If you’re an NRI investing in Indian mutual funds, here’s a question you’ve likely asked:
“Am I liable to pay capital gains tax in India when I sell my mutual funds?”
This question has gained renewed attention thanks to a landmark ruling by the Income Tax Appellate Tribunal (ITAT), Mumbai, which held that NRIs residing in countries with specific DTAAs may not be liable to pay capital gains tax in India — yes, even on large amounts.
Let’s dive into the implications of this, who it benefits, and how you can take advantage of it legally and ethically.
The ITAT Ruling That Started It All
In 2024, the Mumbai ITAT ruled in favor of a Singapore-based NRI taxpayer (ITA No. 1763/Mum/2023), stating that:
“Capital gains arising from the sale of mutual funds in India are not taxable in India if the DTAA with the NRI’s resident country grants exclusive taxing rights to that country.“
The tribunal emphasized that mutual fund units are movable property, and under Article 13 of the India-Singapore DTAA, the right to tax capital gains on such assets rests solely with Singapore.
Real-Life Example: ₹3.39 Cr Capital Gains, Zero Tax
Take this case, illustrated by Mint:
Mr. A, an NRI in the UAE, invests ₹50,000/month in Indian equity mutual funds for 20 years.
- Invested Capital: ₹1.2 crore
- Value After 20 Years (Assumed 12% CAGR): ₹4.59 crore
- Capital Gains: ₹3.39 crore
- Tax Paid in India (if DTAA conditions met): ₹0
Why zero tax? Because:
- The India–UAE DTAA has a residual clause assigning taxing rights on such capital gains to the country of residence.
- The UAE does not levy capital gains tax on mutual funds.
This combination results in a completely tax-free outcome in India, subject to meeting all necessary conditions.
Key Conditions to Qualify for Tax Exemption
It’s not automatic — NRIs need to meet specific compliance criteria:
- Submit a valid Tax Residency Certificate (TRC) from the foreign country (e.g., UAE or Singapore)
- Submit Form 10F if TRC lacks required details (such as tax ID, address, residency period, etc.)
- Investment must be made from NRE/NRO accounts
- NRI must satisfy the “principal purpose test”, i.e., they must not have moved countries solely to avoid tax
- Comply with India’s Income Tax Act and the DTAA provisions of the resident country
Note: If it’s proven that the relocation was primarily for tax avoidance, exemption can be denied.
Countries Where NRIs May Be Eligible for Capital Gains Tax Exemption (MFs)
Based on India’s Double Tax Avoidance Agreements and tax policies of partner countries, NRIs residing in the following countries may benefit from capital gains tax exemption in India on sale of mutual fund units:
Countries with DTAA residual clause + no capital gains tax on MFs:
| Country | DTAA Residual Clause | Capital Gains Tax (MFs) | DTAA Article |
|---|---|---|---|
| UAE | Yes | No | Article 13(5) |
| Singapore | Yes | No | Article 13(4) |
| Mauritius | Yes | No | Article 13 |
| Malaysia | Yes | No | Article 13 |
| Oman | Yes | No | Article 13 |
| Qatar | Yes | No | Article 13 |
| Saudi Arabia | Yes | No | Article 13 |
| Kuwait | Yes | No | Article 13 |
| Bahrain | Yes | No | Article 13 |
These countries generally do not tax capital gains on Indian mutual funds, and their respective DTAAs with India allow taxation rights to reside solely with the country of residence, thanks to the residual clause.
Countries where capital gains on MFs are still taxable in India:
| Country | Reason |
|---|---|
| United States | Capital gains taxed in both countries; India retains taxing rights |
| United Kingdom | No residual clause in DTAA |
| Canada | Mutual fund capital gains taxable in India |
Even if you reside in a country with a DTAA, you must check the specific language of Article 13 of that treaty to determine whether capital gains on mutual funds are taxable in India or not.
What is a Tax Residency Certificate (TRC)?
A TRC is an official document issued by your resident country’s tax authority, proving your tax residency for a particular financial year.
To claim DTAA benefits, an NRI must:
- Obtain and submit a TRC
- Include Form 10F (mandatory unless TRC contains all required details)
- Maintain records proving genuine residence and investment source
Details typically required on TRC/Form 10F:
- Tax identification number (TIN)
- Residential address abroad
- Period of residency
- Nationality
Status (individual/company)
Final Thoughts
This ruling is a game-changer for NRIs looking to optimize their Indian investments while staying compliant. Here’s your quick takeaway:
- You may not owe capital gains tax in India on MF sales if you’re in a country like UAE, Singapore, or Mauritius
- You must submit proper documentation (TRC + Form 10F)
Always consult a cross-border tax expert to ensure eligibility and compliance
NRI Tip
Before redeeming your mutual funds, check your TRC status and DTAA benefits — you could legally save lakhs (or crores) in taxes!
Author’s Note
Need help assessing whether you’re eligible under DTAA for capital gains exemption? I specialize in NRI tax matters — feel free to connect for a one-on-one advisory.
