Mutual Fund Tax Reckoner for NRIs!
Migrating abroad has become a major trend among Gen Z and millennials. The tag of being called an NRI is surely a bliss to hear for many people.
But the question is why migrating abroad has become a trend.
Well, better job opportunity proves to be the paramount of the reasons. However, there comes a time when these NRIs harbour the dream of coming back to India & to their families. As only some NRI have their family settled abroad, the rest have dependants living in India.
Thus, making investments in India is a smart option! But how is India a great option for NRIs when it comes to making investments?
Historical trends suggest that Indian investments can produce better returns over the long term as compared to the US Markets.
The purpose of NRI investments in India is to create a nest egg, plan for retirement, and take care of their families.
In terms of making investments, mutual funds have been the most popular choice for NRIs to grow their wealth.
ARE NRIs ALLOWED TO INVEST IN MUTUAL FUNDS?
NRIs are allowed to invest in mutual funds in India — as long as they comply to the restrictions of the Foreign Exchange Management Act (FEMA). Nevertheless, several AMCs in the USA and Canada do not accept applications for mutual funds from NRIs.
Your initial investment options may include debt, hybrid, or equity funds, based on your risk tolerance and investing goals. Additionally, you have a ton of options at your fingertips, and based on your investing horizon, you can select your ideal mutual fund.
Mutual Fund Tax Reckoner for NRIs!
When making investments in India, NRI investors frequently worry that they may be subject to double taxation. That is certainly not the case if India has signed a Double Taxation Avoidance Agreement (DTAA) with your country of residence.
Taxation on Capital Gains
For NRIs, the taxation of gains from equity mutual funds is similar to that for resident investors. If the investment is held for more than one year, it is considered a long-term capital gain (LTCG), and no tax is levied on gains up to INR 1 lakh. Any LTCG above this limit is taxed at 10%. If the investment is held for one year or less, it is considered a short-term capital gain (STCG), and a flat tax of 15% is applicable.
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A Specified Mutual Fund (a mutual fund investing less than 35% of its proceeds in domestic equity shares) will not be eligible for indexation benefits when calculating long-term capital gains. Taxes will now be applied to debt mutual funds based on the applicable slab rates.
Taxation on Dividends:
As of April 2020, dividends from equity mutual funds are subject to a Dividend Distribution Tax (DDT) paid by the mutual fund itself. However, NRIs need to pay tax on dividends received at their applicable slab rates.
Debt mutual funds also attract a DDT, but NRIs are taxed at their individual slab rates on the dividends received.
Tax Implications on Systematic Withdrawal Plans (SWPs):
SWPs from mutual funds are considered redemptions, and the taxation is similar to that of capital gains. NRIs must be mindful of the holding period to determine whether the gains are classified as short-term or long-term.
Tax Deductions and Exemptions:
Equity-Linked Savings Scheme (ELSS):
NRIs are not eligible for tax deductions under Section 80C for investments in ELSS. However, they can benefit from capital gains tax exemptions if they meet the specified criteria.
Tax Deducted at Source (TDS):
TDS applies to NRIs on capital gains from mutual funds. The rates vary for equity and debt funds. NRIS need to ensure compliance with TDS regulations.
Investing in mutual funds can be a lucrative option for NRIs, but understanding the tax implications is crucial to optimize returns and comply with Indian tax laws.
NRIs should carefully consider the holding period, type of mutual fund, and applicable tax rates to make informed investment decisions. Staying informed about changes in tax regulations is also essential to make adjustments to the investment strategy accordingly.
Disclaimer : The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose.