Tax rates on Mutual Fund Investment for NRIs.

India is one of the favourite investment destinations for investors all over the globe and especially for NRI’s. India has seen a huge jump in the investments made by NRI’s in India and one such instrument is investments in Mutual funds.

The only thing that restricts lot of NRI’s to invest is the lack of knowledge relating to the taxation rules with respect to NRI investment in Mutual funds. All investors should have the basis knowledge about taxation which will help them in choosing the product they want to invest in more prudently.

Here is an attempt to cover Mutual Fund Taxation for NRIs specifically.

Income from Mutual Fund can be divided into 1. Capital Gains or 2. Dividends. So taxation of Mutual Funds in India can be divided in 2 parts Capital Gain & Dividends.

Taxation on Capital Gains

In order to understand the taxation rules with respect to capital gains it would be wise to understand what capital gains mean. Capital gains can be defined as “the appreciation in value of the investment with respect to the investment originally made is called Capital gains”.

So let’s say an investor invests INR 100,000 in a mutual fund and is able to sell it for INR 150,000 the extra 50,000 that he made after selling his units is termed as capital gains.

If the investors sells the allotted mutual fund units before 365 days of making the investment it is termed as Short Term Capital Gains; and

If the investors sells the allotted mutual fund units after 365 days of making the investment it is termed as Long Term Capital Gains.

The taxes on the capital gains are also dependent on the kind of fund the investment is made in and can be divided in two parts Capital gains in Equity funds and Capital gains in Debt funds.

Capital Gain Tax on Equity Mutual Funds

Any fund that has more than 65% holding in equities will be termed Equity Fund and the rest are termed as debt funds.

Long term capital gains on equity funds is tax free whereas short term capital gains in equity funds attracts 15% TDS in case of NRIs.

Capital Gain Tax on Debt Mutual Funds

A fund that is not an equity fund can be termed as debt fund and in case of NRIs the mutual fund companies deduct a TDS of

30% in case of short term capital gains and

20% in case of long term capital gains.

Taxes on Dividends

In order to understand the taxation rules with respect to dividend it would be wise to understand what dividends mean. Dividends can be defined as “the payment received from the mutual fund companies at regular intervals when an investor chooses the dividend option instead of the growth option”.

As Capital gains taxation on dividends and dividend distribution taxes are based on the type of Mutual Fund the investment is made – Equity or Debt.

Taxes on Dividends from Equity Mutual Funds

Dividends in case of an equity fund are tax free at the hands of the investors and there is no dividend distribution tax for the mutual fund companies for equity funds.

Similarly there is not tax on the dividends received from debt mutual funds but the Mutual fund companies are liable to pay dividend distribution tax to the Income tax department.

Dividend Distribution Tax on Debt Mutual Funds

There are no taxes on dividend distribution in case of equities mutual fund.

Dividend Distribution Tax on Debt Mutual Funds

The dividend distribution taxes are again based on the type of fund the investment is made in.

Dividend Distribution Tax on Liquid/Money Market Schemes

Any fund which invests in money market instruments or in securities that have maturity of less than 90 days is called Liquid/Money Market Schemes.

Mutual fund companies are liable to pay 27.038% tax (25% Tax + 5% Surcharge + 3% Cess) and hence the same is deducted from the dividends.

Dividend Distribution Tax on Debt Funds other than Liquid/Money Market Schemes

Here 13.519% tax (12.5% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

NRI Tax on Indian Mutual Funds

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