Published 9 May 2026
Long-Term and Short-Term Capital Gains rates post Finance Act, 2024 -- equity-oriented funds at 12.5% / 20%, debt funds at slab rate, the section 195 Tax Deducted at Source default, the Double Taxation Avoidance Agreement reduction, the Foreign Account Tax Compliance Act / Common Reporting Standard reporting overlay, and the redemption-and-repatriation framework
Taxpayer Brief
Indian mutual funds are open to Non-Resident Indian investment subject to a Know-Your-Customer-plus-Foreign Account Tax Compliance Act-and-Common Reporting Standard layer that the asset management companies enforce on registration. The Non-Resident Indian invests through a Non-Resident External account (repatriable) or a Non-Resident Ordinary account (non-repatriable, with the United States Dollar one million per year cap). Capital-gain taxation is identical to a Resident's -- the Finance Act, 2024 redrew the rates effective 23 July 2024, and the same rates apply to a Non-Resident Indian. The section 195 Tax Deducted at Source on redemption is the practical complication -- it is deducted at the asset management company end, often at higher than the actual Double Taxation Avoidance Agreement rate, and a Form 13 / Tax Residency Certificate route is the optimisation lever.
1. Mutual Fund Categories and Capital-Gain Rates
Fund Type | Holding Period for Long-Term | Long-Term Capital Gain Rate (post 23 July 2024) | Short-Term Capital Gain Rate (post 23 July 2024) |
|---|---|---|---|
Equity-oriented mutual fund (more than 65% in Indian equities) | 12 months | 12.5% on gains exceeding ₹1.25 lakh per year, under section 112A | 20% under section 111A |
Debt-oriented mutual fund (Specified Mutual Fund -- post Finance Act, 2023, units bought from 1 April 2023) | Not applicable -- always Short-Term | Not applicable | Slab rate -- treated as Other Income |
Debt mutual fund (Specified Mutual Fund -- units bought before 1 April 2023) | 36 months | 20% with indexation (pre 23 July 2024) or 12.5% without indexation (post 23 July 2024) | Slab rate |
Hybrid fund (Balanced Advantage, Multi-Asset) | Depends on equity allocation -- equity-oriented if > 65% equity, else debt-oriented | As per category | As per category |
International funds (predominantly foreign equity) | Treated as debt fund post Finance Act, 2023 -- slab rate; Long-Term abolished for new units | Not applicable | Slab rate |
Gold ETF and Gold Fund of Fund (units bought from 1 April 2023) | Treated as debt fund -- slab rate | Not applicable | Slab rate |
Two regime cliffs 23 July 2024 split the Long-Term rate -- pre that date, equity Long-Term at 10% (over ₹1 lakh threshold); post that date, 12.5% (over ₹1.25 lakh threshold). And 1 April 2023 split debt-fund treatment -- pre that date, debt funds qualified for indexation and 20% Long-Term after 36 months; post that date, all redemptions of newly-bought debt funds are slab-rate Short-Term. Track each unit's purchase date for correct treatment. |
2. Tax Deducted at Source on Mutual Fund Redemption
The asset management company (registrar) deducts Tax Deducted at Source under section 195 on Non-Resident Indian redemption proceeds. Default rates as below; Double Taxation Avoidance Agreement reduction available with Tax Residency Certificate plus Form 10F.
Mutual Fund Class | Default Tax Deducted at Source Rate | With Tax Residency Certificate / Double Taxation Avoidance Agreement (typical) |
|---|---|---|
Equity Long-Term Capital Gain | 12.5% plus surcharge plus 4% Cess (effective 13% to 14.95%) | Often retained at 12.5% -- treaty rates rarely lower |
Equity Short-Term Capital Gain | 20% plus surcharge plus 4% Cess (effective 20.8% to 23.92%) | Treaty cap typically 15% |
Debt fund (Specified Mutual Fund) Short-Term | 30% plus surcharge plus 4% Cess (slab equivalent) | Treaty cap typically 15-20% |
Dividend distribution from mutual fund | 20% plus surcharge plus 4% Cess (with section 196A read with the First Schedule) | Treaty cap typically 10-15% |
3. The Foreign Account Tax Compliance Act / Common Reporting Standard Overlay
Indian asset management companies and registrars are required under the Foreign Account Tax Compliance Act regulations of 2014 (with the United States Internal Revenue Service) and the Common Reporting Standard adopted under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters to report Non-Resident Indian holdings to the relevant foreign tax authority. Each Non-Resident Indian investor signs a Foreign Account Tax Compliance Act / Common Reporting Standard self-certification at the time of investment. The information flow is automatic -- the United States Internal Revenue Service receives data on every United States-resident Non-Resident Indian's mutual-fund holdings, and similar exchanges happen with Canada / United Kingdom / Australia / Singapore / United Arab Emirates.
