For Non-Resident Indians (NRIs) residing in specific jurisdictions like the UAE, Singapore, and Mauritius, the prospect of legally avoiding taxes on mutual fund gains in India is becoming a significant draw. Fueled by India’s robust economic growth and reforms, NRIs are increasingly looking to align their investments with their homeland. Adding to this appeal is the tax-friendly nature of these particular hubs, which, combined with Double Taxation Avoidance Agreements (DTAAs) with India, can amplify investment returns.  

The primary reason NRIs in these countries can often enjoy tax-free gains on Indian mutual funds lies in a combination of their resident countries’ tax policies and the DTAAs India has in place with them.

• UAE: As a zero-tax jurisdiction, the UAE imposes no personal income tax whatsoever. This naturally extends to capital gains, meaning NRIs residing in the UAE are not taxed on their worldwide income, including gains from Indian mutual funds. For this benefit, the NRI must be eligible for UAE residency and possess a Tax Residency Certificate (TRC) from the UAE. The India-UAE DTAA’s residual clause ensures that mutual funds are taxed in the country of residence.  
• Singapore: While Singapore taxes income generated within its borders, foreign-sourced income not remitted to Singapore is generally not taxed. Furthermore, the India-Singapore DTAA clarifies taxation rights, often allowing taxation primarily in the country of residence. A recent ruling by the Mumbai Income Tax Appellate Tribunal (ITAT) further solidified this for NRIs in Singapore, stating that capital gains from the sale of mutual funds in India are taxable only in Singapore, which doesn’t levy such taxes.  
• Mauritius: Historically a preferred investment gateway to India, Mauritius offers a very favorable tax regime on investment income, with effective tax rates that can be near zero on certain incomes. The DTAA between India and Mauritius has also been structured to avoid double taxation, often assigning the right to tax capital gains to the country of residence.
  

A significant development bolstering this tax advantage was a recent ruling by the Mumbai ITAT. This ruling, in the case of an NRI residing in Singapore, clarified that capital gains from the sale of mutual fund units in India should be taxed in the NRI’s country of residence, citing the “residual clause” in the India-Singapore DTAA. The ITAT made a crucial distinction, stating that mutual fund units, being issued by trusts and not companies, do not equate to shares and thus fall under this residual clause. This precedent has positive implications for NRIs in other countries with similar DTAA clauses with India, including the UAE and Mauritius.  

While the prospect of tax-free gains is attractive, NRIs must keep a few key points in mind:

• Tax Residency Certificate (TRC): To claim the benefits of the DTAA, holding a valid TRC from the country of residence is usually essential.  
• Scope Limited to Mutual Funds: It’s crucial to note that this tax advantage, particularly concerning the ITAT ruling, currently applies specifically to capital gains from mutual funds and not to gains from the sale of stocks or other assets.
• Domestic Laws Prevail: NRIs must also comply with the tax laws of their country of residence. While the UAE has no income tax, Singapore and Mauritius have their own tax regulations that NRIs need to be aware of.

This tax treatment has the potential to further incentivize NRI investments in Indian mutual funds. The clarity provided by the ITAT ruling and the inherent tax advantages in countries like the UAE, Singapore, and Mauritius can lead to increased inflows into the Indian mutual fund industry as NRIs seek to maximize their post-tax returns.  

Key Highlights:

• NRIs residing in the UAE, Singapore, and Mauritius can legally avoid taxes on capital gains from Indian mutual funds due to these countries’ tax regimes and DTAAs with India.  
• The UAE has a zero-tax policy, while Singapore and Mauritius offer favorable tax treatment on foreign-sourced income and investment income, respectively.  
• A recent ITAT ruling clarified that capital gains from the sale of mutual fund units by NRIs in Singapore are taxable only in Singapore.  
• NRIs need to hold a valid Tax Residency Certificate to claim these DTAA benefits.  
• This tax advantage primarily applies to mutual funds and can encourage more NRI investment in India.