NRI mutual fund tax in India: capital gains, TDS and DTAA.

Advisory Monks Consulting is a cross-border tax advisory for NRIs and returning residents managing Indian investments. What actually gets taxed when an NRI sells Indian mutual funds — the equity-vs-debt rates, the TDS that over-deducts at redemption, and how to stop it.

For an NRI, the tax on an Indian mutual fund turns on what the fund holds, not where you live — the capital-gains rate is the same as a resident pays. Where being non-resident changes everything is the withholding at redemption: the fund house deducts TDS before the money reaches you, usually at the headline rate on the whole gain, and getting the excess back is a separate exercise. This note covers both sides, as of FY2025-26.

Equity vs debt: the classification that decides the rate

Every Indian mutual fund sits in one of two tax buckets, and the label on the marketing sheet is not always the tax label:

• Equity-oriented funds — broadly, funds that hold at least 65% in listed Indian equity. This includes most diversified equity funds, ELSS, index funds and equity-heavy hybrids.
• Debt and "specified" funds — debt funds, liquid funds, and (for units bought on or after 1 April 2023) gold funds, international funds and many hybrids with low equity. These are governed by Section 50AA.

The in-between band — hybrids with equity between 35% and 65% — follows a third, non-equity treatment. If you are not certain which bucket a fund falls in, check the scheme's taxation status on the factsheet before you redeem; it is the single fact that changes your bill the most.

The rates, for FY2025-26

These rates have applied since the 23 July 2024 changes and continue for FY2025-26:

The ₹1.25 lakh equity exemption and any treaty relief are usually not given at source — the fund deducts on the gross gain and you recover the difference in your return. Run your own figures in the NRI capital-gains calculator. As of FY2025-26; rates and the specified-fund definition have changed twice in two years, so confirm the current position before acting.

The TDS trap at redemption

This is the part that surprises NRIs. A resident pays capital-gains tax when they file; an NRI has it withheld by the fund house at redemption under Section 195, before a rupee is paid out. In practice the AMC deducts roughly:

• Equity short-term gains — about 20% (plus applicable surcharge and cess).
• Equity long-term gains — 12.5%, typically on the whole gain, without giving you the ₹1.25 lakh exemption at source.
• Debt / specified-fund gains — up to 30% (plus surcharge and cess), because they are taxed at the highest slab.

Two things make it worse. First, if your PAN is not linked to the folio, Section 206AA forces a flat 20% regardless of the real rate. Second, the deduction is on the gain as the registrar computes it — which may ignore your actual holding-period split or the exemption — so NRIs routinely have more tax withheld than they owe, then wait a year to reclaim it through an Indian return. The fix is to deal with it before redemption, not after.

How to reduce the TDS

NRIs cannot file Form 15G/15H — those are for residents. The real levers are:

• A lower- or nil-deduction certificate under Section 197 (Form 13). You apply to the Indian tax authority before redeeming; if granted, it instructs the fund house to deduct at your actual effective rate instead of the headline one. For a large redemption with a modest real gain, this is the difference between cash in hand now and a refund claimed next year. This is the same mechanism NRIs use on property sales — see our capital-gains tool and the NRI property-sale guide.
• Link your PAN and keep it active so you never fall into the 206AA 20% floor.
• Time redemptions across financial years to use the ₹1.25 lakh equity exemption more than once where it fits your plan.

DTAA, the TRC and Form 10F

A Double Taxation Avoidance Agreement can relieve double tax, but for capital gains most of India's treaties leave India's right to tax in place — so, unlike dividends or interest, the treaty often does not cut the Indian rate on fund gains. Where it does help, you need a Tax Residency Certificate from your country of residence and an electronically filed Form 10F; many fund houses insist on holding both before they process a reduced rate. The bigger DTAA question for most NRIs is the foreign tax credit in your home country for the Indian tax paid — getting both returns to tell the same story is where the planning value sits, and it needs coordinating, not improvising at redemption.

Repatriation: NRE vs NRO routing

Tax and repatriation are separate questions that NRIs often merge. Funds bought from an NRE account are freely repatriable; redemptions routed through an NRO account are repatriable within the USD 1 million per financial year limit, and the bank will want Form 15CA/15CB certifying the tax position before it remits. If repatriation matters to you, decide the account routing when you invest — not when you sell — because moving units between the two after the fact is awkward. See our note on the USD 1 million repatriation route.

How Advisory Monks Consulting helps

Our Pravasi Desk computes the real gain by fund category and holding period, files the Section 197 (Form 13) application so the fund house withholds at your actual rate, prepares the Form 15CA/15CB for repatriation, and coordinates the foreign tax credit with your home-country advisor so nothing is taxed twice or left stranded as an un-recovered TDS.

General information, not advice; rates and reliefs change. Section references (195, 197, 50AA, 206AA) are to the Income-tax Act, 1961; the Income-tax Act, 2025 (in force from 1 April 2026) renumbers many sections — confirm current numbering before citing externally.

This note is general guidance, not tax or legal advice. Positions depend on your specific facts — speak with a partner before acting.