NRIs can cut tax on mutual fund gains using DTAA — here’s how

Recent rulings by the Income Tax Appellate Tribunal (ITAT) have now brought meaningful clarity: NRIs in countries with favourable Double Taxation Avoidance Agreements (DTAAs) may be taxed only in their country of residence, not in India. They can choose whichever is more beneficial — domestic tax rules or DTAA provisions.

Under the Income-tax Act, 1961, capital gains on mutual funds are taxed as follows: long-term gains on equity funds held over 12 months are taxed at 12.5% (above ₹1.25 lakh), while short-term gains are taxed at 20%. Fund houses deduct tax at source (TDS) before disbursing proceeds.

But a DTAA can override domestic tax, especially if the treaty grants exclusive taxing rights to the country of residence. That means India cannot levy tax on capital gains in such cases.

Judicial support for DTAA-based exemption

Two recent ITAT decisions reinforce this.

In Saket Kanoi (UAE) vs. DCIT [2024] (Delhi ITAT, 23 October 2024), the tribunal held that capital gains on Indian mutual funds for a UAE-based NRI are non-taxable in India, as Article 13 (read with residual clause under Article 13(5)) of the India-UAE DTAA assigns taxing rights solely to the country of residence.

Similarly, in Anushka Sanjay Shah (Singapore) vs. ITO (Mumbai ITAT, 26 March 2025), mutual fund units were recognized as movable capital assets, and Article 13 of the India-Singapore DTAA grants Singapore exclusive taxing rights.

Together, these rulings set a strong precedent for NRIs in countries with similar treaty provisions, allowing them to legally avoid double taxation on Indian mutual fund gains.

The DTAA framework: What the treaties say

Most DTAAs that India has signed with countries like the United Arab Emirates, Singapore, Oman, Qatar, Saudi Arabia, Kuwait, Malaysia, France, and Germany follow a similar structure.

Article 13 of these treaties deals with “capital gains.” Typically, clauses 1 to 4 relate to immovable property, business assets or shares in companies deriving value from immovable property. Mutual funds, however, do not fall into these categories.

Therefore, the residual clause becomes relevant. This clause generally states that capital gains from the alienation of any property other than those mentioned in earlier paragraphs shall be taxable only in the contracting state of which the alienator is a resident. What this means is that an NRI who is a resident of such a country will pay tax only in that country and not in India. If that country, such as the UAE or Singapore, does not levy capital gains tax, the gain becomes effectively tax-free.

NRIs residing in the countries stated above can typically benefit from this DTAA-based relief, subject to documentary compliance and absence of a permanent establishment (PE) in India.

On the flip side, NRIs in the US, UK, Canada and several other nations — despite having DTAAs with India — cannot claim this relief because those treaties either explicitly allow India to tax capital gains or do not include a residual clause.

Documentation and compliance requirements

Claiming this DTAA benefit is not automatic. The income-tax department requires proof of residence and compliance with treaty conditions. The following documents are essential:

• Tax Residency Certificate (TRC): Issued by the foreign tax authority (for example, the Ministry of Finance in the UAE). It certifies that the individual is a resident of that country for tax purposes during a specified financial year.
• Form 10F: A short self-declaration available on the Indian income-tax portal, confirming details such as nationality, tax identification number, and absence of a permanent establishment in India.
• Self-Declaration Letter: Addressed to the mutual fund company or its registrar (CAMS or KFintech), declaring that you are a resident of the treaty country and are claiming DTAA benefits under Article 13.
• Submission to AMC or Registrar: Providing the above documents before redemption ensures that the fund house does not deduct TDS.
• ITR Filing in India: Even if capital gains are exempt, filing an ITR (Form ITR-2) is advisable, especially where TDS has been deducted. The return should report the transaction under “exempt income” and reference the applicable treaty article.

NRIs planning a redemption should secure the TRC and complete Form 10F well in advance. Early submission prevents TDS altogether — eliminating the delay and hassle of refunds later. Maintaining investment records, proof of overseas residency, and a clean NRE/NRO banking trail also helps demonstrate genuine eligibility during assessments.

For NRIs, this opens a powerful opportunity to structure Indian investments efficiently and legally while staying fully compliant.

Ajay R. Vaswani, founder, Aras and Co., Chartered Accountants.