ELSS tax benefits are available for both Indian residents and NRIs

Prateek Mehta •

Updated on 13 Oct, 2023

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This article was first published on livemint.

Are there any tax-saving advantages in NRI mutual funds?

Equity-linked saving schemes (ELSS) allow tax saving under Section 80C of the Indian Income Tax Act. An investment of up to ₹1.50 lakh in ELSS can be claimed as a deduction from taxable income in India. These tax-saving benefits are available to both Indian residents and NRIs. If you have taxable income from a house property or other sources in India, then investing in ELSS makes sense.

Indicative returns of 10-12% annually

Investment horizon of 1-3 Years

3 Years of lock-in

Short term goals such as buying a car or funding a vacation

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Mirae Asset ELSS Tax Saver Fund (G)

DSP ELSS Tax Saver Fund (G)

Coming to mutual fund taxation structure in India, capital gains from equity mutual funds are taxed at 15% for units redeemed within 1 year (short-term capital gains) and at 10% if redeemed after 1 year (long-term capital gains). Also, long-term capital gains up to ₹1 lakh in a financial year are currently exempt from income tax. On the other hand, short-term capital gains on debt mutual funds are added to your total income and taxed at your marginal income tax rate. This applies for investments which are redeemed before 3 years. Long-term capital gains on debt funds are taxed at 20% with indexation benefit.

It is worth noting that a TDS of 10% is applicable on capital gains arising from mutual fund redemptions by NRIs. This is not applicable for resident Indians. Also, mutual funds in India are taxed only at the time of redemption and not on an accrual basis every year.

What happens if I am an NRI but invest in mutual funds using my domestic account as a domestic customer?

Some NRIs keep investing from their resident accounts unaware of the regulations around NRI taxation and investments. Whenever you spend more than 182 days living outside India in a financial year, your tax status changes to NRI. When that happens, you need to convert your existing bank accounts in India to NRO accounts. Continuing to use your existing bank accounts is not allowed as per the FEMA Act. You could also open an non-resident external (NRE) account if you plan to take your investment proceeds back to the country of your residence freely. Investments done through NRE accounts are fully repatriable.

India has signed the avoidance of Double Taxation Avoidance Agreement treaty (DTAA) with many countries. If you reside in such a country, you can claim any tax paid in India as a credit while filing your tax returns.