ITAT Ruling: No Tax on NRI Mutual Fund Capital Gains – Professional Analysis
The Mumbai ITAT has held that capital gains earned by an NRI resident of Singapore from sale of Indian mutual fund units are not taxable in India, based on the India–Singapore DTAA. This is a significant precedent with broader implications for treaty-resident NRIs.
Key Technical Reasoning of ITAT
1. Mutual Fund Units ≠ Shares
Mutual Funds in India are structured as trusts under SEBI Regulations, not companies.
DTAA provisions dealing with taxation of “shares” do not automatically apply to mutual fund units.
Since the treaty did not explicitly cover MF units, India lost taxing rights.
Conclusion: Gains taxable only in the country of residence (Singapore), not India.
2. DTAA Overrides Domestic Law (Section 90(2))
Even though Indian domestic law taxes:
| Type | Tax Rate (NRI) |
|---|---|
| STCG Equity MF | 20% |
| LTCG Equity MF | 12.5% |
DTAA benefit prevails if more beneficial.
3. Taxing Rights Shifted to Country of Residence
Under India-Singapore DTAA:
Capital gains taxable in country of residence, unless specifically covered.
Mutual fund units not specifically covered → India cannot tax.
Critical Compliance Requirement: TRC Mandatory
To claim DTAA benefit, NRI must have:
✔ Tax Residency Certificate (TRC)
✔ Form 10F
✔ No PE (Permanent Establishment) in India
✔ Beneficial ownership
Without TRC → DTAA benefit denied.
Practical Implications for NRIs
Positive Impact Countries
This principle may apply to NRIs resident in:
Singapore
UAE
Mauritius
Portugal
UK
Germany
France
Australia
Hong Kong
Subject to specific DTAA wording.
Important Caveat – Not Universal Exemption
This ruling:
Is case-specific
Depends entirely on:
DTAA language
Facts of case
Residency proof
Not automatic blanket exemption.
Department may appeal in High Court.
Professional Advisory View (Strategic Interpretation)
Structuring Opportunity
NRIs in favourable DTAA countries may achieve:
Zero capital gains tax in India
Taxable only in residence country
Potential tax arbitrage if residence country exempts
Technical Position under Indian Law (Current)
| Particular | Resident | NRI (without DTAA) | NRI (with favourable DTAA) |
|---|---|---|---|
| Mutual Fund LTCG | Taxable | Taxable | Possibly Not Taxable |
| Mutual Fund STCG | Taxable | Taxable | Possibly Not Taxable |
Conclusion
This ITAT ruling creates major tax planning opportunity for NRIs, but it is not a blanket exemption. Proper treaty analysis and documentation are critical.
CA Ramakrishna Sanjay
+91 7760252581
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