How NRIs Can Claim DTAA Exemption on Indian Mutual Fund Capital Gains

Potentially, yes. Under Indian domestic law, capital gains from Indian mutual-fund units can be taxable
in India. However, a qualifying non-resident may apply the more beneficial provisions of an applicable
DTAA.

• Immovable property;
• Assets of a permanent establishment or fixed base;
• Ships and aircraft;
• Shares of a company; and
• Property not covered by the preceding clauses.

The final category is commonly called the residual capital-gains clause. In the treaties discussed in this
article, it generally gives the exclusive taxing right over qualifying residual gains to the country in which
the seller is a treaty resident.

Indian mutual funds are ordinarily constituted as trusts. Their investors hold units; they do not hold
shares in the capital of an Indian company merely because the scheme invests in Indian shares. Indian
securities law also recognises shares and mutual-fund units as distinct securities. This distinction
supports the position that gains from mutual-fund units fall under the residual clause rather than the
treaty clause for shares of an Indian company.

The Delhi Bench of the Income Tax Appellate Tribunal in *Saket Kanoi v. ACIT*, ITA No. 3243/Del/2023,
order dated 23 October 2024, accepted treaty entitlement for a UAE resident in relation to debt-mutual-
fund gains. The order also discusses K.E. Faizal, where units of equity-oriented mutual funds were held
to be different from shares for purposes of the India–UAE DTAA.

In Anushka Sanjay Shah v. ITO (International Taxation), IT(IT)A No. 174/Mum/2025, dated 26 March
2025, the Mumbai Tribunal applied the residual clause in Article 13(5) of the India–Singapore DTAA to
gains from equity- and debt-oriented mutual-fund units. The decision is reported as [2025] 173
taxmann.com 570 (Mumbai – Trib.).

These are important authorities, but a Tribunal decision does not turn every redemption by every NRI
into an automatic exemption. The applicable treaty and the taxpayer’s own eligibility must still be
established.

The treaty analysis normally proceeds as follows:
1. The investor owns units issued under an Indian mutual-fund scheme.
2. A mutual-fund unit represents an interest in a scheme or trust; it is not a share in the capital of an
Indian company.
3. The specific clauses concerning immovable property, permanent-establishment assets, ships,
aircraft and company shares therefore may not cover the unit.
4. The gain consequently falls for consideration under the residual clause for “any property other
than” property covered by the earlier paragraphs.
5. If that clause provides that the gain “shall be taxable only” in the seller’s country of residence,
India’s domestic taxing right is restricted for an eligible treaty resident.

The character of the unit should not ordinarily change merely because the underlying scheme invests in
shares. Nevertheless, fund structure, legal ownership and the exact treaty language must be checked.
Direct ownership of Indian company shares is a different asset and may be taxable in India under the
shares clause.

The following table is a screening guide, not a substitute for an individual opinion:

The treaty language can be checked in the Income Tax Department’s official texts for the UAE, Saudi
Arabia, Oman, Qatar, Kuwait and Singapore.

Treaty residence is different from merely holding a residence visa, work permit or local identity card.
The investor must satisfy the residence article of the relevant agreement and obtain the TRC required by
Indian law. The principal-purpose test under an applicable Multilateral Instrument, domestic anti-abuse
provisions and the commercial substance of the arrangement must also be considered.

India and Bahrain have an agreement for the exchange of tax information, known as a TIEA. A TIEA
facilitates cooperation and exchange of information; it does not allocate taxing rights in the manner of a
comprehensive DTAA.

The Income Tax Department’s official India–Bahrain TIEA therefore does not contain a residual capital-
gains article under which a Bahrain resident can claim that Indian mutual-fund gains are taxable only in
Bahrain.

Accordingly, Bahrain-based NRIs should generally plan on the basis of Indian domestic capital-gains
provisions unless another valid treaty entitlement applies on their particular facts. They should not rely
on social-media lists describing the benefit as available throughout the Gulf.

For periods governed by the earlier Income-tax Act, 1961, non-residents furnished additional treaty
information in Form 10F.

From 1 April 2026, the Income-tax Act, 2025 and the Income-tax Rules, 2026 apply. Rule 75(1) of the
notified Rules prescribes Form 41 for information to be provided by a non-resident under section
159(8). Form 41 requires, among other details:

• The applicant’s name, address and contact information;
• PAN, if available;
• The relevant tax year and status;
• The country of residence;
• The overseas Tax Identification Number or other government identification number;
• The period covered by the residence certificate;
• The overseas address for that period; and
• An uploaded copy of the TRC.

The official Income-tax Rules, 2026 place Form 41 under Rule 75 for DTAA relief. Therefore, Form 41 is
the relevant prescribed treaty-information form for FY 2026–27/AY 2027–28. Form 10F remains
relevant to earlier financial years governed by the old law. Any portal-specific transitional instruction
subsequently issued by CBDT should, of course, be followed.

