Expert verified If you’re an NRI investing in India, learning about NRI taxation in mutual funds will help you make the right choices.
Learn with us the mutual fund taxation rules for NRIs, repatriation basics and how to reduce your tax liability using deductions, exemptions and other benefits.
Types of Mutual Fund Investments for NRIs
NRIs can diversify their portfolios by investing in mutual funds. Before investing, NRIs must fulfill a few prerequisites:
- NRE or NRO account: Required for mutual fund transactions.
- PAN Card: Mandatory for tax compliance in India
- KYC compliance: Includes proof of identity, address (India and overseas), and FATCA/CRS declaration.
- PIS (Portfolio Investment Scheme) approval (only for repatriable investments through NRE accounts): Issued by RBI-authorized banks.
Types of Mutual Funds that NRIs can invest in include:
1. Equity Mutual Funds
This is best for NRIs seeking high-growth investments and are comfortable with volatility.
Invest primarily in shares of publicly listed companies. This is suitable for long-term wealth creation.
Subcategories:
- Large-Cap Funds: Well-established companies with strong fundamentals
- Mid & Small-Cap Funds: Higher growth potential but also higher risk
- Sectoral/Thematic Funds: Focused on specific industries like IT, Pharma, etc.
- ELSS (Equity Linked Savings Scheme)
2. Debt Mutual Funds
Best for conservative NRIs or those with short- to medium-term financial goals.
It offers capital preservation and predictable returns.
Types:
- Liquid Funds: High liquidity, short duration.
- Short-Term Debt Funds: Suitable for 1–3-year investment horizons.
- Gilt Funds: Invest only in government bonds.
3. Hybrid Mutual Funds
These funds combine equity and debt instruments, offering a balance between risk and return.
Suited for NRIs seeking moderate risk and diversification.
Subtypes:
- Aggressive Hybrid Funds: >65% equity
- Conservative Hybrid Funds: <65% equity
- Balanced Advantage Funds (BAFs): Dynamic equity-debt allocation based on market trends
4. Fixed Maturity Plans (FMPs)
These are close-ended debt funds with a defined maturity period. Similar to fixed deposits but with potentially better post-tax returns.
Good option for NRIs who prefer predictable returns over a fixed tenure.
5. International Mutual Funds (Feeder Funds)
These invest in global equity or debt markets via feeder funds, offering exposure to U.S., European, or other international markets.
Best for NRIs seeking global diversification alongside Indian exposure.
6. Index Funds & ETFs
These are passive funds that replicate benchmark indices like Nifty 50 or Sensex.
Well suited for cost-conscious NRIs looking for market-linked returns without active fund management.
7. Solution-Oriented Funds
These are customized for specific life goals such as retirement or children’s education. Usually come with longer lock-in periods.
Types:
- Retirement Funds: Lock-in of 5 years or retirement age
- Children’s Education Funds: Lock-in until the child reaches majority
Taxes Implications & Rates for NRI Investment in Mutual Funds
For NRIs, investing in mutual funds has multiple tax implications. Here’s a look at it:
Capital Gains Tax on Mutual Funds (For NRIs)
Capital gains tax applies when an NRI sells mutual fund units and makes a profit. The tax rate depends on two things:
- Type of mutual fund (Equity or Debt)
- Holding period (how long you held the investment before selling) – Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG)
Equity Mutual Funds (New Rules)
These are funds that invest 65% or more in Indian equities
| Holding Period | Type of Gain | Tax Rate |
| <12 months | STCG | 20% |
| >12 months | LTCG | 12.5% on gains exceeding ₹1.25 lakh (no indexation) |
Debt Mutual Funds (New Rules)
These are funds that invest less than 65% in equities, like debt or conservative hybrid funds.
The taxation depends on when NRIs have bought the mutual funds:
On or After April 1, 2023: Any capital gain on sale will be treated as short-term gains and taxed at your regular income tax rate with no indexation benefit.
Before April 1, 2023: Tax treatment depends on how long you held them:
- <36 months: Short-term gains, taxed at your slab rate.
- > 36 months: Treated as long-term gains, taxed at 20% with indexation
Also, for older investments (pre-April 2023) sold after 24 months, LTCG is taxed at 12.5% without indexation, as per the recent reforms.
| Investment Date | Holding Period | Tax Treatment |
| On or after April 1, 2023 | Any duration | Short‑term gains → taxed at slab rate; no indexation |
| Before April 1, 2023 | ≤36 months | Short‑term gains → slab rate |
| Before April 1, 2023 | >36 months | Long‑term gains → 20% with indexation |
| Pre-April 1, 2023, sold >24 months | After July 23, 2024* | LTCG → 12.5% without indexation |
Dividend Income Taxation for NRIs
If you opt for dividend (IDCW) mutual fund plans, any dividend paid to you is taxable in your hands.
How It Works:
- From FY 2020-21 onwards, the dividend is added to your income and taxed as per your slab.
