How Indian mutual fund capital gains may be taxed for NRIs

Rohan: Veda, I just sold my mutual fund units. The app says I made a profit, but it also deducted tax before sending me the money. Is this a fine?

Veda: No fine yet, Rohan. That is not a fine. That is TDS. Tax Deducted at Source. It is the government’s way of saying, “We will see you later.”

Rohan: Later? I am in Dubai. Why is India seeing me later?

Veda: Because the money came from India. And India wants its share. But first, we need to know who you are to them.

Rohan is a software engineer living in Dubai for the last four years. He keeps his savings in India. He sold a chunk of his equity mutual fund to buy a car. Now the taxman is knocking. He is not alone. Every NRI who sells an Indian asset faces this same question. The good news is that the rules are not magic. They are just rules, and we can read them.

Step one: Are you a resident or an NRI?

Rohan: I have been in Dubai for four years. I visit India for two weeks every year. Am I an NRI?

Veda: Most likely yes. The test is simple. If you are in India for 182 days or more in a year, you are a resident. If you are in India for 60 days or more in a year and 365 days or more in the last four years, you are a resident. Otherwise, you are an NRI.

Rohan: So I am an NRI. Does that mean I pay more tax?

Veda: Not necessarily more. It means your income is treated differently. An NRI is taxed only on income that is earned in India. Your Dubai salary is safe. Your Indian mutual fund profit is not.

Rohan: Okay. So I pay tax on the fund profit. What rate?

Veda: That depends on the fund. This is where most people get confused. Equity funds and debt funds are taxed like two different species of animal.

Step two: Equity or Debt?

Rohan: I have both. My SIP is in an equity fund. My emergency money is in a debt fund.

Veda: Then you have two different tax bills. Equity funds are taxed on the profit from the sale of shares. Debt funds are taxed like your salary.

Rohan: Like my salary? So slab rates?

Veda: Yes. Since the 2023 budget, debt mutual funds no longer get the indexation benefit. The profit is added to your total income and taxed at your slab rate. This applies to NRIs too. It is not a flat rate. It is whatever your slab is.

Rohan: And the equity fund?

Veda: Equity funds have their own flat rates. But we must check the holding period. This is the most common mistake I see.

Rohan: So the table is my cheat sheet?

Veda: It is a starting point. But remember, Rohan, tax rates and rules change with every Union Budget. Always verify the current position at the official sources before you file.

Step three: Short term or Long term?

Rohan: I held my equity fund for 18 months. So long term?

Veda: Yes. For equity, the line is 12 months. Before 12 months, it is short term. After 12 months, it is long term.

Rohan: What is the rate for long term?

Veda: The standard rate for long-term equity gains is 10% on profits above ₹1 lakh in a financial year. There is no indexation for equity. Short-term equity gains are typically taxed at 15%. Again, check the latest budget notification.

Rohan: And the ₹1 lakh? Do I get that?

Veda: Yes. The ₹1 lakh exemption applies to NRIs too. If your long-term equity profit is below ₹1 lakh, you pay nothing on it. If it is above, you pay 10% on the amount above ₹1 lakh.

Rohan: What about the basic exemption limit? Like the ₹2.5 lakh everyone talks about?

Veda: NRIs are eligible for the basic exemption limit. So if your total Indian income is below the limit, you may not pay tax. But the TDS has already been deducted. You will need to file a return to get that money back.

Rohan: File a return? I thought NRIs did not need to file.

Veda: That is a myth. If tax was deducted, you usually need to file to claim a refund. If you do not file, the money stays with the government. That is a free gift you do not want to give.

Step four: TDS and getting the money back

Rohan: So the app deducted tax. Can I stop that?

Veda: You can apply for a lower TDS certificate under Section 195 if your estimated tax is lower. But this takes time. For most people, it is easier to pay the tax and claim a refund later.

Rohan: What about repatriation? Can I bring the money to Dubai?

Veda: That depends on the account. If the money is in an NRE account, it is fully repatriable. If it is in an NRO account, there are limits. You can repatriate up to $1 million per financial year from an NRO account, subject to taxes and documentation.

Rohan: Documentation? I thought money was money.

Veda: In India, money is paperwork. You need the sale statement, the tax payment proof, and the bank certificate. FEMA rules are strict. Do not try to move money through informal channels. That is how people get into trouble.

Rohan: Okay. So I pay the tax, file the return, and keep the papers. Is there anything else?

Veda: One more thing. Check if India has a Double Taxation Avoidance Agreement with your country. If you already paid tax in Dubai on the same income, you might get a credit. But you need to prove it.

Before you sell: A quick checklist

• Confirm your residency status for the financial year.
• Identify whether the fund is equity-oriented or debt-oriented.
• Check the exact holding period from the date of purchase.
• Calculate your total capital gains for the financial year.
• Check if TDS was deducted on the transaction.
• Verify the current tax rates in the latest Union Budget.
• Keep all sale statements and tax payment proofs.
• Check if a Double Taxation Avoidance Agreement applies.

Common pitfalls to avoid

Rohan: What usually goes wrong?

Veda: Three things. First, people assume NRE accounts are tax-free. The account is tax-free, but the income earned in it is not. Second, people mix up equity and debt funds. A balanced advantage fund may be equity-oriented, but a hybrid fund may not be. Check the scheme’s classification. Third, people forget to file the return. If tax was deducted and you do not file, you lose the refund.

Rohan: I thought I was being smart by not filing.

Veda: You were being lazy. Filing is free and it protects you. It also builds a clean tax history for your future loans and applications.

FAQs

1. Do NRIs get the basic exemption limit?

Veda: Yes. NRIs are eligible for the basic exemption limit just like residents. If your total Indian income is below the limit, no tax is due. But you may still need to file a return to claim a refund of TDS.

2. Can I avoid TDS on capital gains?

Veda: You can apply for a lower TDS certificate if your estimated tax liability is lower. However, this requires approval from the tax officer. For most small investors, paying the TDS and claiming a refund is simpler.

3. What happens if I hold a debt fund for more than 36 months?

Veda: Nothing special. Since the 2023 budget, debt funds are taxed at slab rates regardless of the holding period. The 36-month indexation benefit has been removed. Do not plan your exit based on old rules.

Rohan: Veda, I feel less panicked now.

Veda: Good. Tax is not a monster. It is just math. Do the math, keep the papers, and file the return. If you are unsure, talk to a qualified professional. This conversation is for education, not advice.

Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws and rates change frequently. Please verify the current position with the official sources below or consult a qualified Chartered Accountant before making financial decisions.

References

• Income Tax Department of India
• Securities and Exchange Board of India
• Reserve Bank of India