What is the status of taxation of capital gains from mutual funds for NRIs, as there is the Double Taxation Avoidance Agreement with several countries, which is also a kind of capital-gain tax, despite the tax being deducted at the source in India?
- T Parlapalli
So, first of all, the capital-gain tax on mutual-fund investments is the same for NRIs and resident Indians. However, in the case of NRIs, a TDS is levied at the time of redemption of those units, whereas local investors don't need to pay any TDS.
Now he's right that India has the Double Taxation Avoidance Agreement, or DTAA as it is popularly known, with several countries where the Indian diaspora is spread. The tax rules governing these DTAAs could vary from country to country. However, my broad understanding is that at a broad conceptual level, any income arising from investments is not exempt from tax in the source country, which in the case of NRIs happens to be in India.
So what happens is that if an NRI has investments in India and there is a capital gain that arises through these investments, then the LTCG will be taxable at the rate of 10 per cent, which he'll have to pay in India. Now let's assume that in the country of residence of this NRI, the long-term capital gains are taxed at the rate of 30 per cent. So that country would provide him with the tax credit for the tax that he's already paid in India. Thus, in that case, he'll pay the tax at the rate of 10 per cent in India but his country of residence would provide him with this 10 per cent tax credit and tax his capital gains only at the rate of 20 per cent, and not at 30 per cent, which is the normal rate applicable over there.
So that is kind of the broad construct of how double taxation is avoided through these agreements. But as I said that the rules may vary from country to country, it is, therefore, best to seek advice from a tax consultant for a more nuanced and specific understanding.