DTAA Benefits on Mutual Fund Capital Gains for NRIs

Picture this: You're an NRI in Dubai, you invested ₹20 lakhs in Indian mutual funds three years ago, and now you want to redeem them at ₹35 lakhs. 

Your first thought? "How much tax will I pay, and will I be taxed twice?"

This exact question haunts thousands of NRIs every year. At Belong, we've helped hundreds of global Indians navigate these tax complexities through our GIFT City investment platform and our active WhatsApp community. But today, I want to share something that could save you lakhs in taxes.

A recent ruling by the Income Tax Appellate Tribunal (ITAT) has changed everything about how mutual fund capital gains are taxed for NRIs. 

Depending on where you live, you might pay zero tax in India on these gains.

Let me walk you through exactly how the Double Taxation Avoidance Agreement (DTAA) works for mutual fund investments, which countries benefit, and how you can claim these benefits legally.

The Game-Changing ITAT Ruling That NRIs Need to Know

In April 2025, the Mumbai ITAT delivered a landmark judgment in the case of Ms. Anushka Sanjay Shah, a Singapore-based NRI.

She had earned ₹1.35 crore in capital gains from selling Indian mutual funds. The Income Tax Department wanted to tax this amount in India. She claimed exemption under the India-Singapore DTAA.

The tribunal ruled in her favor.

Here's why this matters: The ITAT clarified that mutual fund units are fundamentally different from shares. Since they're issued by trusts and not companies, they fall under the "residual clause" of most DTAAs.

What does this mean for you?

If you live in a country where India's DTAA includes this residual clause, your mutual fund capital gains may only be taxable in your country of residence, not in India.

For NRIs in the UAE, Saudi Arabia, Kuwait, Oman, and Qatar where there's no personal income tax this translates to zero tax liability.

👉 Tip: This benefit applies only to mutual fund units, not direct equity shares. Understanding this distinction is crucial for tax planning.

Understanding DTAA: Your Shield Against Double Taxation

DTAA stands for Double Taxation Avoidance Agreement. India has signed over 90 such treaties with countries worldwide.

The purpose is simple: prevent the same income from being taxed in two countries.

For NRIs, this becomes critical. You might earn rental income in India, dividend from Indian stocks, or gains from mutual funds. Without DTAA, both India and your resident country could tax this income.

DTAA specifies which country has the right to tax which type of income. For mutual fund gains specifically, the treatment varies dramatically based on which country you live in.

Three ways DTAA provides relief:

1. Exemption method: Income is taxed only in one country
2. Credit method: Tax paid in one country can be claimed as credit in another
3. Deduction method: Foreign tax paid is allowed as a deduction

Most NRIs benefit from the exemption or credit methods when it comes to investment income.

Why Mutual Fund Units Are Different From Shares

This is the technical distinction that changed everything.

The Income Tax Department had been treating mutual fund units like shares of companies. Under that classification, capital gains would be taxable in India for most NRIs.

But the ITAT clarified otherwise.

Here's the difference:

Mutual funds in India are structured as trusts under SEBI regulations. When you invest in a mutual fund, you're buying units of a trust, not shares of a company.

Shares, on the other hand, represent ownership in a company registered under the Companies Act.

This distinction matters because most DTAAs specifically mention "shares of a company deriving value from Indian assets" as taxable in India. But they don't specifically mention mutual fund units.

Since mutual fund units aren't explicitly covered, they fall under the residual clause which typically grants taxing rights to your country of residence.

👉 Tip: When filing your income tax return in India, ensure your CA understands this distinction to claim the correct DTAA benefits.

Country-by-Country: Where Your Mutual Fund Gains Are Taxed

Not all DTAAs are created equal. The tax treatment of your mutual fund gains depends entirely on which country you're a tax resident of.

I've analyzed the DTAA provisions for major NRI destinations. Here's what you need to know:

Countries Where You Pay Zero Tax (in both India and abroad)

These are the jackpot countries for NRI investors:

United Arab Emirates
Under Article 13(5) of the India-UAE DTAA, mutual fund capital gains are taxable only in your country of residence. Since the UAE doesn't levy personal income tax, you pay nothing.

Saudi Arabia
Article 13(6) grants exclusive taxing rights to the country of residence. No personal income tax means complete exemption.

Kuwait
Same as UAE Article 13(6) of the DTAA makes gains taxable only in Kuwait, which has no income tax.

Oman
Article 15(6) follows the residual clause pattern. Tax-free in both countries.

Qatar
Article 13(6) ensures gains are taxed only in Qatar. No income tax there means zero liability.

These five countries represent the best tax-efficient jurisdictions for NRIs investing in Indian mutual funds.

