Taxation of mutual funds for NRIs in India: rates, TDS and DTAA

Do NRIs pay tax on Indian mutual funds?

Yes. An NRI pays Indian tax on the gains from mutual fund units sold in India, and on IDCW, under the same rules as a resident.

NRI means non-resident Indian. For the Finance Act's rates, that is a citizen or person of Indian origin who is not resident in India for tax. IDCW is the payout a fund makes from its income or gains; it reduces the fund's NAV, the price of one unit, by the amount paid.

Tax residence decides all of this. You are resident for tax if you spent 182 days or more in India in the tax year. There are other tests for visitors and returning citizens. The definition of an NRI under FEMA (the Foreign Exchange Management Act) is a separate test. We cover it in how NRIs can invest in mutual funds.

The Income-tax Act, 2025 has been in force since 1 April 2026. It speaks of a "tax year" instead of "previous year" and "assessment year". The section numbers below are the new ones; the 2025 Act article has the full list.

How are mutual fund gains taxed for an NRI?

By fund type and holding period, at the same rates as a resident. A capital gain is the profit you make when you sell units for more than you paid. The holding period is how long you owned them, and it decides whether the gain is short-term or long-term.

An equity-oriented fund invests at least 65% of its money in shares of domestic listed companies, measured as the annual average of monthly averages. A Specified Mutual Fund invests more than 65% in debt and money market instruments, or 65% or more in units of such a fund.

Here is the tax on the gain itself, for tax year 2026-27 under the Income-tax Act, 2025. Add 4% cess to every row. Cess is an extra 4% charge on the tax. STT is the securities transaction tax charged when units are sold. Slab rates are the rates for your income band.

The ₹1,25,000 is one allowance per person per tax year. It covers all your qualifying equity shares, equity-oriented fund units and business trust units together, not each fund separately.

Surcharge is an extra charge on the tax itself, not on your income. It is 10% once total income passes ₹50 lakh, 15% above ₹1 crore and 25% above ₹2 crore. A 37% rate above ₹5 crore applies under the old regime only. On tax under sections 196 to 198 and on dividends, it cannot exceed 15%. For debt fund detail, see tax on debt mutual funds. A resident's full rulebook is in tax on mutual fund redemption.

Which reliefs do residents get that NRIs do not?

Two matter here. First, a resident whose other income is below the tax-free limit gets the unused part of that limit set against the gains first. This sits in sections 196(2) and 198(3), and it is for residents. An NRI does not get it.

Second, the rebate. Under the default regime, a resident individual gets a rebate of 100% of the tax or ₹60,000, whichever is less, if income does not exceed ₹12 lakh. It is for "a resident individual" only, so an NRI cannot claim it.

IDCW is taxed under "Income from other sources" at normal rates. From 1 April 2026, no interest expense can be deducted against it.

What does this look like in rupees?

Take Priya, a non-resident living abroad. These are assumptions, not a forecast. Her total income is not above ₹50 lakh, so there is no surcharge. She has no other Indian capital gain this tax year, and no treaty rate is used.

She sells equity-oriented fund units bought 20 months earlier, at a gain of ₹2,40,000. Her tax is 12.5% on ₹1,15,000, the part above ₹1,25,000. That is ₹14,375, plus ₹575 cess, so ₹14,950.

Had she sold after 10 months, the gain would be short-term. Tax would be 20% of ₹2,40,000, which is ₹48,000, plus ₹1,920 cess, so ₹49,920.

How much TDS is cut when an NRI redeems?

For an NRI, the fund house deducts tax when it pays out, at 20% on short-term equity-oriented gains and 12.5% on long-term ones above ₹1,25,000. It is 12.5% on other long-term gains and 30% on Specified Mutual Fund units bought on or after 1 April 2023. IDCW carries 20%. Add 4% cess and any surcharge. TDS means tax deducted at source. Section 393(2) requires it when the income is credited or paid, whichever is earlier. A resident's redemption gains carry no TDS.

Keep two numbers apart. The tax rate is what you finally owe on the gain. The TDS rate is what the fund house holds back at the time of sale. Here is the TDS, before any treaty rate and surcharge. Add 4% cess to every row.

Surcharge on TDS for a non-resident individual is 10% above ₹50 lakh and 15% above ₹1 crore, and on capital gains under sections 196 to 198 and on dividends it cannot exceed 15%.

Back to Priya. At 20 months, the Finance Act rate is 12.5% on the gain above ₹1,25,000. If the fund house applies that allowance when it deducts, the TDS is the same ₹14,950. The ₹1,25,000 is one allowance per person, so do not assume you get it free of TDS at every fund house. At 10 months, TDS is 20% plus cess, so ₹49,920. That is the same as her tax.

Debt funds show why the two rates differ. Say she has a ₹50,000 gain on Specified Mutual Fund units bought on or after 1 April 2023. TDS is 30%, which is ₹15,000, plus ₹600 cess, so ₹15,600. Her final tax is at slab rates, and that can be less. The difference comes back only through a return.

Is TDS the final tax?

No. TDS is a payment made on your behalf towards your final tax. It is subtracted when your tax due is worked out on your return (section 390(5), section 266(2)(b)). If it is more than you owe, processing of the return refunds the excess (section 270). TDS does not change what is taxable.

Can the TDS be lower?

You can apply to the Assessing Officer for deduction at a lower rate or none at all. The officer issues a certificate if your total income justifies it (section 395(1), Form 128, earlier Form 13). Nothing in that section makes it resident-only, so an NRI may apply.

Give the fund house your PAN, your permanent account number. Without it, tax can be deducted at a higher rate.

How does DTAA work for mutual fund gains?

If your country of residence has a tax treaty with India, the treaty rate applies where it is lower than the Indian rate. DTAA is the double taxation avoidance agreement: a treaty between India and another country so the same income is not fully taxed twice.

The Act says its provisions apply to the extent they are more beneficial to you than the treaty. To claim treaty relief you must hold:

• a certificate that you are a resident of that country, issued by that country's government (a tax residency certificate); and
• the other documents and information the rules prescribe, which are set out in Form 41 under the Income-tax Rules, 2026 (earlier Form 10F).

That is section 159(8) of the Act. For IDCW, the lower treaty rate on TDS applies only if you have furnished the certificate.

Whether the other country gives you credit for the Indian tax is that country's own rule.

Do NRIs have to file an income tax return in India?

You must file if your Indian income before deductions is above the tax-free limit. An NRI whose only Indian income is from certain specified investments, with tax already deducted, is excused. Those are shares and certain debentures and deposits of Indian companies, central government securities and notified assets, bought in convertible foreign exchange. Mutual fund units are not on that list.

Even if you are excused, filing is the way to get money back. If the fund house deducted more than you owe, a return is the only route to the difference. The Act says every claim for a refund is made by furnishing a return (section 433).

How to file your income tax return walks through the steps, and why filing matters covers the resident case. Your capital gains statement shows the gain on each redemption.

Does an NRE or NRO account change the tax?

No. The account you invest from does not change the tax rate on the gain. It changes where the money can go afterwards.

An NRE account is one NRIs may open and maintain; inward remittances and remittances outside India from it are permitted. An NRO account is the non-resident (ordinary) account. From it, banks may allow NRIs, on documentary evidence, to remit up to USD one million per financial year, including to NRE accounts. The accounts and the KYC are in how NRIs can invest in mutual funds and mutual fund KYC.

NRIs can invest in mutual funds through Koshex. Koshex accepts NRIs living in the US or Canada.