United States residents and Passive Foreign Investment Company rules Indian mutual funds are treated as Passive Foreign Investment Companies under United States Internal Revenue Code Sections 1291-1298. United States residents (including Non-Resident Indians on H1B / Green Card / United States citizens) face punitive Passive Foreign Investment Company taxation on Indian mutual funds -- annual mark-to-market or excess-distribution regime, with onerous Form 8621 filing requirements. Engage a qualified United States tax preparer before investing in Indian mutual funds while United States resident. |
4. Investment and Redemption Process for Non-Resident Indians
- Open a Non-Resident Indian portfolio investment account or a Non-Resident Ordinary / Non-Resident External feeder account.
- Complete Know Your Customer with passport, Permanent Account Number, Aadhaar (if held; not mandatory for Non-Resident Indians), foreign address proof, Foreign Account Tax Compliance Act / Common Reporting Standard self-certification.
- Choose between Non-Resident External (repatriable) or Non-Resident Ordinary (non-repatriable, USD 1M / year cap) feed.
- Invest through Systematic Investment Plan, lump sum, or Systematic Transfer Plan.
- Redemption proceeds credit back to the same Non-Resident External / Non-Resident Ordinary account; Tax Deducted at Source deducted at registrar end.
- Apply for Tax Residency Certificate from country of residence and submit to asset management company for Double Taxation Avoidance Agreement rate -- annually.
- Reconcile against Form 26AS / Annual Information Statement category 4.32 / 4.50; file Income Tax Return-2 with Schedule 112A / Schedule CG.
5. Worked Example -- Long-Term Equity Redemption
Mr. Karan, a Non-Resident Indian based in Singapore, redeemed equity-oriented mutual-fund units in March 2026 for ₹50 lakh. Acquired in 2018 for ₹15 lakh.
Computation | Amount (₹) |
|---|---|
Sale consideration | 50,00,000 |
Cost of acquisition | 15,00,000 |
Long-Term Capital Gain | 35,00,000 |
Annual exemption under section 112A | (1,25,000) |
Taxable Long-Term Capital Gain | 33,75,000 |
Tax at 12.5% under sub-section (1A) of section 112A | 4,21,875 |
Health and Education Cess at 4% | 16,875 |
Surcharge at 10% (income above ₹50 lakh) -- includes other Indian income | (varies) |
Effective tax | Approximately ₹4.39 lakh plus surcharge |
Tax Deducted at Source by asset management company at 13% (12.5% + 4% Cess) | ₹6,50,000 |
Refund expected through Income Tax Return-2 | Approximately ₹2.10 lakh plus interest under section 244A |
BharatTax NRI Compliance Tool Is your Non-Resident status reflected in the income-tax department's Permanent Account Number database, and is your Permanent Account Number-Aadhaar status correctly tagged as exempt? Use the NRI Compliance Tool at itr.bharattax.co to verify, update residential status on the e-filing portal, and pre-validate your Non-Resident External or Non-Resident Ordinary bank account for any refund. |
6. Case Law Reference and Anticipatory Legal Analysis
Case Law Reference: NRI mutual fund taxation Section 115AB of the Income-tax Act, 1961 prescribes special rates for NRI investors. Under section 112A, equity LTCG is taxed at 12.5% post-Finance-Act-2024 with rupees one lakh twenty-five thousand annual exemption. The Income Tax Appellate Tribunal Mumbai in [VERIFY: confirm Tribunal citation on NRI mutual fund LTCG] confirmed the operational framework. The Karnataka High Court in [VERIFY: confirm High Court ruling on the section 195 TDS on NRI mutual fund redemption] addressed the section 195 TDS mechanism. [VERIFY: cross-check specific Tribunal citations in the BharatTax case-law database.] |
Prospective Interpretation -- The post-Finance-Act-2024 reclassification Two unsettled interpretive issues. (i) Treatment of the post-23-July-2024 LTCG rate hike to 12.5% under the Finance Act, 2024. (ii) Treatment of section 50AA reclassification of debt-oriented mutual funds (specified mutual funds) -- post-1-April-2023, these are taxed at slab rate as Short-Term Capital Gain regardless of holding period. The BharatTax case-law database should monitor emerging Tribunal positions. [VERIFY: confirm Tribunal decisions emerging on the post-Finance-Act-2024 NRI framework.] |
7. Key Takeaways
- Equity-oriented mutual fund -- Long-Term Capital Gain at 12.5% (over ₹1.25 lakh annual exemption) post 23 July 2024; Short-Term Capital Gain at 20% under section 111A.
- Debt mutual fund (units bought from 1 April 2023) -- always Short-Term, slab-rate.
- Section 195 Tax Deducted at Source applies on redemption proceeds; reducible via Tax Residency Certificate plus Form 10F.
- Foreign Account Tax Compliance Act / Common Reporting Standard automatic information exchange means United States / United Kingdom / Canada / Singapore / United Arab Emirates tax authorities receive Non-Resident Indian holding data.
- United States residents -- Indian mutual funds are Passive Foreign Investment Companies; Form 8621 burden is heavy. Take United States tax advice before investing.
- Repatriation -- Non-Resident External proceeds unlimited; Non-Resident Ordinary capped at United States Dollar one million per financial year.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.