NRIs and mutual funds: how your gains are taxed, and how to get back extra TDS

If you are an NRI with mutual funds in India, there is a good chance the fund house has already cut tax from your money before you even saw it. The rules are not complicated once they are laid out plainly. Here is what you actually pay, and how to claim back anything extra.

The rates are the same as for residents

For equity funds (funds that hold mostly Indian shares):

1. If you sell within 12 months, your gain is short-term and taxed at 20%.
2. If you sell after 12 months, your gain is long-term. The first 1.25 lakh of such gains in a year is tax-free, and anything above that is taxed at 12.5%.

For debt funds bought on or after 1 April 2023, there is no long-term benefit at all. The whole gain is taxed at your normal slab rate, however long you held the units.

For gold funds, it depends on the type. A listed gold ETF becomes long-term after 12 months; an unlisted gold fund-of-funds needs 24 months. Long-term gains there are taxed at 12.5%.

The two things that are different for an NRI

This is where NRIs lose money if they are not careful.

First, tax is cut at source. When you redeem, the fund house deducts TDS straight away, on the full gain, before paying you. It does not apply the 1.25 lakh exemption at that stage. So even a small gain gets tax cut from it.

Second, you cannot use the basic exemption limit against these gains. A resident with low income can set the basic exemption against capital gains. An NRI cannot. These gains are taxed from the first rupee.

How to get the extra money back

Because TDS is cut on the full gain, you often pay more than you actually owe. There are two ways to fix this.

1. Claim it back by filing your Indian tax return. When you file, the 1.25 lakh exemption and the correct rate are applied, and the extra TDS comes back to you as a refund.
2. Reduce it in advance. If you expect excess TDS, you can apply for a lower-deduction certificate before you redeem, so less tax is cut in the first place.

If you live in a country that has a tax treaty with India, India taxes the gain and your home country usually gives you credit for the tax paid here, so you are not taxed twice. For that, keep clean gain statements and TDS proof.

Want help working out your gains and claiming back your TDS? Get a quote and we will handle it end to end.

Related reading on our site: NRE vs NRO accounts explained.

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