Decoding the ITAT Rulings: A Turning Point for NRIs Claiming Capital Gains Exemption on Indian Mutual Funds

Two recent decisions of the Income Tax Appellate Tribunal (ITAT) — Saket Kanoi (UAE) vs DCIT (Delhi ITAT, October 2024) and Anushka Sanjay Shah (Singapore) vs ITO (Mumbai ITAT, March 2025) — have brought long-awaited clarity to the taxation of capital gains earned by Non-Resident Indians (NRIs) from Indian mutual funds. Both rulings reaffirm that where India’s Double Taxation Avoidance Agreement (DTAA) assigns taxing rights exclusively to the country of residence, India cannot impose capital gains tax — even if that country does not itself levy tax on such income.

These landmark pronouncements are of far-reaching significance for NRIs residing in the UAE, Singapore, Oman, Qatar, Saudi Arabia, Kuwait, Malaysia, France, Germany, and similar treaty jurisdictions.

The fundamental question in both cases was simple but critical:
Can India tax capital gains arising to an NRI from the sale or redemption of Indian mutual fund units when the relevant DTAA provides that such gains are taxable only in the taxpayer’s country of residence?

In both cases, the taxpayers — residents of UAE and Singapore respectively — contended that Article 13 of the respective DTAAs allocates taxing rights exclusively to their country of residence. The Assessing Officers, however, argued that since mutual fund units derive value from assets located in India, India should retain taxing rights.

The Tribunals ruled decisively in favour of the taxpayers, making several important observations that now form the cornerstone of NRI tax interpretation.

The ITAT held that mutual fund units are trust securities and not equity shares. Under the Companies Act and SEBI Regulations, mutual funds in India are set up as trusts — not as companies. Consequently, the articles of DTAAs that deal with shares of Indian companies do not apply. Instead, the residual article (usually Article 13(5)) governs such gains, allocating taxing rights solely to the country of residence.

This reasoning was consistent across both rulings and relied on earlier precedents such as Satish Beharilal Raheja (Mum ITAT, 2013) and K.E. Faizal (Cochin ITAT, 2019).

Both rulings confirmed that since mutual fund units are not covered under the preceding clauses of Article 13, the residual clause becomes operative. Under this clause, capital gains on “any other property” are taxable only in the state of residence. For residents of the UAE and Singapore — where such income is either untaxed or taxed differently — this means complete exemption from Indian capital gains tax.

The Tribunals reiterated that Section 90(2) of the Income-tax Act gives taxpayers the right to choose whichever provision — domestic law or treaty — is more beneficial. Hence, if the DTAA exempts the income, India cannot tax it under Section 9(1)(i) or any domestic deeming provision.

One of the most significant clarifications emerging from Saket Kanoi (UAE) is the interpretation of the phrase “liable to tax.” The Revenue had contended that since the UAE does not levy personal income tax, its residents are not “liable to tax” and therefore ineligible for DTAA benefits. The Tribunal rejected this argument, holding that “liable to tax” refers to the legal capacity or right of a country to tax its residents, not the actual payment of tax.

This reasoning drew support from earlier Indian and foreign authorities, including Azadi Bachao Andolan (Supreme Court), Green Emirates Shipping, and the Canadian case John N. Gladden v. Her Majesty the Queen, as well as commentary from Klaus Vogel on Double Taxation Conventions. The outcome: residents of no-tax jurisdictions such as the UAE, Qatar, or Kuwait remain fully entitled to treaty benefits.

The Mumbai ITAT in Anushka Sanjay Shah specifically noted that the wording of Article 13(5) in the India–Singapore DTAA is identical to that in the India–UAE and India–Swiss treaties. Therefore, its interpretation should remain uniform across all similar DTAAs. This brings welcome consistency for NRIs residing in multiple jurisdictions, ensuring predictability and fairness in cross-border tax treatment.

1. Capital gains on Indian mutual funds may be exempt in India if you are tax-resident in a country whose DTAA assigns taxing rights solely to the country of residence.
2. Countries benefitting from this interpretation include the UAE, Singapore, Oman, Qatar, Saudi Arabia, Kuwait, Malaysia, France, Germany, and Switzerland.
3. Mutual fund units are not “shares”, and hence fall under the residual clause (Article 13(5) or equivalent).
4. A valid Tax Residency Certificate (TRC) and Form 10F are mandatory to claim this benefit.
5. Section 90(2) allows choosing the more beneficial provision — the treaty prevails where it offers relief.
6. “Liable to tax” does not mean actually taxed — residence status under treaty suffices for benefit.
7. Uniform interpretation across DTAAs strengthens the legal position for NRIs globally.

These rulings provide both legal clarity and administrative relief. Fund houses and tax filers can now rely on judicial precedent to process redemptions and returns where treaty benefits are claimed. NRIs, especially in zero-tax or territorial-tax jurisdictions, can plan their mutual fund investments with greater confidence.

Importantly, these cases reinforce India’s commitment to international tax principles — ensuring that DTAAs are interpreted not as tax-avoidance tools but as instruments for tax neutrality and cross-border fairness.

The ITAT’s decisions in Saket Kanoi (UAE) and Anushka Sanjay Shah (Singapore) collectively mark a defining moment in India’s NRI taxation landscape. They align India’s interpretation of capital gains and residency-based relief with global tax jurisprudence. For NRIs, this translates into both opportunity and responsibility — to structure investments transparently, maintain proper documentation, and assert treaty benefits through lawful means.

In essence, these rulings reaffirm that the true spirit of a DTAA lies in preventing double taxation, not in creating double jeopardy.