How Are Mutual Funds Taxed for NRIs in India?

Your mutual fund gains face a tax bill before you ever see the money. NRI mutual fund taxation in India works differently from resident taxation, for one reason. Tax is deducted at source on every redemption, regardless of your actual income that year. This guide breaks down the exact Long Term Capital Gains (LTCG), Short Term Capital Gains (STCG) and Tax Deducted at Source (TDS) rates that apply. You’ll also learn how to legally bring your tax outgo down.

In this article, we cover:

• How equity and debt mutual funds are taxed differently for NRIs
• The current LTCG and STCG rates on your redemptions
• TDS rates NRIs face under Section 195
• How DTAA and a lower TDS certificate can reduce your tax outgo
• Whether NRIs must file a return to claim a refund

Why Do NRIs Pay Tax Differently on Mutual Funds Than Residents?

The tax rates on mutual funds are identical for NRIs and residents. What differs is TDS. Resident investors calculate and pay capital gains tax themselves, usually through advance tax or at return filing. NRIs don’t get that choice.

Under Section 195, the fund house deducts tax before your proceeds leave India. This rate is fixed by law, not your actual slab. This upfront deduction often does not match your final tax liability.

You correct this gap by filing a tax return, or applying for a lower TDS certificate in advance.

Capital Gains Tax on Mutual Funds for NRIs

Capital gains tax for NRIs depends on two things: your fund type, and how long you held the units. Equity and debt mutual funds follow separate rate structures, and confusing the two is a costly mistake.

How Are Equity Mutual Funds Taxed for NRIs?

Equity mutual funds are schemes that invest at least 65% of their corpus in Indian company shares. Tax on these funds depends purely on your holding period.

LTCG Tax Rate on Equity Funds for NRIs

Gains on equity fund units held for more than 12 months count as long-term capital gains. From 23 July 2024, these gains are taxed at 12.5%, on gains above ₹1.25 lakh in a financial year. This is up from the earlier 10% rate on gains above ₹1 lakh, and indexation is not available.

STCG Tax Rate on Equity Funds for NRIs

Units sold within 12 months attract short-term capital gains tax. This rate rose to 20% from 23 July 2024, up from 15% earlier. It applies as a flat rate on the entire gain, with no exemption threshold.

How Are Debt Mutual Funds Taxed for NRIs?

Debt fund taxation changed sharply for investments made after 1 April 2023, and works differently from equity funds.

Any “specified mutual fund” no longer gets long-term capital gains treatment, however long you hold it. Since 1 April 2026, this means funds investing over 65% of their corpus in debt and money market instruments. Gains from these funds count as short-term, taxed at your applicable income tax slab rate, with no indexation benefit.

Debt fund gains are taxed at your slab rate, however many years you hold the units.

Fund type	Holding period	Tax rate for NRIs
Equity-oriented funds	Over 12 months (LTCG)	12.5% on gains above ₹1.25 lakh/year
Equity-oriented funds	Up to 12 months (STCG)	20%, flat
Debt/specified funds	Any period	Your income tax slab rate

Equity funds reward patience with a lower, capped rate. Debt funds don’t, so your redemption timing matters less for tax planning there.

What Is TDS on Mutual Funds for NRIs?

TDS on mutual funds for NRIs is deducted automatically at redemption. This happens before your money is credited to your NRE or NRO account.

Why Do NRIs Face TDS When Residents Don’t?

Resident investors face no TDS on mutual fund capital gains; they self-assess and pay tax through their annual return. Section 195 requires tax deduction on payments to non-residents. Fund houses withhold tax at source for every NRI redemption, regardless of income.

What Are the Current TDS Rates for NRIs?

Type of income	TDS rate for NRIs
Equity fund LTCG	12.5% plus applicable surcharge and cess
Equity fund STCG	20% plus applicable surcharge and cess
Debt/specified fund gains	Deducted at the maximum applicable rate, plus surcharge and cess
Dividend/IDCW payouts	20%, or the applicable tax treaty rate, whichever is lower

Surcharge on these capital gains is capped at 15%, even if your total income crosses ₹2 crore. A 4% health and education cess applies on top of tax plus surcharge.

Fund houses deduct TDS on your entire long-term equity gain, not just the portion above ₹1.25 lakh. You reclaim the excess only by filing a return.

Can NRIs Reduce TDS Through a Lower Deduction Certificate?

You can apply for a lower or nil TDS certificate under Section 197. This helps when your income falls below the basic exemption limit, or you have carried-forward losses.

