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The basic tax rates for investments in Mutual Funds are the same, whether the assesse is an NRI or an ordinary Indian citizen.

A quick recap: withdrawals after a year attract long-term capital gains tax, withdrawals in less than a year are subject to short-term capital gains tax. Long-term capital gains tax on equity funds is nil. Short-term capital gains tax on equity funds is 15.45% (15% base rate and 3% cess). Long-term capital gains tax on debt funds is 10.30% (10% base rate and 3% cess) without indexation benefits or 20.6% (20% base rate and 3% cess) with indexation benefits. Short-term capital gains tax is as per your tax bracket.

But in case of TDS there is a slight difference. NRI withdrawals are subject to tax deducted at source (TDS). If an NRI withdraws from MF within a year, he has to pay a TDS at the rate of 30% if it’s a debt fund or a gold fund and 15% for equity-oriented schemes. The TDS imposed is in line with the normal taxation rates applicable to MF investments. There is no TDS if NRI withdraw from equity funds after a year, but if he withdraws from equity funds within a year, he has pay a TDS of 15%. If he withdraws from his debt funds after a year, a TDS of 20% (after indexation benefits) gets deducted; short-term withdrawals attract a TDS of 30%. The idea behind TDS on MF withdrawals is that it could get difficult for the income-tax authorities to chase NRIs if they fail to file their tax returns. Hence, fund houses are required to deduct the tax at the time an NRI investor exits a fund. TDS is imposed when an NRI either withdraws from his scheme or switch from one scheme to another or even switch from the dividend or growth plan or vice-versa within the same scheme.

Possible problems: The TDS is a flat rate as we already told you. However, if an NRI fall in a lower tax bracket, he is entitled to a refund. For instance, if an NRI withdraws from his debt fund within a year, TDS of 30% gets deducted. But if he falls in, say, 20% tax bracket or an NRI income is below the taxable limit, he is entitled to a refund. So ensure he files for a refund when filing his income-tax returns in India. Although NRIs, just like ordinary (those residing in India) citizens, are allowed the basic exemption limits, they cannot take its benefit when it comes to long-term capital gains tax, unlike ordinary citizens. For instance, the basic exemption limit for an Indian citizen (other than someone who’s aged 60 years or above and those who are aged 80 years or above) is Rs.2.5 lakh. Any income up to Rs.2.5 lakh is exempt from tax. So if an NRI’s capital gains from the sale of MFs come up to, say, Rs.50,000, he doesn’t pay any tax because his gains fall under the basic exemption limit of Rs.2.5 lakh. However, if he is an NRI, he will be liable to pay tax (which may have been deducted by way of TDS), notwithstanding the fact that his income is less than Rs.2.5 lakh.

Short term capital gains

Units of Non-equity oriented scheme such as debt and money market mutual funds should be taxed as per your income tax slab, but the TDS is deducted at the highest applicable rate of 30%, irrespective of what tax slab you belong to; while the units of Equity oriented mutual funds are taxed @ 15%.

Long term capital gains

Units of Non-equity oriented scheme if listed are taxed at 10% without indexation or 20% with indexation whichever is lower but the portfolio manager will deduct TDS at flat rate of 20% for NRIs.

Units of a non-equity oriented scheme if unlisted are taxed at 10% without indexation while Long Term capital gains on units of an equity oriented scheme are exempt from tax as Securities Transaction Tax is payable on redemption.

 

Applicable Tax Rates for NRI

Category of Units

Tax Rates under the Act

TDS Rates under the Act

Short Term Capital Gain

Units of Non-equity Oriented Scheme

Taxable at normal rates of taxes applicable to the assesse

30% for Non Resident Individuals

Units of an Equity Oriented Scheme

15% on redemption of units where STT is payable on redemption (u/s 111 A)

15%

Long Term Capital Gain

Listed Units of a Non-Equity Oriented Scheme

10% without Indexation OR 20% with indexation, whichever is lower (u/s 112)

20% for Non Resident Individuals (u/s 195)

Unlisted Units of a Non-Equity Oriented Scheme

10% with no indexation

10% for Non Resident Individuals (u/s 115E/112)

Units of an Equity Oriented Scheme

Exempt in case of redemption of units where STT is payable on redemption (u/s 10(38))

Exempt in case of redemption of units where STT is payable on redemption (u/s 10(38))