Tax implication on Mutual Fund investments by NRI's

Tax implication on Mutual Fund investments by NRI's

Long-term capital gains can arise at the time of redemption of their equity oriented mutual funds held for more than 12 months. They are now exempt from paying any long term capital gains tax. This is, however, applicable only in such cases where NRI’s have bought equity funds from October 2004 onwards. Hence, in such cases, all remittances made by mutual funds to NRI’s to their NRE/NRO accounts have to be made by the respective funds without any tax deduction in case of equity schemes. Mutual fund schemes invest at least 65% of their funds in shares are considered to be equity schemes for this purpose.

However, in the case of equity funds bought by NRI’s since October 2004, the short-term capital gains arising to NRI’s out of equity funds attract a flat 10% tax. This is against the earlier methodology of clubbing such short term capital gains arising to NRIs out of equity funds with other tax liabilities and taxing the same at applicable tax rates for the aggregate income.

In case of capital gains arising to NRI’s out of debt funds or schemes other than equity funds, purchased during or after October 2004, the long term capital gains arising to NRI’s are now subject to a flat rate of tax of 10%. This is against 20% at which such long term gains were taxable in case of NRI’s earlier. However, in case of capital gains arising to NRI’s out of non-equity funds, short-term tax capital gains are subject to a tax rate of 20%. The same was also taxed at a higher rate earlier. All loads applicable to such schemes have to be borne by the NRI too.

In case of dividend, however, the situation is much simpler. The mutual fund makes no distinction of NRI/resident. In both of these cases, the dividend distribution from funds is tax-free in the hands of the receiver. Thus, for NRI’s, there is no tax deduction at source in equity funds or non-equity funds.

Mutual fund is a favoured avenue for investment for NRIs since entry and exit is possible at a quick notice unlike property
Long-term capital gains can arise at the time of redemption of equityoriented mutual funds held for over 12 months

In the case of equity funds bought since Oct ’04, the short-term capital gains arising out of equity funds attract a flat 10% tax

In case of capital gains arising to NRIs from non-equity funds, shortterm tax capital gains are subject to a tax rate of 20%

good guidance for those who need the advice on taxation