Are DTAA benefits applicable to MFs?
I read that UAE-based NRIs (non-resident Indians) are able to claim taxation exemption on mutual fund investments made in India. I had invested in some mutual funds many years back when I was a resident. Will I also get the benefit of capital gains tax exemption in India? Or is it only applicable for mutual funds purchased by transferring money from UAE?
—Name withheld on request
You can avail the benefits of the India-UAE double taxation avoidance agreement (DTAA) only if you qualify as a ‘resident’ of UAE. Only an individual who has stayed in UAE for more than 183 days in the respective calendar year can qualify as a ‘resident’ of UAE for DTAA purposes.
Further, you also need to obtain a tax residency certificate from UAE tax authorities and file Form 10F online on the Indian tax portal.
The exemption from tax on capital gains upon sale of mutual fund units is provided by the residual clause under article 13, viz. article 13(5) of the India-UAE DTAA. The allocation of taxation rights under the capital gains article of the DTAA is usually not concerned with the source of investment, rather it is dependent upon the situs (location) of the asset or the residence of the alienator (seller) of the asset at the time of sale.
Similarly, exemption granted under article 13(5) is not tied to the source of investment made in mutual funds, rather it is linked to the residence of the seller.
The capital gains from the sale of mutual funds would be exempt irrespective of the source of funds for investment, i.e. irrespective of whether the investment was made from resident fund sources if the person was a resident at the time of investment or from funds lying in NRO (nonresident ordinary) or NRE (non-resident external) accounts or by way of inward remittance if the person was non-resident at the time of investment.
Also, there is no condition of repatriation of sale proceeds to UAE for claiming such exemption. However, since the investment in mutual funds was made on a non-repatriation basis (since you had invested when you were a resident), you will not be able to repatriate the sale proceeds outside India (except up to $1 million per financial year after payment of taxes).
Harshal Bhuta is partner at P.R. Bhuta & Co. Chartered Accountants.
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