I live in Australia with my family. Somewhere in mid-2020, I had invested in some liquid mutual funds, which I redeemed in March this year to book profits. TDS (tax deducted at source) has been deducted upon redemption. I have read that NRIs (non-resident Indians) in the UAE do not have to pay capital gains tax upon redemption. Is the same benefit available to Australian NRIs, too? If not, what is the taxation upon sale?
—Name withheld on request.
I assume that you are a non-resident as per Indian tax law. Liquid funds typically invest in a portfolio of money market and short-term debt securities, and since investment in equity shares of domestic listed companies is less than 35% of its total portfolio, they do not meet the criteria of being an equity-oriented fund. For units of mutual funds other than equity-oriented funds, the period of holding to qualify as a long-term capital asset is three years. The period of holding as per your facts exceeds three years. For debt-mutual funds, TDS on long-term capital gains for NRIs is 10% without indexation benefit (plus applicable surcharge and cess) and so would the final tax, too.
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The Finance Act 2023 made certain amendments in lieu of which capital gains on sale of debt mutual funds are deemed to be treated as short-term capital gains irrespective of the period of holding. However, the amendment applies for any units purchased after 1 April 2023, and thus it would not apply in your case.
Under the India-UAE double taxation avoidance agreement (DTAA), mutual fund units qualify as ‘property’ not described under other paragraphs of the capital gains article under the DTAA. Therefore, as per residual clause of article 13(5), the sole taxation rights on sale of mutual funds are allocated to the UAE. Whereas the capital gains article under the India-Australia DTAA is worded slight differently than under the India-UAE DTAA. First, we have to determine whether the mutual fund units qualify as ‘interests in a company’ comparable to shares since taxation rights for ‘comparable interests in a company’ (as for shares) are shared between India and Australia under article 13(5). Only if mutual fund units do not qualify as ‘comparable interests in a company’ would they become ‘property’ that is not described under other paragraphs of the capital gains article under the DTAA and, accordingly, the sole taxation rights would be allocated to Australia under article 13(6) of the India-Australia DTAA (which is similar to article 13(5) under the India-UAE DTAA).
‘Company’ has been defined under the India-Australia DTAA to mean a body corporate or an entity treated as a body corporate for tax purposes. In terms of the mutual fund regulations of the Securities and Exchange Board of India, a mutual fund means a fund established in the form of a trust. A mutual fund, being a trust, is not a company or other body corporate. Therefore, mutual units do not qualify as ‘interests in a company’ comparable to shares.
Thus, they are eligible to be treated as ‘property’ under the residual article 13(6) of India-Australia DTAA and would be taxed only in Australia. The TDS that has been deducted in India can be claimed as a refund by filing your income tax return in India, and you will have to pay taxes on the capital gains in your home country, being Australia. Indian TDS cannot be claimed as foreign tax credit in Australia.
Harshal Bhuta is a partner at chartered accountancy firm P.R. Bhuta and Co.
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Published: 10 Jun 2024, 04:38 PM IST