The Mumbai income-tax appellate tribunal (ITAT) has ruled that capital gains from mutual fund units earned by non-resident Indian (NRI) investors of Singapore are not taxable in India.
This ITAT ruling will impact all NRIs investing in Indian mutual fund schemes, as the capital gains earned will not be subject to taxation in India as per the provisions of the double taxation avoidance agreement (DTAA) between India and Singapore. Importantly, the same does not hold for investments in the Indian share market by the NRIs.
The case refers to Anushka Sanjay Shah, an NRI residing in Singapore, who had earned short-term capital gains of Rs 1.35 crore from the sale of equity and debt MF units during the assessment year (AY) 2022–23.
The assessee had claimed that capital gains earned on the transfer of equity shares can not be charged as she is a tax resident of Singapore and the provisions of Article 13(5) of DTAA are applicable.
The Assessing Office (AO) did not accept the contentions of the assessee and proposed to tax the entire amount in the draft assessment. The assessee filed an objection, but the action of the AO was endorsed, which held that the capital gains arising from the units of mutual funds that derived substantial value from assets located in India are taxable in India.
Accordingly, AO proceeded to tax the short-term capital gain of Rs. 1,35,66,368 in December 2024. Aggrieved with the order of the AO, the assessee appealed before the Tribunal.
In the past, there were at least two similar incidents where the NRIs were residing in Switzerland and the UAE.
The bone of contention in all these cases is Article 13(5) of the DTAA entered into by India with different countries. The DTAA rules consider capital gains earned on the sale of shares but not mutual fund units.
As per Article 13(5), gains arising from the sale of shares in a company in which a resident of India can be taxed in India. The AO had treated the units of a mutual fund as shares of the Indian company and held that the gain is taxable under Article 5 (b). The case of the assessee is that units of mutual funds are different from shares of Indian companies and have been given different treatment in the Income Tax Act.
The appellate tribunal’s view is that in the absence of any specific provision under the Act to deem the unit as shares, it could not be considered as shares of companies and, therefore, the provisions of Article 13 (5) (b) can not be applied in the case of mutual fund units.
In a similar case with an NRI in UAE, it was also ruled that the assessee, who is a resident of UAE for the purposes of the Tax Treaty, STCG arising from sale of units of equity-oriented mutual funds and debt-oriented mutual funds should not be liable to tax in India in accordance with the provisions of Article 13(5) of the Tax Treaty.
The term ‘share’ is not defined under the Tax Treaty. Under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1995, mutual funds in India can be established only in the form of ‘trusts’, and not ‘companies’. Therefore, the units issued by Indian mutual funds will not qualify as ‘shares’ for the purpose of the Companies Act, 2013.
Nilesh Shah, managing director at Kotak Mahindra Asset Management Company shared his views on this ruling on X. Shah writes, “US levies hefty Exit tax on citizens becoming non-resident. India is incentivising Citizens to shift tax residency and save on capital gains tax liability.
If you have significant capital gains tax liability on eligible securities, shift to the UAE for more than 183 days.
We should amend the laws immediately to ensure that tax is paid in the host country and credit is taken in the reciprocal country.
If we have to persist with tax benefits for larger causes, they should only be available to foreign citizens and not to “seasonal non-residents.”
As things stand out today, whether it is double taxation avoidance agreement (DTAA) between India and Singapore or the Indo-Swiss DTAA or India-Singapore DTAA, the mutual fund units cannot be considered as shares and, therefore, are except from capital gains taxation in the hand of the NRIs when invested in countries where India has a DTAA in place.