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In a ruling that could significantly influence the tax liabilities of Non-Resident Indians (NRIs) investing in Indian mutual funds, the Income Tax Appellate Tribunal (ITAT), Mumbai bench, has determined that capital gains earned by NRIs on the redemption of mutual fund units are not taxable in India. This decision was delivered in a case involving a Singapore-based NRI who had declared short-term capital gains from mutual fund investments but claimed exemption under the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.

The case centered on a Singapore tax resident who realized capital gains amounting to approximately ₹1.35 crore through the sale of mutual fund units—both equity and debt—during the financial year 2021–22. The taxpayer argued that under Article 13 of the India-Singapore DTAA, these capital gains should only be taxed in her country of residence, not in India.

The Indian Income Tax Department challenged this position, asserting that mutual fund units, which derive substantial value from Indian assets, should be treated similarly to shares and thus be taxable in India. However, the ITAT rejected this claim, drawing a distinction between mutual fund units and equity shares. The tribunal clarified that mutual fund units are issued by trusts and not by companies, and therefore, they do not fall within the scope of the DTAA clauses that relate specifically to shares of companies.

Crucially, the tribunal referred to the residual clause in the India-Singapore DTAA, which states that any gains from assets not specifically addressed in the agreement are taxable only in the country of residence. Since mutual fund units do not fall under the definition of shares or immovable property, and are not linked to any permanent establishment in India, the tribunal concluded that the capital gains from these units could not be taxed in India.

This judgment has broader implications for NRIs who are tax residents of countries with which India has similar DTAAs. Countries such as the UAE, Mauritius, the Netherlands, Spain, and Portugal have tax treaties with India that include comparable residual clauses. For NRIs residing in these jurisdictions, the ruling opens the door to claiming similar exemptions, potentially resulting in significant tax savings on their Indian mutual fund investments.

Another dimension of the ruling is its potential impact on how Asset Management Companies (AMCs) and mutual fund distributors apply Tax Deducted at Source (TDS) on redemption proceeds for NRIs. Until now, many AMCs have applied TDS on capital gains made by NRIs, regardless of DTAA provisions. This ITAT judgment may prompt a reevaluation of those practices and lead to more refined, treaty-compliant approaches to tax deduction.

For NRIs and their financial advisors, this development underscores the importance of understanding and leveraging the terms of DTAAs between India and their country of residence. While the Indian tax landscape remains complex for expatriate investors, favorable treaty provisions, such as the one utilized in this case, can offer significant relief when properly invoked.

Moreover, the ruling strengthens the notion that mutual fund investments made by NRIs should be assessed based on the nature of the investment instrument, the legal structure of the issuing entity, and the specific language of relevant tax treaties. It also highlights the increasing role of international tax agreements in resolving cross-border tax disputes.

As NRIs continue to be a vital segment of the investor base in Indian financial markets, clarity on tax matters plays a critical role in guiding their decisions. This ruling provides such clarity and is likely to influence future cases involving NRI investments and capital gains taxation in India. While the Income Tax Department may consider appealing the decision in higher forums, for now, this verdict sets a precedent that could benefit thousands of expatriate investors.