Countries Where You Pay Tax Only in India

United States
Article 13 of the India-US DTAA makes capital gains taxable in India as per Indian law. You'll pay the standard rates: 15% on short-term gains (equity funds held under 12 months) or up to 30% on debt funds.

However, you may be able to claim foreign tax credit in the US for taxes paid in India.

United Kingdom
Article 14 follows similar logic. Gains are taxable in India. UK residents can claim foreign tax credit to avoid double taxation.

Hong Kong
Article 14 of the India-Hong Kong DTAA makes gains taxable in India despite Hong Kong's territorial tax system.

Australia
Under Article 13, capital gains from Indian mutual funds are taxed in India according to Indian tax laws.

Also Read -India Has DTAA With How Many Countries

Countries With Shared Taxation (Tax Credit Available)

Canada
Article 13 allows both countries to tax the gains. You pay tax in India first, then claim foreign tax credit when filing in Canada to avoid double taxation.

This requires careful documentation and filing in both countries.

Countries Where You Pay Zero Tax in India

Germany
Article 13 of the India-Germany DTAA states that capital gains from mutual funds should not be taxed in India. They're taxable only in Germany as per German law.

Italy
Article 14(6) grants exclusive taxing rights to Italy. Not taxable in India.

Malaysia
Article 14(6) makes gains taxable only in Malaysia, not in India.

Singapore
This is the country where the ITAT ruling originated. Article 13(5) ensures gains are taxed only in Singapore. Since Singapore doesn't tax capital gains, you pay nothing anywhere.

Nepal
Article 13(6) makes gains taxable only in the country of residence.

Philippines
Article 14(5) follows the residual clause, making gains taxable only in the Philippines.

Quick Comparison Table

👉 Tip: Before investing in mutual funds, check your country's specific DTAA provisions. Use Belong's Residential Status Calculator to confirm your tax residency status.

Also Read -DTAA vs. Non-DTAA Countries

How Indian Tax Law Treats Mutual Fund Gains for NRIs (Without DTAA)

Before we dive into claiming DTAA benefits, let's understand the baseline Indian tax law that applies when DTAA isn't invoked.

For Equity-Oriented Mutual Funds:

Short-term capital gains (holding less than 12 months): 20%
Long-term capital gains (holding more than 12 months): 12.5% on gains above ₹1.25 lakh per year

For Debt-Oriented Mutual Funds:

All capital gains (regardless of holding period): Taxed at slab rates (typically up to 30% + surcharge/cess for NRIs), without indexation benefit (effective from April 1, 2023)

Tax Deducted at Source (TDS):

Mutual funds deduct TDS on redemption at these rates:

• 20% TDS on short-term capital gains from equity funds (source)
• 12.5% TDS on both short-term and long-term gains from debt funds (Source)

This TDS is deducted regardless of your actual tax liability. If you're eligible for DTAA benefits, you'll need to claim a refund by filing your income tax return.

The taxation of mutual funds for NRIs can get complex, which is why thousands of NRIs in our community ask these questions daily.

Step-by-Step: How to Claim DTAA Benefits on Mutual Fund Gains

Knowing you're eligible is one thing. Actually claiming the benefit is another.

Here's exactly how to do it:

Step 1: Obtain a Tax Residency Certificate (TRC)

This is the most critical document. A TRC proves you're a tax resident of your country.

Where to get it:

• UAE: Federal Tax Authority (FTA)
• Singapore: Inland Revenue Authority of Singapore (IRAS)
• USA: IRS (Form 6166)
• UK: HMRC

The TRC must contain:

• Your name and address
• Your tax identification number in that country
• Period of residency
• Certification that you're a tax resident

Common challenge: In the UAE, TRCs are issued only for the previous year, not the current year. This creates timing issues. Plan your redemptions accordingly.

👉 Tip: Apply for your TRC at least 60 days before you plan to redeem your mutual funds. Processing times vary by country.

Also Read - India-UAE DTAA

Step 2: Fill Form 10F

Form 10F is an Indian tax form that captures details from your TRC.

You'll need to provide:

• Name and address
• Tax identification number in your country
• Period for which resident status applies
• Address in India (if any)

This form is typically submitted to your mutual fund house or through your tax advisor when filing returns.

Also Read -Best Monthly Investment Plans in UAE

Step 3: Submit Documents to Your AMC

Some Asset Management Companies (AMCs) allow you to submit your TRC and Form 10F before redemption. This can help avoid or reduce TDS deduction at source.

However, not all AMCs follow this process consistently. Many will still deduct TDS and require you to claim a refund later.

