💬 Q1. What’s the buzz around this new ITAT ruling for NRIs?
A: The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) delivered a game-changing verdict:
🔑 Capital gains earned by NRIs from redeeming mutual fund units in India are not taxable in India—if a favorable tax treaty applies.
Sounds like good news, right? Especially if you’re an NRI from Singapore, UAE, Mauritius, or other countries with similar treaties.
🌍 Q2. Which country’s treaty made this possible?
A: This ruling revolved around the India–Singapore Double Taxation Avoidance Agreement (DTAA).
The case involved Mr. A Shah, a Singapore tax resident, who had invested in Indian mutual funds and earned capital gains upon redemption.
🧩 Q3. What is this “residual clause” everyone is talking about?
A: The “residual clause” in some DTAAs says:
💡 If capital gains arise from assets other than shares or immovable property, they are taxable only in the country of residence of the seller (i.e., the NRI), not India.
Example:
• Mr. Shah from Singapore sold mutual fund units worth ₹20 lakhs.
• Normally, such gains might attract capital gains tax in India.
• But due to the residual clause, he’s taxed only in Singapore, not in India.
🚫 Q4. Why did the Indian Tax Officer deny this benefit initially?
A: The Assessing Officer argued that mutual fund units derive their value from Indian assets and should be taxed in India.
But Mr. Shah countered that mutual fund units aren’t “shares”, and this is where the legal nuance kicks in.
🔍 Q5. So, how did the ITAT distinguish mutual fund units from shares?
A: The ITAT clarified:
🏛️ Mutual fund units are issued by trusts (not companies), so they don’t qualify as “shares”.
Therefore, they fall under the residual clause, not under share-related clauses.
🌐 Q6. Are other countries’ NRIs eligible too?
A: Absolutely. Similar DTAA benefits exist with:
• UAE
• Mauritius
• Netherlands
• Portugal
• Spain
If you’re an NRI residing in any of these countries, your mutual fund redemptions may not be taxed in India.
💼 Q7. What’s the practical impact of this ruling for NRIs?
A: This ruling is a relief and a planning opportunity:
✅ Avoids double taxation
✅ Saves effort in Indian return filings
✅ Boosts post-tax returns on Indian mutual fund investments
🔎 Q8. Can you give a practical example?
Sure! Here’s a simple one:
Case: Anita, an NRI in the UAE, invested ₹10 lakh in an Indian equity mutual fund in 2021.
She redeems it in 2025, earning ₹3 lakh capital gain.
Outcome: Thanks to the UAE-India DTAA, the ₹3 lakh gain is taxable only in the UAE, not in India.
🧠 Key Takeaway
“If you’re an NRI from a country with a favorable tax treaty, your mutual fund redemptions in India may be completely tax-free here. That’s not just good tax planning – it’s smart investing.”
📞 Need personalized advice?
📦 CA Bhavesh Panpaliya | +91 88887 55557