The documentation file should ordinarily contain:

• Valid TRC issued by the government or tax authority of the overseas country;
• Acknowledgement and copy of Form 41 for FY 2026–27;
• PAN and passport;
• Overseas residence visa and national identity card, where applicable;
• Travel history and Indian residential-status working;
• Overseas address proof;
• Tax Identification Number or other government identifier;
• Declaration of treaty eligibility, beneficial ownership and absence of a relevant permanent
establishment in India;
• Mutual-fund statements showing scheme, folio, purchase date, cost, units and proposed
redemption;
• Capital-gains computation for each scheme;
• Emails and acknowledgements from every fund house or registrar and transfer agent (RTA); and
• Bank statements tracing the original investment and redemption proceeds.

A TRC is essential, but it should not be treated as the entire file. The Income Tax Department’s DTAA
guidance explains the requirement to obtain a foreign TRC and furnish the prescribed additional
information.

1. Confirm Indian residential status
Calculate the investor’s days in India and apply the citizenship, Indian-income and extended-stay rules
relevant to that person. A foreign TRC does not by itself determine residential status under Indian
domestic law.

2. Establish treaty residence
Check the residence article and any tie-breaker provision. Ensure that the TRC period covers the
redemption date. A certificate for the wrong calendar year or tax period can weaken the claim.

3. Obtain the overseas TRC early
TRC applications can take time and may require immigration records, local tax registration, identification
documents, proof of residence and government fees. Start before deciding the redemption date.

4. File Form 41
Prepare Form 41 accurately and upload the TRC. The country, TIN, address and validity period must
agree with the supporting documents.

5. Review each folio and scheme
Prepare a scheme-wise schedule covering the nature of the fund, acquisition dates, cost, market value,
estimated gain, holding period, exit load and proposed redemption amount. Do not assume that all
investments have identical facts.

6. Contact every fund house or RTA
Submit the TRC, Form 41, PAN, declarations and any format required by the asset-management
company. Where holdings span several fund houses, a submission to one intermediary may not update
every folio.

7. Obtain written acceptance
Ask each fund house or RTA to confirm by email:
• that the DTAA documents have been received and recorded;
• whether further declarations are required;
• whether the treaty position will be considered at redemption; and
• whether tax will nevertheless be deducted.
An email acknowledgement is not a legal ruling on treaty eligibility, but it is valuable evidence of timely
compliance and helps avoid operational surprises.

8. Redeem only after the file is ready
Once the legal review and operational confirmation are complete, execute the proposed redemption or
switch. Retain the transaction confirmation, capital-gains statement and bank credit proof.

9. File the Indian ITR correctly
Report the transaction in the appropriate capital-gains and treaty-relief schedules of the return
prescribed for AY 2027–28. Do not simply omit the gain because it is claimed as not taxable in India.
Identify the country, treaty article and amount consistently, and reconcile the return with AIS, TIS, Form
26AS and fund-house statements.

10. Preserve the evidence
Maintain the complete file for future verification. Large treaty claims may be selected for detailed
examination even when legally valid.

An eligible NRI may evaluate redeeming appreciated mutual-fund units while treaty protection is
available and reinvesting the proceeds. The first redemption crystallises the gain. The new investment is
acquired at the fresh purchase price, creating a new cost base for a future sale.

This can be particularly relevant where the investor expects to:
• Move to Bahrain or another country without the same treaty protection;
• Return to India and become resident;
• Cease to qualify as a treaty resident;
• Be unable to obtain a TRC in a later year; or
• Face a future amendment to the treaty or domestic framework.

This is a tax-timing and risk-management strategy, not a statutory step-up or grandfathering provision.
The new cost arises because there is an actual redemption and a genuine fresh acquisition. Merely
revaluing units in a spreadsheet does not reset the tax cost.

Assume an eligible UAE treaty resident holds units of an Indian mutual fund:

Suppose the fresh units are later sold for ₹42 lakh at a time when the investor can no longer claim the
DTAA protection.

• Without the earlier redemption and reinvestment, the broad economic gain measured from the
original ₹20 lakh cost would be ₹22 lakh.
• After the genuine reinvestment at ₹35 lakh, the gain measured from the fresh cost would
ordinarily be ₹7 lakh, subject to the law applicable on the future sale.

The illustration assumes that the original ₹15 lakh gain validly receives treaty protection and that the
₹35 lakh purchase is a genuine new investment. It does not account for exit load, stamp duty, market
movement between transactions, tax in the country of residence or differences in future law.

Exit load and transaction costs

An exit load can reduce or eliminate the expected tax benefit. A switch between schemes is ordinarily
treated as a redemption followed by a purchase and can also involve costs.

