NRI Investor Wins Tax Battle over Rs1.35 Crore Capital Gains on Mutual Funds

Moneylife Digital Team 04 April 2025

Economy & Nation

In a significant ruling that could impact thousands of non-resident Indian (NRI) investors, the Mumbai bench of the income-tax appellate tribunal (ITAT) held that capital gains from mutual fund (MF) units earned by Singapore-based Anushka Sanjay Shah are not taxable in India, due to the provisions of the double taxation avoidance agreement (DTAA) between India and Singapore.

Ms Shah, an NRI residing in Singapore, had earned short-term capital gains of Rs1.35 crore from the sale of equity and debt MF units during the assessment year (AY) 2022–23. While filing her income-tax return (ITR), she claimed these gains were exempt from Indian taxation under Article 13(5) of the India-Singapore DTAA.

However, the income-tax (I-T) department disagreed. The assessing officer (AO) proceeded to include the entire gain in Ms Shah's taxable income, arguing that the capital gains were derived from assets situated in India and thus taxable here. The dispute resolution panel (DRP) upheld the AO's stand, triggering Ms Shah's appeal to ITAT.

Delivering the order on 26 March 2025, the ITAT bench comprising accountant member Renu Jauhri and judicial member Beena Pillai noted that MF units are distinct from company shares and cannot be taxed in the same manner under the tax treaty.

Referring to Article 13(5) of the DTAA, the tribunal observed: "Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B… shall be taxable only in the contracting State of which the alienator is a resident."

ITAT rejected the tax department's classification of MF units as shares in Indian companies.

Citing previous judgements and the definitions under Indian laws, the bench says, "In our view, in the absence of any specific provision under the Act to deem the unit as shares, it could not be considered as shares of companies, and therefore, the provisions of Article 13(5)(b) cannot be applied in case of units."

Importantly, the tribunal also observed that Ms Shah had made the investments directly, not through any portfolio manager and that all transactions were documented with bank statements showing credits from mutual fund houses.

"The investment was made directly by the assessee and not by the portfolio manager," the order recorded. "Bank statements show investments made to mutual funds and sale consideration credited directly… to the assessee's bank account."

The ruling sets a crucial precedent for NRIs claiming treaty benefits on capital gains from Indian mutual fund investments. While the I-T department has often sought to tax such gains by arguing source-based jurisdiction, the ITAT's interpretation reinforces the residency-based taxing right of the treaty partner country.

(Case No. IT(IT)A No.174/MUM/2025 Date: 26 March 2025)

Comments

User

Manish Dafria

2 months ago

India's DTAA with almost all GCC countries have similar provision as in Singapore DTAA whereby capital gains from Mutual Funds in India are not taxable for residents of GCC Countries. Surprisingly, due to sheer ignorance, many people fail to take benefit of this exemption.
CA Manish Dafria , [email protected]