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NRI Mutual Fund Taxation – Key Changes in 2024

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Despite being an NRI for years, 36-year-old, NY-based investment banker Sameer Bhatia was always drawn back to his roots in India, not just emotionally, but financially. The appeal of India’s growth had him investing in mutual funds, a choice that was driven not just by sentiment but also by strategy. Thanks to their high potential for wealth creation mutual funds have been a popular option for Indians and NRIs alike. 

Along with easy liquidity, the option to diversify and the prospect of high returns mutual funds offer several advantages. As fund managers take care of them, even investors who are not well-versed in the market can capitalise on the investment opportunities.  

While there are many like Sameer, who wish to grow their portfolio in India, it is essential to understand the NRI mutual fund taxation. Taxation for NRI in mutual funds may seem confusing if you do not understand the intricacies of the system. But, keep in mind that clarity on the taxability of mutual funds can help you make the most of your investments. 

So, if you or someone you know is an NRI who wants to invest in mutual funds, read on to get a fair view of the latest rules on mutual fund taxation for NRIs.

SIP vs STP

Can NRIs Invest in Indian Mutual Funds? 

First things first, let us come to the question, “Can NRIs Invest in Indian Mutual Funds?” The answer is yes! As a non-resident India, NRI, you can both start and continue your investments in mutual funds. However, it is important to follow the rules and guidelines as set by the Foreign Exchange Management Act, better known as FEMA. 

There are certain key considerations that as an NRI you must pay attention to. Take a look:

  1. As per the FEMA guidelines, you should be an NRI.

  2. As you are not allowed to invest in mutual funds in foreign currency, you need to have a rupee-denominated account. Therefore having an NRI account which can either be a Non-Residential Ordinary or a Non-Residential External account.

  3. As soon as you become an NRI you should update your KYC details. You will be asked to furnish the required documents. 

Who Qualifies as an NRI?

While for many any India-born individual living abroad is considered to be an NRI, it is not really so.   Let us also understand who is an NRI as per the rules set by the Income Tax Act, of 1961. Keep in mind that your residential status has to be checked for every fiscal year to identify how much you need to pay in that year. 

As per Section 6 of the IT Act, a person is considered to be an NRI if they have lived in India for less than 182 days in the previous financial year. Or if they have been in India for over 60 days during the previous year and a total of 365 days or more in the four years preceding that year.

Understanding TDS on NRI Income in India   

Tax Deducted at Source, better known as TDS is a way of collecting tax. Here, the person making the payment deducts tax from the amount being paid to another individual or entity. As per Section 195 of the Income Tax Act, in case someone makes a payment in the form of interest or an amount (other than a salary) to an NRI, the NRI has to file their tax return. The NRI can claim a refund, if applicable, when they file their income tax return. 

In the 2020 Union Budget, Finance Minister Nirmala Sitharaman introduced a new tax system with lower rates and more slabs. Taxpayers, including NRIs, can choose between the old system and the new one. However, the decision to choose between the two often causes confusion, therefore, it’s important to understand the differences. 

Income Tax for NRIs: Tax Slabs Under the Old Tax Regime (FY 2024-25) 

Take a look at the tax rate as per the Old Tax Regime

  • Up to Rs. 2.5 lakh: Nil

  • Rs. 2.5 lakh to Rs. 5 lakh: 5% of the taxable income

  • Rs. 5 lakh to Rs. 10 lakh: 20% of the taxable income with a base tax of Rs. 12,500

  • Above Rs. 10 lakh: 30% of the taxable income with a base tax of Rs. 1,12,500.

Income Tax for NRIs: Tax Slabs Under the New Tax Regime (FY 2024-25)  

Take a look at the tax rate under the New Tax Regime

  • Up to Rs. 3 lakh: Nil

  • Rs. 3 lakh to Rs. 7 lakh: 5%

  • Rs. 7 lakh to Rs. 10 lakh: 10%

  • Rs. 10 lakh to Rs. 12 lakh: 15%

  • Rs. 12 lakh to Rs. 15 lakh: 20%

  • Above Rs. 15 lakh: 30%

Note: If you choose the New Tax regime, keep in mind that most of the deductions and exemptions will not be available.

Mutual Fund Taxation for NRIs – Revised TDS Structure for NRIs 

Several changes were made in the NRI taxation system in July 2024. Take a look at the revised TDS rates for NRIs.

