Are mutual funds taxable for NRIs from the US/UK/Middle-East?
Mutual Fund and Taxation is a very complex subject. To make it clear, let us first understand the mediums of investment in mutual funds. NRIs can invest into mutual funds from their NRE and NRO accounts. Now a brief description of these accounts can be understood as:
Non-Resident External (NRE): The NRE account can be opened for the purpose of maintaining the income earned outside India with tax free interest (upto 7.60*%) on Fixed Deposits. Both the principal amount and interest earned are completely repatriable from India.
Non-Resident Ordinary (NRO): The NRO account can be opened for the purpose of maintaining the income earned from India such as income from rent, pension, etc. The repatriation of the money in the account can be done up to a maximum of 1 million USD per financial year. Note: 30% tax + surcharge + education cess will be deducted at the source of interest earned in India (only current income such as rent, pension etc. can be repatriated)
Now, a clear understanding of these two accounts makes it clear that for NRE Accounts, since the funds are fully and freely repatriable, any investment done through this account such as in mutual funds will be subject to TDS (Tax Deducted at Source) so that as soon as you get money in your NRE account, that is fully repatriable without any hassle where as for NRO Accounts; it is clearly mentioned that 30% tax + surcharge + education cess will be deducted at the source of interest earned in India.
However, you can later claim for a tax refund according to your tax slab.
|Income Tax Slab||Tax Rate|
|Up to 2.5 Lakhs||Nil|
|2.5 Lakhs to 5 Lakhs||5%|
|5 Lakhs to 7.5 Lakhs||10%|
|7.5 Lakhs to 10 Lakhs||15%|
|10 Lakhs to 12.5 Lakhs||20%|
|12.5 Lakhs to 15 Lakhs||25%|
|15 Lakhs and above||30%|
If the net profit/income in India for an NRI is below Rs. 2,50,000/- (Two Lakhs Fifty Thousand), a tax return can be filed to claim a refund of the taxes deducted as there are no taxes applicable for people in India with annual income of less than Rs. 2,50,000/- (Two Lakhs Fifty Thousand).
So, to summarize on Mutual Fund and Taxation: YES! Mutual Funds investments in India are taxable for NRIs.
Note: NRIs need not pay double taxes. There is a provision called DTAA (Double Taxation Avoidance Treaty). If the DTAA is signed between India and the country of residence of the NRI, the NRI will not be paying double taxes on the same source of income. NRIs will however need to pay differential taxes. (For example: If for a certain investment, taxes are 30% in India and 40% in the USA, NRIs from the USA need to pay the remaining 10% to US.)
India has signed DTAA with more than 85+ countries all around the globe including USA, UK, Saudi Arabia and UAE. You can check the list of the countries and find additional information regarding DTAA here.
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