Step 4: File Your Income Tax Return in India

Even if your gains are exempt under DTAA, you must file an ITR in India to:

• Disclose the capital gains
• Claim the DTAA exemption under Section 90/91
• Get a refund of TDS deducted (if any)

In your ITR:

• Report the capital gains in the appropriate schedule
• Claim deduction under the relevant DTAA article
• Attach your TRC and Form 10F as supporting documents

Step 5: Claim Tax Refund (if TDS was deducted)

If your AMC deducted TDS before you could submit your TRC, you'll need to claim a refund.

This happens through the ITR filing process. Once you file and claim the DTAA exemption, the Income Tax Department will process your refund.

Refunds typically take 3-6 months after successful ITR filing.

👉 Tip: Work with a CA who specializes in NRI taxation. DTAA claims require precise documentation and can get rejected for minor errors.

Also Read -Documents Required for NRI Account Opening in India - Full Guide

What If Your Country Doesn't Have a Favorable DTAA?

Not every NRI is lucky enough to live in the UAE or Singapore.

If you're in the US, UK, Canada, or Australia, your mutual fund gains will be taxed in India. Here's how to minimize the damage:

1. Choose Equity Funds Over Debt Funds

Equity mutual funds have lower tax rates (15% for short-term, 10% for long-term above ₹1 lakh) compared to debt funds (up to 30%).

If you're investing for the long term, equity funds give you both better returns and better tax treatment.

2. Hold for the Long Term

Long-term capital gains on equity funds are taxed at just 10% above ₹1 lakh. This is significantly lower than the 15% short-term rate.

3. Consider GIFT City Investments

Here's where Belong comes in.

At GIFT City, we offer USD-denominated fixed deposits that provide:

• Tax-free returns No capital gains tax, no TDS
• Currency protection No rupee depreciation risk
• Easy repatriation Simplified transfer back to your home country

These GIFT City FDs are taxed completely differently from regular mutual funds or NRE FDs. They're recognized as offshore instruments under Indian tax law.

Many of our community members who live in DTAA-unfavorable countries have moved portions of their portfolio to GIFT City for exactly this reason.

Also Read - DTAA Between India and USA

4. Claim Foreign Tax Credit in Your Resident Country

If you paid tax in India, most countries allow you to claim that as a credit against your home country tax liability.

For example, if you're in Canada and paid 15% tax in India on your mutual fund gains, you can claim a foreign tax credit when filing your Canadian return.

This doesn't eliminate the tax, but it prevents double taxation.

Also Read -India Has DTAA With How Many Countries

5. Time Your Redemptions Strategically

If you're planning to return to India permanently in the next few years, consider:

• Waiting until you become a resident to redeem (if the gains will be lower)
• Redeeming before you leave if you're moving to a high-tax country

Tax planning around residential status can save you lakhs.

Common Mistakes That Cost NRIs Lakhs in Unnecessary Taxes

Over the years, I've seen these errors repeatedly:

Mistake #1: Not Obtaining a TRC

Many NRIs assume the DTAA benefit is automatic. It's not.

Without a valid TRC, the mutual fund will deduct full TDS, and the Income Tax Department may reject your DTAA claim.

Mistake #2: Submitting an Incomplete Form 10F

Form 10F must match your TRC exactly. Any discrepancy name spelling, address format, tax ID can lead to rejection.

Double-check every field before submission.

Mistake #3: Not Filing ITR to Claim Refund

Some NRIs think if they don't owe tax, they don't need to file. Wrong.

If TDS was deducted and you're eligible for DTAA exemption, the only way to get your money back is by filing an ITR.

Mistake #4: Claiming DTAA Benefits Without Genuine Residency

If you moved to the UAE just to avoid tax and spend most of your time in India, the tax authorities can invoke General Anti-Avoidance Rules (GAAR).

GAAR provisions allow the department to disregard arrangements made primarily for tax avoidance.

To claim DTAA benefits legitimately:

• Spend the required days in your resident country (typically 183+ days)
• Have genuine employment or business there
• Maintain a home and family there

Also Read - Residential Status Under Section 6 Of Income Tax Act

Mistake #5: Assuming All Countries Are Like the UAE

Just because you heard that "NRIs don't pay tax on mutual funds," doesn't mean it applies to you.

The benefit is country-specific and depends entirely on your DTAA. Always verify your specific country's treaty provisions.

👉 Tip: Join our WhatsApp community where over 2,000 NRIs discuss real cases and share their DTAA experiences.

Real Example: How Three NRIs in Different Countries Paid Different Taxes

Let me show you how this plays out in reality.

Scenario:
Three friends Raj, Priya, and Amit all invested ₹10 lakhs in the same equity mutual fund in January 2023. By January 2025, it's worth ₹15 lakhs. They each redeem and book ₹5 lakhs in long-term capital gains.

