NRI Mutual Fund Capital Gains: Tax Filing Rules Explained

Non-Resident Indians (NRIs) investing in mutual funds in India often ask whether they must file a tax return if tax is already deducted at source (TDS). The answer depends on how capital gains are classified under Indian income tax law.

Long-term capital gains on mutual funds
Since the investment was made in 2019, the mutual fund units qualify as long-term capital assets. On redemption, the gains will be treated as long-term capital gains (LTCG).

Equity-oriented funds such as flexi-cap schemes are taxed at 12.5 percent plus surcharge and cess if LTCG exceeds ₹1,25,000 in a financial year. Unlike residents, NRIs cannot adjust these gains against the basic exemption limit even if their total income in India is lower.

TDS and exemption from filing
The Income Tax Act provides an exemption from filing if an NRI’s only income is long-term capital gains from a foreign exchange asset and the correct TDS has been deducted.

But mutual fund units are not considered foreign exchange assets. The definition covers only shares of an Indian company, debentures of an Indian public limited company, deposits with an Indian public limited company, and central government securities. Mutual funds fall outside this scope.

NRE account interest
Interest earned on NRE accounts is exempt from Indian tax and does not form part of taxable income. This leaves capital gains from mutual funds as the only taxable income.

Tax treaty with Australia
The India–Australia Double Taxation Avoidance Agreement does not provide relief in this case. Capital gains from mutual fund units remain taxable in India, and the treaty does not give Australia exclusive taxing rights.

Conclusion
Even if TDS has been deducted on your capital gains, you must still file an income tax return in India. The applicable tax rate is 12.5 percent plus surcharge and cess. Since mutual funds are not foreign exchange assets, the special exemption from return filing does not apply.