If you are a Non-Resident Indian (NRI) and confused by the tax aspects related to mutual fund investments, this is for you.
As an NRI, you might be keen to capitalize on investment opportunities back home. By becoming aware of the tax nuances, you can also get the best value for your investments.
How are the capital gains taxed?
For the purpose of mutual fund investments, taxation rules are the same for both residents and NRIs.
For equity-oriented funds (investing 65 per cent or more into equities), any redemption made within a year of purchase attracts Short-Term Capital Gains (STCG) tax of 15 per cent. And if it is sold after a year, Long-Term Capital Gains (LTCG) over and above Rs 1 lakh (in a financial year) is taxed at 10 per cent without indexation benefit.
For debt and other non-equity oriented funds, you need to hold investments for three years or more to qualify for LTCG rates. While LTCG for listed funds (say FMP funds) are taxed at the rate of 20 per cent (with indexation benefit), it is 10 per cent (without indexation benefit) for unlisted funds. Listed funds are traded on the exchanges. If you sell a debt fund within three years, STCG is applicable at the rate of 30 per cent, if you are in the highest tax bracket.
How are these surcharges and cess levied?
Surcharge rates are between 10%-37% if your income is above Rs 50 lakh annually in India". For income below Rs 50 lakhs, it is 0%. For instance, if your Indian income in a year is Rs 1 crore, then 10% surcharge is applicable and it increases with your income. In addition, health and education cess at the rate of 4 per cent is levied on income-tax and surcharge.
For example, if your annual income is Rs 1 crore, then you pay a surcharge of 10% on the 10% LTCG base rate which makes it effectively 11%. On this rate, four per cent cess is applicable, which makes the effective rate at 11.44%.
What about Tax deductions?
While there is no Tax Deducted at Source (TDS) for local investors, redemption by NRIs are subject to TDS at the highest tax rates. For instance, TDS for LTCG made in equity funds is 10% while it is 20% for debt funds.
However, if you have lower tax liabilities, you can claim tax refunds through your yearly tax filings. Besides, if the NRI investor produces a zero or lower withholding certificate from the income tax authorities, then tax shall be deducted at such rates mentioned in the certificate.
Will you be subject to double-taxation?
Not if you reside in one of 90 countries that has a DTAA (Double Tax Avoidance Treaty) with India. In case of a treaty, income-tax is payable at the rate provided under the Income Tax Act, 1961 or the rate provided in the said agreement, whichever is more beneficial to the NRI investor. So, if you stay in US or Canada, then your TDS will be considered for tax purposes in your resident country.
Are mutual fund units liable to Wealth tax?
No, units issued to NRIs will not be treated as 'Assets' as defined under the Wealth-Tax Act, 1957 and hence will not be liable to wealth tax.
How will you get to know about TDS?
A TDS certificate (Form 16 A) is issued in the name of the investor mentioning the details of the transaction and the tax deducted. Once in a quarter, these digitally-signed TDS certificates are dispatched to you by the mutual fund.
What about the dividends?
From April 1, 2020, the Central Government has abolished Dividend Distribution Tax (DDT) that was levied on the dividends paid by the mutual fund. The dividends are now taxable in the hands of the unitholders at their marginal tax slab rates, subject to withholding of taxes. TDS rate for NRI is 20 per cent plus surcharge and cess.
Can you set-off your capital gains with losses?
A capital gain can be set-off (netted) against a capital loss made during the year. You can set-off gains of a debt fund against that of equity fund loss or vice-versa.
Though, set-off rules for long-term capital loss and short-term capital loss are different.
A short-term capital loss can be set-off against both LTCG and STCG. However, a long-term capital loss can be set-off only against LTCG.
Also, you can carry forward unadjusted losses after separating them into short-term and long-term capital losses for up to eight subsequent years. You may consult your tax advisor for more guidance.