Why UAE NRIs don’t pay capital gains tax on Mutual Funds (MFs) in India

Many NRIs in the UAE choose to invest in the Indian market through mutual funds due to the convenience and versatility offered by these investments. However, one concern they may have is about paying tax on capital gains earned. 

Background on NRI taxation in India
 

It is essential for UAE NRIs to understand how their income and capital gains through MF’s are treated under Indian tax laws.

• An individual is considered an NRI if they have stayed in India for less than 182 days in the preceding financial year.
• NRIs are taxed similarly to resident Indians on their income from Indian investments or property. Any income earned in India is subject to tax, regardless of their residential status.
• Capital gains arising in India from the sale of listed shares and immovable property located in the country are also liable to capital gains tax.
• India has signed Double Taxation Avoidance Agreements (DTAAs) with various countries including the UAE. These treaties provide relief to NRIs from being taxed twice on the same income or gains.

Capital gains tax on mutual funds in India.
 

• Any capital gains from debt mutual funds are taxed at the NRI's applicable income tax slab rates, which can be as high as 30% (Plus surcharge and cess as applicable).
• Any capital gains from equity mutual funds redeemed within 12 months of purchase are treated as Short-Term Capital Gains (STCGs) and are taxed at 20% (Plus surcharge and cess as applicable).
• However, capital gains earned from redeeming equity mutual fund units held for more than 12 months attract lower Long-Term Capital Gains (LTCG) tax rates at 12.5% (plus surcharge and cess as applicable).
• For equity funds, long term capital gains up to ₹1.25 lakh in a financial year are exempt from tax. 

Tax exemptions for NRIs in UAE
 

Understanding tax treaties is essential for maximising returns on investments made across borders.

• India and UAE have signed a DTAA to avoid double taxation of income and capital between both countries. The benefit of DTAA can be extended to the NRI if he provides documents like Tax Residency Certificate and Form 10F to the person who is required to deduct tax.
• As per Article 13 of this DTAA, for UAE NRIs capital gains made from selling shares, debentures, or mutual fund units in India would be taxable in UAE and not in India.
• The NRI must not be considered a tax resident of India as per the 182-day rule and must be an actual resident of UAE with a valid UAE tax identification number. 

Benefits of investing in Indian mutual funds for UAE NRIs.
 

• The complete absence of capital gains tax on equity and debt funds allows UAE NRIs to retain all returns earned.
• Indian equity markets have historically delivered high returns, which can help build wealth in the long term.
• Access to a wide range of diversified mutual fund portfolios across sectors, companies, and market segments helps build robust long-term savings.
• UAE NRIs have the opportunity to invest in India's infrastructure and development through dedicated thematic and sector funds.
• There are regular investment options like Systematic Investment Plans (SIPs) which help create wealth through rupee-cost averaging and compounding.

Strategies for maximising tax efficiency
 

There are some strategies that can be employed to maximise tax efficiency as NRIs:

• Opt for dividend plans that receive payouts instead of growth plans to avoid paying tax on capital appreciation later.
• Route investments through the NRI route instead of the general power of attorney route for clarity on tax exemptions.
• Keep all investment-related documents readily available, including account statements, purchase and redemption confirmations, and DTAA-related details. This will smoothen the process if any tax-related inquiries arise in the future.
• While the DTAA offers tax benefits, navigating tax regulations can be complex. It's advisable for UAE NRIs to consult a tax professional familiar with the India-UAE DTAA and NRI taxation to ensure they are maximising their tax advantages and complying with all regulations.

You can send money to India from the UAE with no charges. 
 

• Leading money transfer services have vast networks facilitating free instant money transfers between UAE and India bank accounts.
• Their user-friendly online platforms allow investors to easily track fund movements and receive amounts directly into their Indian accounts within minutes.
• No transfer fees are charged on remittances up to annual thresholds.
• Online interbank transfers through services on major UAE and Indian bank websites also provide swift, paperless fund routing with competitive exchange rates.

Conclusion
 

UAE NRIs enjoy the unique benefit of investing in Indian mutual funds completely free of capital gains taxes, making them an extremely tax-efficient instrument. Coupled with India's strong fund performance, convenient online money transfer options, and goal-based portfolio choices, UAE NRIs are well equipped to build robust long-term wealth by allocating capital to mutual funds.