Capital Gains Exemption on Indian Mutual Funds for NRIs: A DTAA-Based Advantage Explained

Non-Resident Indians (NRIs) across the world have always shown a strong interest in investing in India’s financial markets, particularly mutual funds. However, taxation on capital gains often becomes a point of confusion. Recent judicial pronouncements by the Income Tax Appellate Tribunal (ITAT) have brought significant clarity for NRIs residing in countries that enjoy favourable Double Taxation Avoidance Agreements (DTAAs) with India. These rulings have reaffirmed that, in certain jurisdictions, capital gains from Indian mutual funds may be taxable only in the country of residence and not in India. It says an individual can choose the more beneficial provision — either the domestic tax rules under the Income-tax Act or the relevant DTAA — and apply whichever is more favourable to their situation.

When NRIs sell mutual funds in India, the gain is usually taxed as a capital gain under the Income-tax Act, 1961. For equity-oriented mutual funds held for more than twelve months, the gain qualifies as long-term and is taxed at 12.5% (above ₹1.25 lakhs). For short-term holdings, the rate is 20%. Fund houses deducts tax at source (TDS) before remitting the proceeds to NRI investors.

However, this domestic law is subject to the provisions of India’s DTAAs with other countries. If the treaty gives exclusive taxing rights to the country of residence, India cannot impose tax on the same income. This is the key to the recent developments that benefit thousands of NRIs.

Two recent ITAT decisions have strengthened the interpretation that capital gains on mutual funds can be exempt in India under DTAA provisions.

In Saket Kanoi (UAE) vs. DCIT [2024] 168 taxmann.com 418 (Delhi ITAT, 23 October 2024), the Tribunal held that capital gains arising to a UAE-based NRI from sale of Indian mutual funds are not taxable in India, since Article 13 of the India-UAE DTAA does not assign taxing rights on such movable property to India. Instead, the residual clause under Article 13(5) provides that such gains shall be taxable only in the country of residence.

Similarly, in Anushka Sanjay Shah (Singapore) vs. ITO (Mumbai ITAT, 26 March 2025), the Tribunal concluded that mutual fund units are movable capital assets, and under Article 13(4) of the India-Singapore DTAA, the right to tax such capital gains rests exclusively with Singapore. Consequently, the Indian tax authorities cannot tax such income again in India.

These two decisions, taken together, provide a persuasive precedent and cushion for NRIs residing in other countries where similar treaty language exists.

Most DTAAs that India has signed with countries like the United Arab Emirates, Singapore, Oman, Qatar, Saudi Arabia, Kuwait, Malaysia, France, and Germany follow a similar structure. Article 13 of these treaties deals with “Capital Gains.” Typically, clauses 1 to 4 relate to immovable property, business assets, or shares in companies deriving value from immovable property. Mutual funds, however, do not fall into these categories.

Therefore, the residual clause – becomes relevant. This clause generally states that capital gains from the alienation of any property other than those mentioned in earlier paragraphs shall be taxable only in the Contracting State of which the alienator is a resident. In practical terms, this means that an NRI who is a resident of such a country will pay tax only in that country and not in India. If that country, such as the UAE or Singapore, does not levy capital gains tax, the gain becomes effectively tax-free.

NRIs residing in the following jurisdictions can typically benefit from this DTAA-based relief, subject to documentary compliance and absence of a Permanent Establishment (PE) in India:

• United Arab Emirates
• Singapore
• Oman
• Qatar
• Saudi Arabia
• Kuwait
• Malaysia
• France
• Germany

Conversely, residents of countries such as the United States, the United Kingdom, or Canada and other countries where DTAA does exist, but cannot avail of this exemption since those treaties either assign taxing rights to India or lack a residual clause.

Claiming this DTAA benefit is not automatic. The Income-tax Department requires proof of residence and compliance with treaty conditions. The following documents are essential:

1. Tax Residency Certificate (TRC) – Issued by the foreign tax authority (for example, the Ministry of Finance in the UAE). It certifies that the individual is a resident of that country for tax purposes during a specified financial year.
2. Form 10F – A short self-declaration available on the Indian income-tax portal, confirming details such as nationality, tax identification number, and absence of a permanent establishment in India.
3. Self-Declaration Letter – Addressed to the mutual fund company or its registrar (CAMS or KFintech), declaring that you are a resident of the treaty country and are claiming DTAA benefits under Article 13.
4. Submission to AMC or Registrar – Providing the above documents before redemption ensures that the fund house does not deduct TDS.
5. ITR Filing in India – Even if capital gains are exempt, filing an ITR (Form ITR-2) is advisable, especially where TDS has been deducted. The return should report the transaction under “Exempt Income” and reference the applicable treaty article.

For NRIs in the UAE, the process of obtaining a TRC involves registering on the EmaraTax portal of the UAE Ministry of Finance, uploading documents such as passport, Emirates ID, visa, bank statements, and paying the applicable fees (AED 50 for pre-approval and AED 1,000 for issuance). Other countries have similar procedures through their local tax authorities. Country like Singapore it’s called ‘Certificate of Residence’ which can be obtained from IRAS. They don’t charge any fees to issue.

Consider an NRI resident in Singapore who redeems Indian mutual fund units resulting in long-term capital gains of ₹10,00,000. Under Indian domestic law, this would attract tax of ₹1,09,375. However, under Article 13(4) of the India-Singapore DTAA, the taxing right rests solely with Singapore. Since Singapore does not levy tax on such capital gains, the NRI’s effective tax liability becomes nil. If TDS has been deducted in India, the NRI can claim a full refund through ITR filing.

NRIs planning to redeem their mutual funds should obtain the Tax Residency Certificate and file Form 10F before the redemption takes place. Submitting these documents to the mutual fund registrar in advance ensures that TDS is not deducted at all, eliminating the need to later claim a refund. It is also important to maintain investment records, proof of foreign residency, and a valid NRE or NRO account trail to demonstrate genuine eligibility.

The ITAT rulings in Saket Kanoi (UAE) and Anushka Sanjay Shah (Singapore) have reaffirmed a long-standing but often under-utilized provision under India’s DTAAs. NRIs residing in countries where the treaty grants exclusive taxing rights on capital gains to the country of residence can now confidently claim exemption from Indian capital gains tax on mutual fund redemptions.

For NRIs, this opens a powerful opportunity to structure Indian investments efficiently and legally while staying fully compliant. Obtaining the right documentation—Tax Residency Certificate, Form 10F, and self-declaration—is essential to secure the benefit. Done correctly, this can result in significant tax savings and smoother repatriation of funds, truly reflecting the spirit of India’s DTAA network: preventing double taxation, not creating double trouble.