NRI Mutual Fund Tax 2024: TDS and DTAA Relief to Optimise Returns

An NRI in Dubai and a cousin in Delhi can buy the same equity mutual fund. Both can invest the same amount on the same day. Even with the same profit after 10 years, the NRI may receive less upfront. The main reason is automatic Tax Deducted at Source (TDS) and how relief is claimed later.

For NRIs, mutual fund returns can face three separate tax touchpoints in India. Capital gains tax applies when units are sold. Dividend income is taxed for dividend-payout options. TDS under Section 195 is also deducted by the fund house. This happens before money reaches the NRO account, which affects cash received on redemption.

After the July 2024 Budget changes, equity mutual funds use a clear holding rule. Units held over 12 months count as long-term. Long-term gains face 12.5% tax on gains above ₹1.25 lakh a year. Units held less than 12 months are short-term. Short-term gains on equity funds are taxed at 20%.

Debt and other non-equity mutual funds follow different rules. These funds no longer get indexation benefits. Gains are taxed at slab rates, based on the investor’s applicable income tax slab. This can change the final tax cost for NRIs and residents. It also makes fund type and holding period important when planning redemptions.

Capital gains tax rates are now broadly similar for residents and NRIs. The difference is how the tax is collected. A resident usually pays capital gains tax through self-assessment or advance tax. TDS is typically not deducted at mutual fund redemption. For an NRI, TDS is deducted on every redemption at the applicable rate.

The NRI TDS approach has no minimum threshold for redemptions. This means tax can be withheld even on smaller gains. Dividend TDS also differs sharply. For NRIs, dividend TDS is 20% from the first rupee. For residents, dividend TDS is 10%, and only after ₹10,000 in a year.

NRI mutual fund tax: DTAA and double taxation risk

India taxes mutual fund gains because the investment is in India. Many NRI resident countries also tax worldwide income. This can lead to the same gain being taxed twice. Double Taxation Avoidance Agreements (DTAA) exist to reduce this risk. They define taxing rights and often allow a foreign tax credit for taxes paid.

India has DTAAs with roughly 90 countries. These include the US, UK, UAE, Singapore, Canada and Australia. Some treaties may allocate taxing rights mainly to the country of residence. India-Singapore can do this under certain conditions. Tribunal rulings also supported UAE-resident NRIs claiming exemption with correct documentation.

The cash-flow gap is easier to see with an example. Consider ₹10 lakh invested in an equity mutual fund for 10 years. Assume it grows to ₹35 lakh, creating ₹25 lakh profit. A resident receives the redemption amount without TDS. An NRI may see TDS deducted first, then needs an ITR to reconcile liability.

Case	Investment	Value after 10 years	Profit	What happens at redemption
Resident Indian	₹10 lakh	₹35 lakh	₹25 lakh	No TDS; LTCG tax of 12.5% on gains above ₹1.25 lakh, about ₹2.97 lakh, paid via ITR
NRI (US-based, no DTAA relief claimed)	₹10 lakh	₹35 lakh	₹25 lakh	TDS at 12.5% plus applicable surcharge and cess is deducted before credit; ITR and US reporting follow

NRI mutual fund tax: steps that can reduce TDS impact

Planning before redemption can reduce excess TDS. NRIs can arrange a Tax Residency Certificate (TRC) from the resident country. Form 10F should also be filed. These documents help apply DTAA benefits correctly. When accepted, this can prevent higher withholding at source. It can also reduce the need to claim refunds later.

If the actual tax liability is lower than standard TDS, Form 13 can help. It is a Lower or Nil Deduction Certificate request. Redemptions can also be staggered across financial years. This helps use the ₹1.25 lakh annual long-term gain exemption on equity funds each year. It can reduce taxable gains in one year.

Dividend options can create yearly tax events, including TDS. Growth plans shift tax to the redemption date. This can give more control over timing of gains. Where eligible, gains may be reinvested under Sections 54EC or 54F. Filing an Indian ITR remains important, since it is often needed for any refund.

NRIs are not necessarily charged higher capital gains tax rates than residents. The key difference is upfront withholding through TDS and later recovery through returns. DTAA relief can also decide whether the same gain is taxed twice. Using a TRC, Form 10F, and Form 13 can improve cash flow. It can also align tax paid with actual liability.