NRI Corner: Taxation and other queries related to investment in mutual funds

What is the tax liability on receipt of Income on Mutual Fund Units?

As per Section 10(33) of the Income Tax Act, 1961 (‘Act’) income received in respect of units of a mutual fund specified under Section 10(23D) is exempt from income tax in India and the mutual funds are subject to pay distribution tax in debt oriented schemes. Hence all dividends are tax-free in the hands of non-resident investors and no TDS is applicable on the same.

What is the tax liability on Redemptions? What is the rate of Tax Deduction at Source for NRIs / PIOs? What is the tax - rate on capital gains for NRIs / PIOs?

Under Section 2(42A) of the Income Tax Act, units of the Scheme held as a capital asset, for a period of more than twelve months immediately preceding the date of transfer, will be treated as a long term capital asset for the computation of capital gains – thus attracting long term capital gains tax rate.

In all other cases it would be treated as a short-term capital asset and would attract short-term capital gains tax rate. Hence depending on the period of investments, long term or short capital gains and tax thereon is applicable on redemption’s.

Though there is currently no long-term capital gain tax liability for redemptions from equity schemes, there is a liability at the time of redeeming from the debt schemes.

For the tax structure on capital gains,

What are the applicable Tax Rates and TDS Rates to NRI’?

 
 
 

 @ after providing for indexation
## Subject to NRI's having Permanent Account Number in India
*STT @ 0.25% will be deducted on equity funds at the time of redemption and switch to the other schemes.
Mutual Fund would also pay securities transaction tax wherever applicable on the securities bought/sold.
^Assuming the investor falls into the highest tax bracket
# The total income of the corporate would exceed Rs. 1 Crore
** The tax rates are subject to DTAA benefits available to NRI's
*** These are the tax rates applicable to capital gains, in case the rate of tax is lower than 20% and if the NRI does not have a Permanent
Account Number, then for the purpose of TDS, the withholding tax rate would be 20%.

5.What is the rate of Tax Deduction at Source for FIIs? 

No tax would be deductible at source from the capital gains (whether long-term or short-term) arising on repurchase/redemption of units in view of the provisions of Section 196D(2) of the Act.

6.What is the proof of the Tax Deduction at Source? 
A TDS certificate is issued in the name of the investor mentioning the details of the transaction and the tax deducted. The TDS certificate is commonly known as Form16 A.


7.When the TDS certificate will be issued?

A TDS Certificate in Form 16A is despatched within 10 days of the month following redemption date at the registered address of the investor. To obtain a duplicate TDS certificate, investor can write a letter quoting his account number requesting for a duplicate TDS Certificate.

Is the indexation benefit available to NRIs?

Yes, in case units are held for more than twelve months i.e. on long-term capital gains.

Can an NRI gift the units of MFs to resident Indians?
An NRI may gift the units to any investor Indian or an NRI. Units gifted by any person would not be liable to any gift tax since the units held under the schemes are also not subject to provisions on the Gift Tax act, 1958.

Are units of MFs chargeable in Wealth Tax?

No. Units issued to investors (including NRIs) etc. will not be treated as assets as defined under section 2(ea) of the Wealth-Tax Act, 1957 and hence will not be liable to wealth-tax.


Can a dividend from mutual credited to an investor’s NRO account be repatriated?
Yes. Though an investment may be done on a non-repatriable basis, according to the provisions for NRI investments, the income generated from investments (dividend in this case) done on a non-repatriable basis qualify for full repatriation.

12. Is there any Tax liability on switching from one option to the other?

Yes. On switching from the Growth option to the Dividend option, the investor is liable to TDS at the applicable tax rate.

Is Securities Transaction Tax applicable to NRI investors? 
Yes.