Mutual Fund Taxation For NRI Clients

What are taxable income for NRI :-

If you reside & work abroad, the NRI income tax you pay will depend on your residential status for the financial year. If you fit the Resident Indian criteria, your total global income is taxable under Indian tax laws Subject to DTAA/Tax Treaties. But if your status for the year is ‘NRI’, only the income earned or accrued or received in India is taxable.

Note :- A non resident indian has to pay tax only when the income is either earned or received in india.

Are Tax deductions available for NRIs ?

NRIs can avail specific tax deductions under Section 80C. Currently, a maximum deduction of up to Rs 1.5 lakh is permissible.

Following assets/securities to claim benefit under this section:

  • Principal repayment of housing loan.
  • Tuition Fees of maximum two children.
  • Premium on Life Insurance Policies.
  • Investment in ELSS.
  • Term deposit of not less than five years.

Note :- Other deductions under section 80D,80E,80TTA & 80G are also available for NRI clients.

What is the taxation pattern for NRI investing in MF ?

As per the current practice AMCs deduct the TDS at the time of redemption of the MF units. The details are furnished below: 

TAX IMPLICATION
Fund TypeHolding PeriodTax SlabIndexation BenefitTDS Rate
Equity oriented FundsShort Term (Less than 1 Year)15.00%NA15.00%
Long Term(More than 1 Year)10% if Capital gain is more than 100000NA10.00%
Debt Oriented FundsShort Term (Less than 3 Year)As per applicable slab ratesNA30.00%*
Long Term(More than 3 Year)20.00%Yes20.00%

Source: https://www.amfiindia.com/investor-corner/knowledge-center/tax-corner.html

Note: *Assuming that the client is falling under the highest Tax Bracket.

TDS rates mentioned here are exclusive of Surcharge & Cess.

The TDS is a flat rate as mentioned above. However, if you fall in a lower tax bracket, you are entitled to a refund. while filing your income-tax returns in India.

When TDS will be deducted from on MFs?

Short term/ long term capital gain tax (along with applicable Surcharge and Health and Education Cess) will be deducted at the time of redemption of units in case of NRI investors.

Are mutual fund units liable to Wealth tax?

No, there is no wealth Tax in India.

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. An Investor can also view his tax credits in form 26AS.

What about the tax applicability on the dividends?

From April 1, 2020, Income Tax Department 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. TDS rate for NRI is 20% 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. 

  • A short-term capital loss can be set-off against both LTCG and STCG. 
  • 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.

Do NRIs have to pay Advance Tax?

If the tax liability exceeds Rs 10,000 in a financial year, then it is required to pay advance tax. Interest under Section 234B and Section 234C is applicable when the advance tax is not paid on time.

Source: https://incometaxindia.gov.in/tutorials/6-interest%20payable%20by%20the%20taxpayer.pdf

When should an NRI file his return of Income in India?

NRI, like any other individual taxpayer, needs to file his return of income in India if his Gross Total Income received in India exceeds Rs 2,50,000 (Irrespective of his/her age) for any given financial year.

What is the due date for filing an Income tax Return in India?

31st July is the last date to file Income tax return in India for NRIs.

What are the measures taken by GOI to save NRIs from Double Taxation?

An NRI in receipt of income from in India, is taxable in India on such income i.e. India as a source state has the right to tax such income. However, the country of which such NRI resides, will also have a right to tax such income as it is the residence state. This situation leads to Double Taxation. In the process, the NRI will end up getting taxed twice on the same income. To overcome this, India has entered into DTAAs with various countries** which provide exemption or credit of foreign taxes paid while filing their return of income in the home country to avoid double taxation.

Note: ** List of the countries you can find in- 

https://incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx

Is there any capital gain applicable if any NRI gifts units to RI or other NRI?

 No, there is no capital gain in case of gifting the mutual fund units or any securities.

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