Do NRIs pay tax in India on mutual fund gains — and what the DTAA argument really is

This is for you if you are a non-resident Indian who holds Indian mutual funds and wants to know what tax comes off when you sell. It is most useful if you live in the Gulf, Singapore, the United States or the United Kingdom, where the treaty answer differs sharply. PMS, AIF and GIFT City gains work differently and have their own guides; moving the money home is covered in our repatriation guide.

How the gain is taxed

A resident waits until the yearly return to settle this tax. For a non-resident, the fund house settles it at the moment of payout, so your redemption lands short of the gain you expected. You are not losing the difference; it is tax paid on your behalf. If that tax comes to more than you finally owe for the year, you are entitled to the excess back. You claim it back by filing an Indian return for the year.

What you pay depends on the kind of fund and how long you held it. An equity-oriented fund is, broadly, one that keeps at least 65% of its money in listed Indian company shares. A Specified Mutual Fund is, broadly, one that keeps more than 65% of its money in debt and money-market instruments. Anything else is a non-equity fund, such as many debt funds.

The tax at these rates is not the final figure. A Health and Education Cess of 4% is added to the tax. A surcharge is added only when your total income crosses ₹50,00,000, and on equity gains the surcharge is capped at 15%.

A worked example

What a tax treaty changes

A DTAA — a Double Taxation Avoidance Agreement — is a treaty between India and another country that decides which of them may tax a given income. Where India has a treaty with your country, the Act applies only so far as it is more beneficial to you than the treaty.

For the Gulf and Singapore, this is where the famous “no tax in India” claim comes from, and where it gets slippery.

A mutual fund unit is issued by a trust, not a company, so we read it as falling under the treaty’s residual clause for “other property”, which assigns the taxing right to your country of residence alone.Our reading On that reading, a resident of the UAE, Singapore or a similar treaty country is taxable on these gains only at home, which may charge little or nothing.Our reading This is a reading of the treaty text, not settled law, and it is exactly the point the old blog got wrong by stating it as fact.

If you live in the UAE, Singapore or a country whose treaty is written the same way: the reading above may place the tax with your home country only. Treat it as an argument India disputes, not a settled “zero”. The fund house still deducts tax at payout; the treaty claim is made afterwards.

If you live in the United States: the India–US treaty lets each country tax the gain under its own law, so India taxes your gain on Indian fund units. The United States taxes its citizens and residents on their worldwide income, so the same gain is also inside the US tax net. Relief comes as a credit in the US for the Indian tax you paid, not as an exemption. The US PFIC rules add a further layer, which we cover in a separate guide.

If you live in the United Kingdom: the India–UK treaty also lets each country tax the gain under its own law, so India taxes your gain. The UK gives a credit for the Indian tax on India-source gains, so relief is a credit, not an exemption. From 6 April 2025 the UK replaced the old remittance basis with a 4-year foreign income and gains regime, which relieves foreign income and gains only for someone in their first four years of UK residence after at least ten years of non-residence. Ask us where that applies to you.

Which rules apply, and from when. The Income-tax Act, 2025 came into force on 1 April 2026; gains on or after that date fall under it, and gains before it stay under the Income-tax Act, 1961. We read the new Act as carrying the tax treatment of a fund redemption over largely unchanged: the same rates, the same holding periods, the same exemption and the same withholding.Our reading

What to do

To claim treaty relief you obtain a tax residency certificate — a TRC — from your country’s tax office, and provide the other documents the law prescribes. A TRC is simply your home country’s proof of where you are tax-resident. For gains from the 2026-27 tax year, the document that goes with the TRC is Form 41, under Rule 75 of the Income-tax Rules, 2026. For income from before 1 April 2026, the same declaration was made in Form 10F, under Rule 21AB of the Income-tax Rules, 1962.

A few mistakes catch people out:

• Reading “no tax in the Gulf” as a settled rule. It is a treaty reading India disputes, not a guarantee.
• Thinking you file later like a resident. The fund house settles the tax at payout, not at year-end.
• Assuming a TRC on its own is enough. The forms and treaty conditions still matter.
• Treating every fund the same. Equity, non-equity and specified funds are taxed differently.
• Forgetting the US or UK side. The same gain is taxed there too, with a credit for the Indian tax.

Then, when you claim treaty relief:

• Keep your purchase statements, so the holding period and the gain are clear.
• Get a TRC from your home country’s tax office for the year you redeem.
• Fill Form 41 to go with the TRC when you claim treaty relief.
• Expect the fund house to deduct tax at payout, and plan around the cash arriving short.
• File an Indian return to reclaim any tax withheld above what you finally owe.
• If you live in the US or UK, line up the foreign tax credit on that side.

Rooted Bharat arranges your mutual fund investments, and when you redeem, we point you to what your accountant needs for the TRC and the forms. Ask Rohit in the question box on this page, with one question to start.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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