Type Of Transaction

Short Term TDS 

Long Term TDS

When you sell listed assets such as bonds, stocks etc. 

20%

12.5%

When you sell equity mutual funds

20%

12.5%

When you sell debt mutual funds

30%

30%

When you sell foreign debt/ equity or unlisted

30%

12.5%

When you sell gold in physical form

30%

12.5%

When you sell real estate

30%

12.5%

When you get income from rent

30%

30%

Impact of the Changes on NRIs

While the changes announced have simplified NRI mutual fund taxation, they have also brought an increase in short term gains. The 5% raise will impact the investors for the short term. Long term investors, on the other hand, will receive a ₹1,25,000 exemption towards the long term capital gains, giving them tax relief. The removal of the indexation benefit, however, has been a cause of concern for many. Also, because now the tax rates have been lowered to 12.5%, capital gains are now calculated on the basis of the purchase price and indexed value. Simply put, NRI may end up paying more towards taxes on real estate.

  • Higher Tax on Short-Term Capital Gains

Short-term capital gains, or STCG refers to capital gains on the transfer of short-term assets. The holding periods differ depending on the type of mutual funds. The government aims to encourage long-term assets and so, the tax levied on STCG is higher. Here are the taxation rules for STCG:

  • Equity-oriented funds are taxed at a flat rate of 15% irrespective of the tax slab of the individual. Equity mutual funds are the funds that invest over 65% in equity shares of a company. The mutual funds held for less than 1 year are termed as short-term capital gains. 

  • The equity mutual fund gains for NRIs are also subject to TDS (Tax Deducted at Source) at 20%

  • Debt-oriented funds are taxed as per the tax slab of taxpayers which may go up to 30%. Debt mutual funds are the funds that invest over 65% in debt securities and not more than 35% is exposed to equity shares. The shares held for over a 1 year period are termed as the long-term capital gains.

  • The debt mutual fund gains for NRIs are also subject to TDS (Tax Deducted at Source) at 30%

Note: Earlier, debt-oriented mutual funds were taxed at a concessional rate of 20%. The new budget does not offer indexation benefits to debt-oriented mutual funds.

  • Uniform Long-Term Capital Gains (LTCG) Tax

When you capitalise on the transfer of long-term mutual fund assets, it is termed as the long-term capital gains on mutual funds. These are the assets held for over 1 years. Unlike STCG, long-term capital gains on mutual funds are taxed uniformly. For NRIs, the LTCG mutual fund is taxed at the same rates as Indian residents. Here are the details of taxation on LTCG:

  • Equity-oriented mutual fund gains exceeding ₹1 lakh in a year are taxed at 10%

  • Debt-oriented long-term mutual fund gains are taxed as per the tax slab of the individual 

  • Equity mutual funds are also liable for 10% TDS (Tax Deduction at Source) for NRIs.

NRIs planning to invest in LTCG mutual funds can benefit from DTAA (Double Taxation Avoidance Agreement) as well. DTAA is an agreement between two countries that helps NRIs avoid paying multiple taxes for the same capital gains. DTAA usually fixes a rate at which the gains will be taxed. So, DTAA helps avoid high taxes and is not an agreement to avoid tax payment.

How Mutual Funds Are Taxed for NRI Investors in India?

Mutual fund gains are taxable for non-resident Indians (NRIs) as well. Like resident Indians, mutual fund gains by NRI also falls under different category of taxation. Here are the details for equity-oriented and debt-oriented mutual funds:

  • If an NRI Holds Equity-Oriented Mutual Fund Units

Equity-oriented mutual funds invest 65% or more in equity shares of a company. These can be of two types, long-term capital gains (LTCG) or short-term capital gains (STCG). These are classified on the basis of their holding period.

Shares that are held for or less than 1 year are termed as short-term mutual fund gains. Those held for more than 1 year fall under the category of long-term capital gains.

STCG equity mutual funds are taxed at a flat rate of 15% for NRI, irrespective of their tax slab. However, long-term equity mutual fund gains are taxed at 10% if the gains exceed ₹1 lakh in a year. In this category, indexation benefits are not offered.

  • If an NRI Holds Debt-Oriented Mutual Fund Units

Debt-oriented mutual funds are the funds that invest over 65% in debt shares of a company. Also, not more than 35% of the funds are invested in equity shares. Debt-oriented mutual fund investments by NRIs are also divided as STCG and LTCG. 

