How UAE based NRIs can invest in mutual funds in India
Mutual Funds in India are a highly lucrative option for UAE based NRIs for two reasons. First, Indian mutual funds provide a diversified and low-cost vehicle for investing in India’s stock and bond market. Second, under the Double Taxation Avoidance Agreement (DTAA) between UAE and India, only UAE can tax capital gains in such mutual funds, not India. Since UAE does not tax capital gains, the profits are effectively exempt in the hands of UAE NRIs.
How to invest
First, UAE NRIs can complete their KYC with an India-based mutual fund distributor. Alternatively, they complete their KYC directly with an AMC office and invest in direct plans of mutual funds. This typically involves submission of passport copy (including visa page), Aadhar Card, PAN card copy and foreign address proof. The AMC or distributor verifies the documents against the originals. If you do KYC from abroad, you must have the documents verified (attested) by an Indian consulate, Indian bank branch or foreign notary. If your KYC is already done in India, update it on your next trip to NRI status as soon as possible. Sometimes rules require re-KYC to be done and Sebi has recently allowed this to happen in video format (no need to visit India).
Where to invest from
You can invest in mutual funds from your NRO or NRE account. Mutual Funds linked to NRE are freely repatriable while those linked to NRO can only be repatriated after paying applicable tax and getting a 15 CA CB certificate. Avoid mixing the two - invest in separate folios from your NRE account than your NRO account. You can select mutual funds with the help of a distributor or Sebi registered investment advisor. Usually the advisor will check your goals and risk appetite and recommend funds appropriately.
Redemption and taxation
On redemption, the AMC will generally deduct TDS. This will either be 20% for short term capital gains on equity funds so 12.5% for long term capital gains. For debt funds, the AMC will deduct tax at 30%. Since the DTAA exempts UAE NRIs from taxation on mutual funds you can claim a refund while filing your income tax return. In order to avoid this hassle, you can also invest in Indian mutual funds through feeder funds in GIFT City which are not subject to tax in India.
Most Asked Questions About Tax Relief for UAE NRIs on Mutual Fund Gains
Why are mutual fund gains tax-free for UAE NRIs while stock and property gains are taxed?
Under the Double Taxation Avoidance Agreement (DTAA) between India and UAE, mutual fund gains fall under a residual clause where only the country of residence has the right to tax them. Since UAE has no capital gains tax, neither India nor UAE taxes mutual fund gains, making them completely tax-free for UAE NRIs.
How does the DTAA determine which country can tax different types of income?
The DTAA allocates taxing rights differently for different income categories. For real estate and stocks, India gets the primary right to tax. However, mutual funds are taxed only in the country of residence. Since UAE has no capital gains tax, this creates a unique tax exemption for UAE NRIs.
What are the actual returns I can expect from mutual fund investments in India as a UAE NRI?
The past 10-year Nifty returns (via NiftyBeES ETF) show 14.14% CAGR. Even accounting for 3-4% USD depreciation, USD returns are approximately 10-11% CAGR over the past decade, significantly outpacing many traditional UAE or international investments.
Do I still face TDS (Tax Deducted at Source) on mutual fund gains in India?
Yes. In practice, India applies TDS on mutual fund gains regardless of account type (NRE, NRO, PIS, or non-PIS). However, as a UAE NRI, you can claim a refund of this TDS through your income tax return, ultimately paying zero tax on the gains.
What is the practical process for claiming back TDS on mutual fund gains?
File your annual income tax return in India and claim a refund of the TDS deducted on mutual fund gains. Since you have no taxable income in India (mutual funds are not taxable for UAE residents), the entire TDS amount becomes refundable.
How can I avoid TDS complications when investing in mutual funds from the UAE?
Invest through GIFT City (Gujarat International Finance Hi-tec City) near Ahmedabad. GIFT feeder funds investing in Indian mutual funds incur zero TDS in both GIFT and India. These funds are USD-denominated, eliminating currency conversion needs and TDS complications entirely.
Can I invest in GIFT mutual fund feeder funds directly from my UAE bank account?
Yes. GIFT feeder funds accept direct USD remittances from UAE accounts. You don't need to convert to Indian rupees, and there's no TDS at any stage—making it the cleanest investment path for UAE NRIs seeking tax-free mutual fund exposure.
Can I still use my NRE or NRO account to invest in mutual funds tax-efficiently?
Yes, but with conditions. You can invest through NRE or NRO accounts, but you'll face TDS that requires refund claims. To streamline this, obtain a 15 CA CB certificate (which certifies your non-resident status) to reduce friction, though GIFT City remains the simpler path.
What is the minimum investment size required for GIFT mutual fund feeder funds?
GIFT feeder funds typically have minimum investment requirements starting from USD 500-1,000, making them accessible to most NRIs. Some AIFs may have higher minimums (USD 150,000+), but retail mutual fund feeder options offer lower entry points.
Why do many UAE NRIs miss out on this tax exemption, and what's the cost?
Many UAE NRIs are unaware of the mutual fund exemption and file returns paying unnecessary tax or failing to claim refunds entirely. This results in significant wealth loss over decades. A UAE NRI earning 10-11% annually on a substantial portfolio could lose tens of thousands in unnecessary taxes—making proper tax planning essential.
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