Raj lives in Dubai (UAE):

Under the India-UAE DTAA, his gains are taxable only in the UAE. Since UAE has no income tax:

• Tax in India: ₹0
• Tax in UAE: ₹0
• Total tax: ₹0

Priya lives in New York (USA):

Under the India-US DTAA, her gains are taxable in India:

• Tax in India: ₹46,875 (12.5% on ₹4 lakhs above the ₹1.25 lakh exemption)
• TDS deducted: ₹1,00,000 (12.5% of ₹5 lakhs)
• Tax refund claimed:62500-46875= ₹15625

Also Read -The Complete DTAA Guide for NRIs: How to Avoid Double Taxation on Your Indian Income

How GIFT City Changes the Game for High-Tax Country NRIs

If you're like Priya or Amit in high-tax countries, regular mutual funds aren't your best option.

This is exactly why we built Belong's GIFT City platform.

What makes GIFT City different:

GIFT City (Gujarat International Finance Tec-City) is India's first International Financial Services Centre (IFSC). Think of it like Singapore or Dubai except it's in India.

Investments made in GIFT City are considered offshore from an Indian tax perspective.

Tax benefits:

1. Zero tax on interest/returns Unlike NRE FDs where interest is tax-free but in rupees, GIFT City FDs give you USD returns that are tax-free
2. No TDS No tax deducted at source, so your full amount grows
3. Currency protection Returns are in USD, so no rupee depreciation risk
4. Easy repatriation No $1 million annual limit applies

We've helped over 5,000 NRIs invest in GIFT City FDs earning 4-5% annual returns in USD completely tax-free.

For NRIs in the US, UK, Canada, or Australia, this is often a better option than domestic mutual funds where you'll pay 15-30% tax in India.

👉 Tip: Download the Belong app to explore current GIFT City FD rates and compare them with mutual fund post-tax returns.

Key Takeaways: What You Need to Remember

Let me summarize the essential points:

1. DTAA Treatment Varies by Country

If you're in UAE, Saudi, Kuwait, Oman, Qatar, or Singapore, your mutual fund gains are likely tax-free.

If you're in the US, UK, Canada, or Australia, you'll pay tax in India and possibly in your home country.

2. Mutual Fund Units ≠ Shares

The recent ITAT ruling confirmed that mutual fund units fall under the residual clause of most DTAAs, not the share clause. This distinction is crucial.

3. Documentation Is Everything

You need a valid TRC and Form 10F to claim DTAA benefits. Without these, you'll pay full tax and TDS.

4. You Must File an ITR

Even if your gains are exempt, file your Indian tax return to claim TDS refunds and stay compliant.

Also Read - Difference Between NRI and Resident Tax Filing in India

5. Consider Alternatives Like GIFT City

For NRIs in high-tax countries, GIFT City investments offer better post-tax returns than mutual funds.

6. Plan Based on Your Residency

Your tax bill depends entirely on which country you're a tax resident of. If you're planning to move countries, time your investments and redemptions strategically.

Your Next Steps

If you're an NRI investing in Indian mutual funds, here's what you should do right now:

Step 1: Verify which country's DTAA applies to you. Check the table in this article and confirm your residency status using our Residential Status Calculator.

Step 2: If you're in a tax-favorable country (UAE, Singapore, etc.), start the process of obtaining your TRC now.

Step 3: Review your current mutual fund holdings. Calculate your potential gains and tax liability under both Indian law and DTAA.

Step 4: If you're in a high-tax country, consider diversifying into GIFT City investments for better post-tax returns.

Step 5: Connect with our community. Over 2,000 NRIs are discussing these exact questions daily in our WhatsApp group. Share your situation, learn from others, and get answers from our team of financial experts.

Step 6: Download the Belong app to explore tax-efficient investment options designed specifically for NRIs. Whether it's GIFT City FDs, mutual fund comparisons, or tax planning tools, everything is in one place.

Tax planning isn't about avoiding taxes it's about paying the right amount, in the right country, at the right time. With proper understanding of DTAA provisions, you can save lakhs while staying completely compliant.

Have questions about your specific situation? Our team of SEBI-registered advisors is here to help. Join the community, and let's figure this out together.

Also Read - Types of Mutual Funds

Disclaimer: This article is for educational purposes only and does not constitute financial or tax advice. DTAA provisions can be complex and subject to change. Always consult with a qualified chartered accountant or tax advisor before making investment or tax decisions. Individual tax liability depends on your specific circumstances, residential status, and applicable tax laws.

Sources:

• Income Tax Appellate Tribunal Mumbai Ruling
• Income Tax Department DTAA Guidelines
• SEBI Mutual Fund Regulations
• RBI FEMA Guidelines
• Quantum AMC DTAA Explainer (April 2025)