Nitin Ghai(Certified Mutual Fund Distributor)

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Taxation of Mutual Funds for NRIs & OCIs in India (2025 Guide)

If you are an NRI (Non-Resident Indian) or an OCI (Overseas Citizen of India), you can invest in Indian mutual funds just like residents. However, taxation works a bit differently for you — mainly because of TDS (Tax Deducted at Source). Let’s break this down in simple terms.

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💡 Investment vs. Returns

• The amount you invest (your principal) is never taxed when you redeem.

• Only the returns/profits (capital gains or dividends) are taxable.

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📌 How Capital Gains are Taxed

✅ Equity-Oriented Mutual Funds (funds with 65%+ in equities)

• Short-Term (sold within 12 months) → Taxed at 20%.

• Long-Term (held 12+ months) → The first ₹1.25 lakh gain in a year is tax-free. Above that, gains are taxed at 12.5%.

✅ Debt / Non-Equity Funds

• Held < 3 years → Gains taxed as per your income tax slab.

• Held 3+ years (if invested before Apr 2023) → Taxed at 20% with indexation (inflation adjustment).

• Held 3+ years (if invested after Apr 2023) → Indexation benefit removed, gains taxed as per slab rates.

✅ Hybrid / International / Gold Funds

• Taxed similar to debt funds unless they qualify as equity-oriented.

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📌 Dividend Income

• Dividends from mutual funds are taxable in your hands.

• For NRIs/OCIs, the fund house deducts TDS before paying dividends.

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📌 The Key Difference: TDS

• For Resident Indians → No TDS on redemption; they pay tax later while filing returns.

• For NRIs & OCIs → The mutual fund company deducts TDS upfront on capital gains and dividends.

• If TDS is more than your actual tax liability, you can claim a refund by filing your Indian tax return.

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📌 What About DTAA (Tax Treaties)?

Many countries have a Double Taxation Avoidance Agreement (DTAA) with India. This means:

• You may pay a reduced rate of tax in India.

• Or you may claim credit in your resident country for the tax paid in India.

Always check your country’s DTAA rules.

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🔑 Example

Suppose you invest ₹1,00,000 in an equity mutual fund and redeem after 18 months for ₹1,30,000:

• Gain = ₹30,000 (LTCG).

• Since ₹30,000 < ₹1.25 lakh exemption limit → No tax liability.

• But the AMC may still deduct TDS at redemption. You can claim a refund when filing returns.

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✅ Key Takeaways

• Only profits are taxed, not your original investment.

• Equity funds → 12.5% LTCG (after ₹1.25 lakh exemption) / 20% STCG.

• Debt funds → Slab rates (post-April 2023 investments).

• TDS is the big difference: Residents pay later, NRIs/OCIs face upfront deduction.

• Refunds possible by filing tax returns.

• DTAA can reduce double taxation.

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📌 Sources & References

• Economic Times – NRI Taxation of Mutual Funds: https://economictimes.indiatimes.com/wealth/tax/nri-taxation-mutual-funds-capital-gain-tds-rules-stcg-ltcg-tax-rules-from-equity-debt-international-hybrid-mfs-and-others/articleshow/122972758.cms

• ICICI Bank – NRI Mutual Fund Investing Guide: https://www.icicibank.com/nri-banking/nriedge/nri-articles/investing-in-mutual-funds-for-nris-made-simple

• Edelweiss MF – Taxation for NRIs: https://www.edelweissmf.com/investor-insights/mutual-fund-investment-tips-and-articles/taxation-of-mutual-funds-for-nris-in-india

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⚠️ Disclaimer: The above information is for educational purposes only. Tax rules change often and may vary based on your country of residence. Please consult a qualified Chartered Accountant (CA) or tax advisor before making any investment or filing decisions.