April 14, 2025 - In a major relief for NRI investors of Mutual Fund (MF) schemes, the Mumbai Bench of the Income-Tax Appellate Tribunal (ITAT) has issued a ruling that capital gains earned in India will not be taxed. This will apply to both debt as well as equity as well as both short- and long-term capital gains.

This directive has brought to the fore a rule many NRIs are unaware of involving capital gains taxation under the Double Taxation Avoidance Agreement (DTAA) between India and other nations, including Singapore. This treaty allows capital gains of Mutual Funds unit to be taxed only in the country of residence of the NRI and not in India.

The ITAT issued this directive in a case that came before it in which a Singapore resident whose tax exemption claim on capital gains on MFs worth Rs 1.35 crore was rejected by an Income Tax Assessing Office (AO). The latter had taxed the capital gains on the premise that the MF units had derived substantial value from Indian assets and therefore would be eligible for tax in India.

The petitioner had claimed exemption under the residual clause of Article 13 of the tax treaty between the two nations by which she would be taxed in Singapore, her country of residence, and not India.

The ITAT ruling in this specific case will benefit all NRIs.

The DTAA rules consider capital gains earned on the sale of shares but not MF units. However, the Assessing Office (AO) had regarded the MF units as "shares"and emphasised that the gain is taxable under Article 5 (b).