losing a chunk of your profit to double taxation and keeping nearly all of it. The paperwork is small; the savings, over a decade of compounding, usually aren't.