- However, for NRIs, TDS of 20% is deducted before you receive the dividend.
| Income Type | TDS Rate for NRIs |
| Mutual Fund Dividend | 20% (plus cess & surcharge, if applicable) |
Example: If your dividend is ₹10,000, the fund house will deduct ₹2,000 as TDS, and you receive ₹8,000.
You can later claim a refund or adjust in your ITR if your actual tax liability is lower.
TDS (Tax Deducted at Source)
Unlike resident Indians, NRIs have mandatory TDS applied on:
- Capital gains from mutual fund redemptions
- Dividends received
| Fund Type | Capital Gain Type | TDS Rate |
| Equity Mutual Funds | STCG (≤12 months) | 15% (before Jul 23, 2024) 20% (from Jul 23, 2024) |
| LTCG (>12 months, >₹1.25L gain) | 10% (before Jul 23, 2024) 12.5% (from Jul 23, 2024) | |
| Debt Mutual Funds | All gains | 30% (from Apr 1, 2025) |
| LTCG (if sold before Apr 1, 2025 and invested before Apr 1, 2023) | 20% with indexation | |
| Aggressive Hybrid Funds | STCG / LTCG | Same as Equity MF |
| Conservative Hybrid Funds | All gains | Slab rate (post-Apr 2023 investment) |
| Gold / International Funds | STCG (≤3 yrs) | Slab rate |
| LTCG (>3 yrs, invested before Apr 1, 2023) | 20% (with indexation) | |
| LTCG (invested on/after Apr 1, 2023) | Slab rate | |
| Fund (≥65% Equity) | STCG / LTCG | Same as Equity MF |
| Fund (<65% Equity) | STCG / LTCG | Same as Debt / Hybrid rules |
| Specified Funds (<65% Equity) | STCG | Slab rate |
| LTCG (>2 years) | 12.5% (from Apr 1, 2025) | |
| Listed ETFs (Equity-oriented) | STCG | 15% (before Jul 23, 2024) 20% (after) |
| LTCG (>₹1.25L) | 10% (before Jul 23, 2024) 12.5% (after) |
Repatriation Rules for NRI Mutual Fund Investments
Repatriation refers to the transfer of funds, both capital and returns, from India to an NRI’s country of residence.
The repatriability of mutual fund investments is determined by the type of account used for the transaction.
NRE (Non-Resident External) Account
- Repatriation Status: Fully repatriable.
- Key Benefits: Both the invested principal and earnings (dividends and capital gains) can be freely transferred abroad.
- Ideal For: NRIs looking for complete flexibility and ease of fund movement.
- Taxation: Earnings repatriated from NRE accounts are generally exempt from Indian tax if properly structured.
FCNR (Foreign Currency Non-Resident) Account
- Repatriation Status: Fully repatriable.
- Key Benefits: Funds are maintained in foreign currency, protecting against currency risk and allowing easy offshore transfer.
- Ideal For: NRIs preferring currency stability and seamless repatriation.
- Taxation: Similar to NRE accounts; typically exempt from Indian tax under specific conditions.
NRO (Non-Resident Ordinary) Account
- Repatriation Status: Restricted
- Limit: Up to USD 1 million per financial year (across all NRO accounts), RBI approval needed for remittances exceeding the limit.
- Applicable To: Income earned in India (e.g., rent, pension, dividends)
- Compliance: Requires documentation such as PAN, passport, Form 15CA, Form 15CB, and other supporting tax declarations.
How DTAA Impacts NRI Taxation in Mutual Funds
One of the most effective ways NRIs can reduce their overall tax burden related to mutual funds is by utilizing the benefits provided under the Double Taxation Avoidance Agreement (DTAA).
DTAAs are designed to prevent the same income from being taxed twice, in both India and the NRI’s country of residence.
For example: NRIs residing in the UAE, Singapore, and Mauritius often do not have to pay capital gains tax on mutual fund gains in India due to provisions in the DTAA these countries have with India.
Key DTAA Benefits for NRI Mutual Fund Investors
- Avoidance of Double Taxation: NRIs can claim credit in their home country for TDS paid in India, avoiding double taxation.
- Exclusive Taxation Clauses: Some treaties exempt Indian capital gains tax if income is taxed only in the country of residence.
- Reduced Tax Rates: DTAAs may lower TDS on equity STCG (e.g., 15% to 10%) and debt LTCG (e.g., 20% to lower rates).
- Tax Exemption in India: Countries like UAE, Singapore, Kuwait, and Oman may allow MF gains to be tax-free in India under treaties.
| Capital Gains Type | Without DTAA | With DTAA |
| Equity STCG (< 1 year) | 15% TDS | May be reduced to 10% or as per treaty |
| Equity LTCG (> 1 year) | 10% on gains > ₹1 lakh | May be exempt or reduced rate |
| Debt STCG (< 2 years) | Taxed at income slab (TDS @ 30%) | May be reduced or credited in home country |
| Debt LTCG (> 2 years) | 20% with indexation | Treaty may allow relief or exemption |
How to Claim DTAA Benefits
To avail of DTAA benefits, NRIs must complete specific documentation and follow a formal process:
1. Tax Residency Certificate (TRC)
- Issued by the tax authority in the NRI’s country of residence
- Must contain the NRI’s name, address, tax ID, and applicable period
- Mandatory for claiming DTAA benefits in India
2. Form 10F
- Filed electronically via the Indian Income Tax portal
- Supplements the TRC by declaring residential status and other personal details
3. Self-Declaration
- A letter stating the intent to claim benefits under a specific DTAA, mentioning the treaty and nature of income.
