Tax-Saving Strategies for NRIs on Mutual Fund Gains in India

Investing in mutual funds is a popular wealth-building strategy for Non-Resident Indians (NRIs). Thanks to simplified KYC norms and seamless online access, NRIs can actively participate in India’s fast-growing financial markets. However, tax implications on mutual fund returns can eat into those gains if not planned wisely.

The good news is that NRIs can employ several strategies to minimize tax on save tax on mutual fund gains as an NRI. In this blog, we’ll explore how mutual fund taxation works for NRIs and how you can legally reduce your tax outgo.

How Are Mutual Fund Gains Taxed for NRIs?

Taxation on mutual fund returns for NRIs depends on the type of fund and the holding period. Additionally, NRIs are subject to Tax Deducted at Source (TDS) on all capital gains.

1. Equity Mutual Funds

• Short-Term (Held < 12 months): 15% tax on gains. TDS is also deducted at 15%.

• Long-Term (Held ≥ 12 months): 10% tax on gains above ₹1 lakh/year. TDS is deducted at 10%.

2. Debt Mutual Funds

• All gains (post-April 1, 2023) are treated as short-term, regardless of the holding period.

• Taxed at applicable slab rate. TDS deducted at 30% for NRIs.

Note: If you sell before April 1, 2023, and the holding period exceeds 3 years, LTCG is taxed at 20% with indexation.

7 Tax-Saving Ideas for NRIs on Mutual Fund Gains

1. Capital Gains Harvesting

One of the most underutilized methods is LTCG harvesting. Every financial year, you’re entitled to ₹1 lakh of tax-free long-term capital gains on equity mutual funds. NRIs can redeem mutual fund units up to this threshold annually and reinvest the amount to reset the acquisition cost.

This ensures your returns remain largely tax-free year after year, especially if you’re a long-term equity investor.

2. Invest in ELSS for Section 80C Deduction

NRIs are eligible to invest in Equity Linked Savings Schemes (ELSS)—tax-saving mutual funds under Section 80C. By investing up to ₹1.5 lakh annually, you can reduce your taxable income in India. ELSS has a lock-in of 3 years and can offer market-linked returns along with tax benefits.

This strategy is particularly useful if you have taxable income in India, such as rental income, pension, or interest.

3. Use DTAA to Avoid Double Taxation

India has signed Double Taxation Avoidance Agreements (DTAA) with countries like the US, UK, Canada, UAE, Australia, and many others. These treaties help you avoid being taxed twice on the same income.

To avail DTAA benefits:

• Submit a Tax Residency Certificate (TRC) from your resident country.

• Fill and submit Form 10F and a self-declaration to the AMC.

This can reduce TDS rates or allow you to claim credit in your home country for tax paid in India.

4. File Income Tax Returns in India

Even if your taxable income in India is low, NRIs should consider filing ITR to:

• Claim refunds on excess TDS.

• Report capital gains.

• Show eligibility for DTAA relief.

Filing a tax return is often the only way to recover TDS if your total tax liability is less than what was deducted.

5. Choose Growth Option Over IDCW (Dividend)

NRIs should generally avoid the IDCW (Income Distribution Cum Withdrawal) option in mutual funds. The dividends are taxed at 30% TDS for NRIs, which can be a high cost.

Instead, opt for the Growth option—where your investment compounds until redemption. You only pay capital gains tax when you sell, and with proper planning, much of it can be tax-free or reduced.

6. Systematic Withdrawal Plan (SWP) for Efficient Income

If you’re an NRI retiree or looking for a steady stream of income, use Systematic Withdrawal Plans (SWP) from equity funds held over 1 year. This way, the gain portion may fall within the ₹1 lakh LTCG exemption limit, and most withdrawals may be tax-free.

7. Split Redemptions Across Financial Years

A simple yet effective trick: spread out your large redemptions over two financial years. For instance, redeem ₹1 lakh worth of LTCG in March and another ₹1 lakh in April of the new fiscal year.

This ensures that both tranches are exempt from LTCG tax, saving you ₹20,000 in taxes just through timing.

Bonus Tip: Repatriation and Compliance

Invest through your NRE or FCNR account to allow easy repatriation of funds abroad after redemption. Ensure your mutual fund KYC is updated with your NRI status, and that your PAN is linked to Aadhaar.

Keep records of all transactions, TDS certificates, and acknowledgments for easy tax filing and for use in your resident country.

Conclusion

As an NRI, you’re in a unique position to leverage India’s market growth while also being exposed to complex tax rules. Fortunately, with a bit of planning—such as LTCG harvesting, filing tax returns, opting for growth plans, and using DTAA—you can maximize post-tax returns on your mutual fund investments.

Consulting a financial or tax advisor can help tailor these strategies to your unique situation and ensure compliance both in India and abroad.