Tax relief for UAE NRIs on mutual fund gains
Nothing is certain in life except for death and taxes. But for UAE based NRIs there is a major tax exemption offered by India that you absolutely should use. Let’s understand this exemption a bit better. If you buy property in India and subsequently sell it, you generally have to pay capital gains tax in India at a 12.5% rate. The same capital gains tax applies when you buy and sell shares. However there is one investment that India doesn’t tax, because it is taxable only in the UAE. This is mutual funds. Hence UAE NRIs can build significant wealth using mutual funds in India without facing tax on it.
Why the exemption
The Double Taxation Avoidance Agreements (DTAA) signed between India and various countries give either India or the country of residence the right to tax each category of income. In case of real estate or stocks that right is generally given to India. However mutual funds come under a residual clause - where only the country of residence has the right to tax gains. Since the UAE doesn’t have a capital gains tax, there is no tax by either country on mutual fund capital gains. Mutual Funds have created substantial wealth for investors by giving them exposure to India’s thriving equity market. The 10 yr return on the NiftyBeES (an index ETF) is 14.14% CAGR. Even accounting for a 3-4% dollar depreciation the USD returns on just the Nifty are in the 10-11% over the past decade.
Practical Issues
In practice, India has TDS on gains in stocks and mutual funds. This is regardless of the nature of the account - NRE or NRO, PIS (Portfolio Investment Scheme) or non-PIS. UAE based NRIs generally have to claim a refund in their income tax return. Hence a practical solution is to invest through GIFT City near Ahmedabad. Investments made into GIFT feeder funds that in turn invest in mutual funds in India do not face any TDS in GIFT or India. Such funds are USD denominated so you don’t need to remit money in India rupees. You can however invest in such funds from your NRE or NRO account too (after getting a 15 CA CB certificate).
Conclusion
Many UAE based NRI do not know about the mutual fund exemption and fail to claim it. This leads to an unnecessary tax payment and loss of income. Please plan your investments smartly.
Frequently 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 India–UAE tax treaty, mutual fund gains fall into a category taxed only in the country of residence, and because the UAE has no capital gains tax those mutual fund gains end up untaxed.
How does the DTAA decide which country can tax different income types?
The treaty assigns taxing rights by income class, typically giving India the right over Indian property and shares, while leaving residual categories like mutual fund capital gains to the residence country.
What returns can I realistically expect from Indian mutual funds as a UAE NRI?
Historically, broad Indian equity exposure has delivered mid‑teens annual rupee returns, which translate to roughly low‑double‑digit returns in USD after accounting for currency depreciation over long periods.
Do I still face TDS on mutual fund gains in India as a UAE NRI?
Yes, India may still deduct TDS on capital gains payouts even when the treaty says the gains are not finally taxable there, so refunds must often be claimed.
How do I claim back TDS on mutual fund gains as a UAE NRI?
You file an Indian income tax return, disclose the treaty position and claim the TDS as a refund, which is processed after assessment.
How can GIFT City help avoid TDS issues for UAE NRIs?
Investing through GIFT feeder structures that route into Indian mutual funds can eliminate Indian TDS at fund level while still providing the same underlying exposure.
Can I invest in GIFT feeder funds directly from the UAE?
Yes, many such feeder funds are USD‑denominated and accept remittances from overseas accounts, often without forcing conversion into INR.
Can I still use my NRE or NRO account to invest efficiently?
You can, but TDS will apply and must be reclaimed via returns; using proper certificates and documentation helps, though GIFT structures often reduce friction.
What are typical minimums for GIFT mutual fund feeder options?
Institutional or AIF structures can require large tickets, but retail-oriented feeders can have entry levels in the low hundreds or low thousands of US dollars.
Why do many UAE NRIs miss out on this mutual fund tax exemption?
Lack of awareness of treaty treatment and overreliance on default TDS deductions lead many to accept tax that could have been avoided or reclaimed.
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