NRI may get exemption from Income Tax on gains from Mutual Funds redemption in India:
If you're an NRI (Non-Resident Indian) residing in UAE, Singapore, Malaysia, Qatar, Bahrain, Oman, Saudi Arabia, or Kuwait, and you’re investing in mutual funds in India, you could be entitled to full exemption from capital gains tax on redemption or sale of mutual funds. The exemption is based on a provision known as the "residual clause" under Article 13(5) of the DTAA. (Double Taxation Avoidance Agreement between India and UAE)
What Is Article 13(5) and How Does It Help You?
Article 13 of the DTAA between India and the countries listed above deals with taxation of capital gains. Here's a simplified breakdown:
1. Article 13(1)–(4) talks about gains from:
o Immovable property
o Business property and permanent establishments
o Shares in companies primarily owning immovable property
o Shares in resident companies
2. Article 13(5)—the residual clause—states:
"Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a resident."
In simple terms, if your capital gain doesn’t fall under the categories mentioned in Articles 13(1)–(4), then only your country of residence has the right to tax it.
How This Applies to Mutual Funds
Units of mutual funds do not fall under Articles 13(1)–(4). They are considered movable, non-business, non-immovable assets, and thus fall under Article 13(5).
So, if you're a tax resident of one of the following countries:
United Arab Emirates (UAE)
Singapore
Malaysia
Mauritius
Oman
Bahrain
Qatar
Kuwait
Saudi Arabia
then India does not have the right to tax capital gains from your mutual fund investments. Instead, your country of residence has taxing rights. And here’s the catch—in most of these countries, especially the UAE, capital gains are not taxed at all.
Example: Zero Tax in UAE
Let’s say you're an NRI living in the UAE, and you redeem mutual fund units in India. Based on Article 13(5):
India cannot tax your capital gains.
UAE does not levy capital gains tax.
Result: You pay zero tax on your capital gains from Indian mutual funds.
This interpretation isn’t just theoretical—it’s now backed by a judicial ruling.
Case Law: Anushka Sanjay Shah vs. ITO
🏛️ Tribunal: ITAT Mumbai
📆 Date of Judgment: 26th March 2025
🌐 Context: India-Singapore DTAA
🧾 Verdict: The ITAT ruled in favour of the assessee, confirming that capital gains from mutual funds fall under Article 13(5) and are taxable only in Singapore, not in India.
This sets a strong precedent for NRIs residing in any country where India’s DTAA contains a residual clause under Article 13(5).
How to Claim the DTAA Exemption
To avail the benefit, you need to submit the following documents:
1. Tax Residency Certificate (TRC) from your country of residence
2. Form 10F, filed with Indian tax authorities
3. No PE (Permanent Establishment) Declaration stating you don’t have a business presence in India
Disclaimer: The views and opinions expressed in this article are solely personal and for informational purposes only. They do not constitute professional advice. The opinion may vary depending on the specific facts of each case. Readers are advised not to act solely on the basis of this opinion and should seek appropriate professional guidance before making any decisions.
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