• File Form 13 on the TRACES portal using your PAN
• Submit your income estimate, past returns and Form 26AS
• Verify the application digitally
• Wait 30 to 45 days for the certificate
• Share it with your fund house before your next redemption

The certificate is valid for one financial year only, so you must reapply each year.

How Does DTAA Help NRIs Save Tax on Mutual Funds?

A Double Taxation Avoidance Agreement, or DTAA, between India and your resident country can lower TDS on dividends. This applies if the treaty rate is below 20%. Capital gains relief under DTAA depends on your specific treaty. 

What Documents Do NRIs Need to Claim DTAA Benefits?

To claim a treaty rate instead of the default TDS rate, submit these to your fund house:

• A Tax Residency Certificate from your country of residence
• Form 10F, filed electronically on the Indian income tax portal
• Your Indian PAN

Without these documents, the fund house applies the standard domestic TDS rate by default.

How Much Tax Will an NRI Actually Pay on a Mutual Fund Redemption?

Here is how NRI mutual fund taxation plays out for an equity fund redemption through an NRO account:

• You redeem equity fund units worth ₹20 lakh, held for two years
• Your gain works out to ₹6 lakh, all of it long-term
• Tax applies at 12.5% on ₹4.75 lakh, after the ₹1.25 lakh exemption
• The fund house, however, deducts TDS on the full ₹6 lakh gain at 12.5%, plus cess
• The net amount, after TDS, credits to your NRO account
• You claim back the excess TDS by filing your Indian tax return

This gap between TDS deducted and actual tax owed is exactly why filing a return matters for NRIs. Once your taxes are settled, you can repatriate the net proceeds abroad. See our guide on how NRIs repatriate funds from India.

Do NRIs Need to File an Income Tax Return in India?

You must file a return if your Indian income exceeds the basic exemption limit. Filing also lets you claim a TDS refund. Under the new tax regime for FY 2025-26, this limit is ₹4 lakh.

NRIs cannot claim the Section 87A rebate that makes resident tax liability zero up to ₹12 lakh. You pay tax from the first rupee above your exemption limit. The return filing deadline is usually 31 July, unless it is extended or your accounts need an audit.

How Can Scripbox Help NRIs Invest Tax-Efficiently?

Getting your account structure right from the start makes tax time simpler. Scripbox helps NRIs invest through the account that fits their repatriation and tax needs.

• Invest in Scripbox-recommended direct mutual funds through your NRE or NRO account
• Get consolidated capital gains and TDS statements at redemption, for easier return filing
• Receive guidance on choosing equity or debt funds based on your tax position

Explore Scripbox’s mutual fund investment options for NRIs to start investing with clarity on what you will owe.

Plan Your Mutual Fund Taxes Before You Redeem

Equity funds held over 12 months are taxed at 12.5% above ₹1.25 lakh. Sell earlier, and you pay 20% flat. Debt funds are taxed at your slab rate regardless of holding period. TDS is deducted upfront on every NRI redemption, often more than you actually owe. Filing a return, or securing a lower TDS certificate, helps. Talk to a Scripbox advisor to structure your mutual fund investments around these rules from day one.

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Frequently Asked Questions

1. What is the TDS rate on mutual funds for NRIs?
Equity fund LTCG attracts 12.5% TDS, and STCG attracts 20%. Debt fund gains are deducted at the maximum applicable rate. Surcharge and 4% cess apply on top.

2. Do NRIs pay more tax on mutual funds than resident Indians?
The tax rates are the same. The difference is TDS: fund houses deduct tax at source for NRIs under Section 195, while residents self-assess and pay later.

3. Can NRIs claim the ₹1.25 lakh LTCG exemption on equity funds?
Yes, when computing final tax liability. However, TDS at redemption is deducted on the entire gain, so you claim the exemption benefit back by filing a return.

4. How are debt mutual funds taxed for NRIs now?
Gains from specified debt funds are treated as short-term, taxed at your income tax slab rate, regardless of how long you held the units.

5. Can NRIs reduce TDS on mutual fund redemptions?
Yes, by applying for a lower or nil TDS certificate under Section 197, using Form 13 on the TRACES portal, before redeeming units.

6. Does DTAA help lower tax on mutual fund gains for NRIs?
DTAA mainly helps reduce TDS on dividend income to the treaty rate. Capital gains relief depends on the specific treaty with your country of residence.

7. Do NRIs need to file an income tax return for mutual fund gains?
Yes, if your Indian income exceeds ₹4 lakh, or if you want to claim a refund of excess TDS deducted at redemption.