Long-term debt mutual funds have a holding period of over 1 year. In such a case, the tax levied depends on the tax slab of the NRI. If the holding period exceeds the 3 year period, the tax levied will be at 20% with indexation benefit. The taxation can go up to 30%. Long-term capital gains also attract TDS of 30%. It is applicable on both long-term and short-term capital gains on mutual funds by an NRI.

Short-term debt mutual funds are taxed as per the tax slab of the taxpayer. If the holding period exceeds 3 years, 20% tax will be levied on the long-term gains. LTCG taxation on unlisted mutual funds is charged at 10% without indexation benefit.

Final Takeaway

Mutual fund investments offer both growth potential and comparatively stable returns. As a non-resident Indian, you can access mutual fund investments. By fulfilling certain formalities, you may start diversifying your investment portfolio. Understanding the taxation on these mutual fund gains may seem daunting, although that's not the case. These are simply divided into STCG and LTCG and accordingly, taxes are levied on equity and debt funds. To avoid paying multiple taxes, NRIs can make use of DTAA and make the most out of their investments!

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

search icon

What is the new STCG tax rate on equity mutual funds for NRIs?

Answer Field

Starting July 23, 2024, the STCG tax rates for NRIs on stocks and equity mutual funds have risen from 15% to 20%

How does the LTCG tax change affect NRIs investing in real estate?

Answer Field

In the Union Budget 2024, it was announced that NRIs would no longer be eligible for the indexation benefit on long-term capital gains (LTCG) received from property sales. While there has been a 12.5% reduction in the tax rate, the inability to adjust for inflation means higher tax liabilities for NRIs.

What are the new TDS rates for NRIs selling listed equity shares and mutual fund units?

Answer Field

There has been an increase in the TDS for NRIs on the sale of listed equity shares and equity mutual fund units. 

  • LTCG: The rate has risen from 10% to 12.5%, 
  • STCG (of less than 12 months): The rate has gone up from 15% to 20%.

What happens to mutual funds when a person becomes an NRI?

Answer Field

As an NRI (Non-Resident Indian), you can purchase new or continue your investments in mutual funds. However, it’s crucial to comply with the rules and guidelines outlined by the Foreign Exchange Management Act (FEMA).

What is the tax rate for NRIs in the stock market?

Answer Field

The LTGC for NRIs in the stock market has been increased to 12.5%, while the STCG have now been set at 20%

How can NRIs update their status in mutual funds?

Answer Field

Once you become an NRI, you need to update your KYC details with your Asset Management Company (AMC). SEBI has relaxed the "KYC Registered" status rules for NRIs, and you can invest in mutual fund schemes (both new or existing) till 30th April 2025, without submitting any new paperwork.

Which mutual fund options are best for NRIs?

Answer Field

The choice of mutual funds depends greatly on your financial goals, and also the country that you reside in. You should also keep in mind that certain mutual fund houses discourage investments from USA and Canadian NRIs.

How much mutual fund investment is tax-free for NRIs?

Answer Field

For NRIs, short-term capital gains (STCG) from mutual fund units held for less than a year are taxed at 15%. Investments in equity-oriented mutual funds are tax-free up to the annual exemption limit of ₹1 lakh for long-term capital gains (LTCG)

Is tax automatically deducted from mutual funds for NRIs?

Answer Field

No, tax on mutual fund capital gains isn’t automatically deducted. You have to pay it when you redeem your units. However, TDS (Tax Deducted at Source) is applicable on dividend income from debt funds.

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ADDITIONAL DISCLAIMER FOR CANADIAN PERSONS

Bajaj Financial Securities Limited is not a registered adviser or dealer under applicable Canadian securities laws nor has it obtained an exemption from the adviser and/or dealer registration requirements under such law. Accordingly, any brokerage and investment services provided by Bajaj Financial Securities Limited, including the products and services described herein are not available to or intended for Canadian persons.  

This mailer and its respective contents do not constitute an offer or invitation to purchase or subscribe for any securities or solicitation of any investments or investment services.  

DISCLAIMER FOR REPORT

DISCLOSURES UNDER THE PROVISIONS OF SEBI (RESEARCH ANALYSTS) REGULATIONS 2014 (REGULATIONS)

Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.