A Singapore-based tax resident has won relief on Rs 1.35 crore of capital gains earned from Indian mutual funds after the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that mutual fund units cannot be treated as shares for the purposes of the India-Singapore Double Taxation Avoidance Agreement (DTAA).
The ruling came in the case of Anushka Sanjay Shah, a Singapore tax resident, whose claim for treaty benefits had earlier been rejected by both the Income Tax Department and the Dispute Resolution Panel (DRP). The tribunal eventually ruled in her favour and deleted the entire addition of Rs 1.35 crore made by the tax authorities.
What was the case about?
According to the ITAT order, the taxpayer filed her income tax return for Assessment Year (AY) 2022-23 on June 27, 2022, declaring total income of Rs 4.53 lakh. The case was later selected for scrutiny.
During the assessment proceedings, the tax department noted that she had earned short-term capital gains of Rs 88.75 lakh from debt mutual funds and Rs 46.91 lakh from equity mutual funds, taking her total gains to Rs 1.35 crore.
However, she claimed that these gains were exempt from tax in India under the India-Singapore DTAA because she was a tax resident of Singapore.
The Assessing Officer (AO) did not accept this position and proposed to tax the entire amount. The taxpayer challenged the decision before the DRP, but the panel upheld the department’s view that gains arising from mutual fund units deriving substantial value from assets located in India were taxable in India.
Following the DRP’s decision, the AO passed the final assessment order on December 21, 2024, taxing the entire Rs 1.35 crore of short-term capital gains. The taxpayer then approached the ITAT.
The key question before ITAT
The central issue before the tribunal was whether gains arising from the sale or redemption of mutual fund units should be treated in the same manner as gains arising from the sale of shares under Article 13 of the India-Singapore DTAA.
The taxpayer argued that mutual fund units are not shares and therefore should not fall under treaty provisions dealing specifically with shares.
Instead, such gains should be covered by Article 13(5) of the treaty, which states that gains from assets not specifically covered elsewhere in Article 13 are taxable only in the country where the investor is a resident.
Since she was a tax resident of Singapore, she argued that India had no right to tax the gains.
Why did the tribunal rule in her favour?
The tribunal agreed with the taxpayer’s argument and relied on earlier decisions involving similar treaty provisions under India’s tax treaties with Switzerland and the UAE.
The ITAT referred to previous rulings that had distinguished mutual fund units from shares and observed that the two are not the same legal instruments.
The tribunal noted that Indian mutual funds are structured as trusts and not as companies. As a result, units issued by mutual funds cannot automatically be equated with shares issued by companies.
It also relied on judicial precedents and legal definitions under Indian laws, which separately classify shares and mutual fund units.
Based on this reasoning, the tribunal held that gains arising from mutual fund units do not fall under treaty provisions dealing with shares. Instead, they fall under the residual capital gains provision contained in Article 13(5) of the India-Singapore DTAA.
Consequently, the tribunal held that the taxpayer was entitled to treaty benefits and allowed the appeal.
Why is this ruling important for NRIs?
According to Rajiv Thakkar, Partner and Leader Transaction and Business Advisory, Bhuta Shah & Co., the key takeaway from the decision is the interpretation of the India-Singapore DTAA in relation to capital gains from Indian mutual fund investments held by NRIs who are tax residents of Singapore.
“The Hon’ble ITAT held that mutual fund units are distinct from ‘shares’ for the purposes of Article 13 of the DTAA, including Article 13(4), which deals with taxation of gains from shares acquired on or after 1 April 2017. Accordingly, mutual fund units do not fall within this provision and are instead covered under the residuary Article 13(5), which allocates taxing rights to the country of residence of the taxpayer,” Thakkar said.
The tax expert added that where the investor is a bona fide tax resident of Singapore, capital gains from Indian mutual fund units may not be taxable in India.
“Since Singapore generally does not tax capital gains, the income may escape tax in both jurisdictions, subject to treaty conditions,” he noted.
Why the distinction between shares and mutual fund units matters
A major aspect of the ruling is the tribunal’s conclusion that mutual fund units cannot be treated as shares merely because the underlying investments may include equities.
According to the Thakkar, this distinction goes to the heart of treaty interpretation.
“The Hon’ble ITAT observed that shares represent equity ownership in a company and confer shareholder rights such as voting and participation in corporate governance. In contrast, mutual fund units represent a beneficial interest in a pooled investment vehicle and do not carry attributes of equity ownership. On this basis, mutual fund units cannot be equated with ‘shares’ for treaty purposes unless expressly provided in the DTAA.”
He said the interpretation is significant because it reinforces strict treaty interpretation based on the plain meaning of terms and draws a clear distinction between direct equity investments and collective investment vehicles such as mutual funds.
Can other NRIs also claim similar relief?
The ruling is likely to be closely watched by NRIs investing in Indian mutual funds, particularly those residing in countries that have tax treaties containing provisions similar to the India-Singapore DTAA.
However, experts caution that the judgment should not be viewed as a blanket exemption available to every overseas investor.
“While the ruling arises from a specific set of facts, the underlying legal interpretation has wider relevance for similarly placed taxpayers under the India-Singapore DTAA,” Thakkar said.
According to the expert, Singapore tax residents investing in Indian mutual fund units may also be able to claim similar treaty relief because Article 13(5) allocates taxing rights over assets not specifically covered elsewhere in the treaty to the country of residence.
However, the availability of relief remains fact-dependent and may be examined by tax authorities on a case-by-case basis.
“The ruling is therefore persuasive in nature and provides a favourable interpretational precedent but does not operate as an automatic or blanket exemption in all cases,” he said.
Conditions NRIs should keep in mind
The expert said taxpayers seeking similar treaty benefits should ensure that they satisfy all compliance requirements.
These include maintaining evidence of non-resident status under Indian tax law, obtaining a valid Tax Residency Certificate (TRC) from overseas tax authorities, filing Form 10F where applicable, and properly disclosing the treaty claim in their Indian income tax return.
Thakkar also noted that investors should verify whether the relevant tax treaty contains a provision similar to Article 13(5) of the India-Singapore DTAA and ensure that the investment is in mutual fund units rather than direct equity shares.
For now, the Mumbai ITAT’s ruling adds to a growing line of decisions that distinguish mutual fund units from shares for treaty purposes and could provide support to similarly placed Singapore-resident investors seeking DTAA relief on gains from Indian mutual funds.
Disclaimer: This article is based on the order of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Anushka Sanjay Shah vs ITO (International Taxation) for AY 2022-23 and expert interpretations of the ruling. The decision was rendered on the specific facts of the case and should not be construed as a blanket exemption for all NRIs or foreign investors. Eligibility for relief under a Double Taxation Avoidance Agreement (DTAA) depends on factors such as tax residency status, possession of a valid Tax Residency Certificate (TRC), compliance with treaty conditions, limitation-of-benefits and anti-abuse provisions, nature of the investment, and proper disclosure in tax filings. Tax laws and treaty provisions are subject to interpretation and may be challenged before higher judicial forums. Readers should consult a qualified tax professional before taking any investment or tax-related decisions based on this ruling.
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