Taxation rules for NRIs and residents of India are alike. For equity mutual funds, the investments made for one year or less will be taxed at 15% per the short-term capital gains taxation rules. For long-term investments, mutual funds are taxed at a rate of 10% per the long-term capital gains taxation rules.
The checklist for KYC for NRI mutual funds are:
- Cancelled cheque of NRO, NRE, or FCNR bank account.
- Certified Foreign Address Proof – residential permit, latest utility bill, driving license with address, etc.
- Indian address proof – latest utility bill, driving license, Aadhar card, Bank statement, etc.
- Passport – first two and last two pages.
TDS is applicable for NRIs on Mutual Fund Redemption. The rate depends on the type of scheme and the holding period. The TDS rate is charged at the highest applicable rate. When the NRI falls in a lower tax slab, they are eligible for a refund when they file their returns.
Mutual fund dividends are subject to TDS at 7.5 per cent for dividends above Rs 5,000.
As an NRI, if a person sells a property in India, the real estate buyer deducts 20% of the Tax Deducted at Source (TDS) as Long-Term Capital Gains Tax for properties sold after two years. For properties sold before the two years, the TDS rate is 30%, deducted as Short-Term Capital Gains Tax.
If the investment in mutual funds is held for less than one year, then the capital gains are considered short-term capital gains.
- A short-term tax on capital gains (STCG) applies to equity mutual fund investments that last no more than one year. In this case, the tax rate is 15% of the gains.
- In the case of equity mutual fund investments made for more than one-year, long-term capital gains (LTCG) rules apply. Incremental gains over Rs. 1 lakh in a financial year are taxed at 10%.
NRIs (non-residents of the USA and Canada) can invest in mutual funds just as quickly as Indian residents. The NRIs can invest in mutual funds by opening one of the following accounts with an Indian bank:
- A Non-Resident External Rupee (NRE) account
- A Non-Resident Ordinary Rupee (NRO) account
- A Foreign Currency Non-Resident Account (FCNR)
There is no differential taxation rate for resident Indians and NRIs. NRIs must pay Tax on short-term capital gains on debt funds as per the person’s income tax slab and equity funds at a flat rate of 15%. On long-term capital gains on debt funds, they must pay 20% tax with indexation and 10% tax without indexation, and no tax on the sale of long-term equity funds. However, for NRIs, the Tax is deducted at source, while resident Indians must make tax payments as per the advance tax schedule. Also, NRIs who live in countries that do not have a Double Taxation Avoidance Agreement, i.e., DTAA with India, will have to pay taxes both in India and their country.