4. Submission to Fund House
- TRC, Form 10F, and the self-declaration must be submitted to the mutual fund company or its Registrar and Transfer Agent (RTA).
Refund of Excess TDS
Even after submitting the documentation, TDS may still be deducted at standard rates (10% or 15%) due to system limitations. In such cases:
- File an Indian Income Tax Return (ITR) to claim a refund of excess TDS
- Mention the DTAA clause used for exemption or relief
- Attach the TRC and Form 10F when requested during the assessment
Example: DTAA Tax Relief for a US-based NRI
An NRI in the USA sells Indian equity mutual fund units within 10 months.
STCG = ₹2,00,000
Standard TDS in India = ₹30,000 (15%)
Under India-USA DTAA, the TDS rate on capital gains may be considered for a credit in the US tax return.
The NRI claims a foreign tax credit of ₹30,000 (converted to USD) in their US tax filing, reducing or nullifying their US tax liability on the same income.
Tax Filing Requirements for NRIs Investing in Mutual Funds
NRIs must file income tax returns in India under certain conditions especially when investing in mutual funds or earning income from Indian sources.
NRIs ITR filing is a must if:
- Income exceeds ₹2.5 lakh from Indian sources (interest, rent, capital gains, etc.).
- Excess TDS is deducted on mutual fund redemptions, you’ll need to file to claim a refund.
- Claiming DTAA benefits under a Double Taxation Avoidance Agreement.
- Earning other income in India (e.g., property rent, dividends).
- Carrying forward capital losses to offset future gains.
Even if income is below the exemption limit, filing is recommended to claim refunds or record losses.
Learn More about NRI ITR filing Requirements & Process
Exemptions & Deductions for NRIs in Mutual Funds
NRIs investing in Indian mutual funds can reduce their tax liability through various exemptions, deductions, and benefits such as:
1. Long-Term Capital Gains (LTCG) Exemption
For equity mutual funds, the first ₹1.25 lakh is exempt each financial year. For instance, if you earn ₹1.5 lakh in gains, only ₹25,000 is taxed, resulting in ₹2,500 payable.
2. Tax on Dividend Income
Since 2020, dividends are taxable in the investor’s hands, and mutual funds deduct 20% TDS (plus cess/surcharge). NRIs can claim lower TDS rates (e.g., 10–15%) via DTAA. If excess TDS is deducted, refunds can be claimed by filing an ITR.
3. DTAA Benefits
India has tax treaties with over 90 countries. DTAAs help NRIs avoid double taxation and access reduced TDS rates on dividends, interest, and capital gains.
4. Section 80C Deductions (ELSS)
NRIs can invest in Equity Linked Savings Schemes (ELSS) and claim up to ₹1.5 lakh as a deduction under Section 80C. ELSS has a 3-year lock-in.
5. Nil or Lower TDS Certificate
If your actual tax liability is lower than standard TDS rates, you can apply under Section 195(2) for a nil or reduced TDS certificate to avoid excess deduction.
6. Gifting Mutual Fund Units
Gifting to relatives (spouse, children, parents) attracts no capital gains tax. The recipient pays tax upon sale based on the original cost and holding period.
7. Repatriation of Funds
Redemption proceeds can be repatriated tax-free if capital gains tax is paid, funds are routed through NRE/NRO accounts, and FEMA rules are followed. A foreign tax credit may also apply.
How Can PKC Help NRI Investors With Mutual Funds?
✅ Expert mutual fund taxation guidance for NRIs
✅ Comprehensive FEMA/RBI compliance support for investments
✅ Specialized capital gains tax optimization strategies
✅ Complete ITR preparation for mutual fund investments
✅ TDS management and refund assistance services
✅ Investment advisory for equity and debt funds
✅ Repatriation guidance for mutual fund proceeds
✅ Double taxation avoidance treaty benefits planning
✅ Fund remittance and currency hedging advisory
FAQs on NRI Taxation in Mutual Funds
Yes, NRIs are taxed on both capital gains and dividends earned from Indian mutual funds. Taxes are deducted at source (TDS) by the fund house.
Yes, mutual fund companies deduct TDS on redemption of units before paying proceeds to NRIs. The rate depends on the type of fund and holding period.
NRIs must file ITR in India if they have taxable income, want to claim a refund on excess TDS, or need to use DTAA benefits.
Yes, NRIs can claim deductions under Section 80C by investing in Equity Linked Savings Schemes (ELSS).
DTAA allows NRIs to avoid double taxation by reducing TDS rates on dividends and capital gains. NRIs must submit a Tax Residency Certificate (TRC) to claim benefits.