Market movement

The NAV may change between redemption and reinvestment. The investor must decide whether
immediate reinvestment is commercially appropriate rather than treating the exercise as purely clerical.

Overseas taxation

“Not taxable in India” does not necessarily mean “tax-free everywhere.” Singapore or another residence
country may tax, exempt or otherwise recognise the gain under its own law.

Holding period of the fresh units

The new units have a new acquisition date. This can affect their future classification and applicable
domestic tax treatment.

Anti-abuse and substance

The transaction should have real legal and economic effect. Treaty principal-purpose provisions, GAAR
and other anti-abuse rules must be considered, particularly for artificial, circular or pre-arranged
arrangements.

Ownership and clubbing

If the investment is held in a spouse’s or family member’s name but funded by another person,
beneficial ownership and clubbing provisions require separate review.

Future residential status

Forecast the investor’s NRI, RNOR and resident-and-ordinarily-resident position rather than examining
only the current year.

Common mistakes made by NRIs

• Obtaining the TRC after the mutual-fund redemption.
• Holding a UAE visa but not satisfying treaty-residence requirements.
• Using a TRC that does not cover the date of sale.
• Filing Form 41 with information inconsistent with the TRC.
• Assuming that Form 10F continues to be the FY 2026–27 form without checking the new Rules.
• Informing only one fund house when investments are spread across several AMCs and folios.
• Relying on a telephone conversation instead of written confirmation.
• Assuming that no TDS means no ITR disclosure is required.
• Claiming treaty protection for direct company shares on the same basis as mutual-fund units.
• Ignoring overseas tax consequences.
• Treating the exemption as automatically available to every Gulf resident, including Bahrain
residents.
• Redeeming only to discover later that exit load or market movement exceeded the expected
benefit.

Submission of the TRC and Form 41 does not guarantee that every fund house will agree to apply a nil
rate at the transaction stage. The AMC or its tax adviser may follow a conservative withholding
approach.

If TDS is deducted, the investor can generally claim credit in the Indian ITR and seek a refund while
claiming the treaty position, supported by the complete documentation. The return should reconcile the
gross consideration, gain, TDS, AIS information and treaty schedule.

The refund may be processed routinely or the claim may be examined. A large refund or a difference
between the fund house’s reporting and the return can generate questions. This is why obtaining and
documenting the treaty position before redemption is preferable to treating the ITR as the first stage of
planning.

The following decisions are particularly relevant:

6. Anushka Sanjay Shah v. ITO (International Taxation), IT(IT)A No. 174/Mum/2025, dated 26 March
2025, [2025] 173 taxmann.com 570 (Mumbai – Trib.): Indian equity- and debt-mutual-fund units
were distinguished from company shares, and Article 13(5) of the India–Singapore DTAA was
applied.

7. Saket Kanoi v. ACIT, ITA No. 3243/Del/2023, dated 23 October 2024: the Delhi Tribunal accepted
the UAE resident’s treaty entitlement in a case concerning gains from debt mutual funds and
rejected the proposition that actual UAE tax payment was essential.

8. DCIT v. K.E. Faizal, ITA No. 423/Coch/2018, reported at [2019] 108 taxmann.com 545/178 ITD 383
(Cochin – Trib.): mutual-fund units were treated as distinct from shares for purposes of the
India–UAE DTAA.

9. ITO v. Satish Beharilal Raheja, reported at [2013] 37 taxmann.com 296/145 ITD 29 (Mumbai –
Trib.): a similar distinction was applied under the India–Switzerland DTAA.

10. Apollo Tyres Ltd. v. CIT, [2002] 122 Taxman 562 (Supreme Court): the Court’s reasoning on a UTI
unit not becoming a deemed share has been relied upon in the Tribunal authorities.

The decisions provide meaningful support, especially for UAE and Singapore residents. They do not
remove the need for a country-specific treaty review, and Tribunal rulings may remain subject to further
litigation or later legal change.

Zenify Consultancy Services, led by CA. Ajay R. Vaswani, provides end-to-end assistance for eligible NRI
mutual-fund DTAA claims. The engagement can include:

• Preliminary DTAA eligibility review;
• Indian residential-status assessment;
• Assistance in obtaining the overseas TRC;
• Preparation and filing of Form 41;
• Preparation of supporting declarations for fund houses and RTAs;
• Scheme-wise capital-gains review;
• Coordination and follow-up with mutual-fund houses;
• Written-documentation and email-confirmation tracking;
• Evaluation of cost-of-acquisition reset planning;
• ITR reporting and DTAA exemption claims;
• Reconciliation of AIS, TIS, Form 26AS and capital-gains statements; and
• Assistance with tax notices, mismatches and refund-related queries.

The objective is not merely to insert a treaty article into the income-tax return. It is to plan the
transaction in advance, complete the documentation, coordinate with the fund houses and preserve a
defensible file from beginning to end.