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The tax on mutual funds for NRIs in India depends on the type of fund, the holding period, and the applicable tax regulations. Equity and debt mutual funds are taxed differently, and recent regulatory changes have influenced how profits are computed and taxed.
Understanding these tax rules is critical for NRIs when calculating the total impact on their investments. Capital gains treatment, TDS rules, and relevant regulations all have an impact on returns and compliance needs.
Key Takeaways
● Short-term capital gains on equity mutual funds (holding period up to 12 months) are taxed at 20% (plus surcharge and cess).
● Long-term capital gains on equity mutual funds (holding period above 12 months) are taxed at 12.5% above ₹1.25 lakh.
● Dividend income from mutual funds is taxed as per the investor’s income tax slab, with TDS deducted at 20% plus applicable surcharge and cess.
● Hybrid mutual funds with more than 65% equity exposure are taxed in the same manner as equity mutual funds.
NRI Mutual Fund Taxation – New Tax Rate Changes in 2026
Recent updates have simplified NRI mutual fund taxation with changes introduced between 2024 and 2025 continuing to apply in FY 2025–26:
● Equity mutual funds: Long-term capital gains (after 12 months) are taxed at 12.5% above ₹1.25 lakh, while short-term gains are taxed at 20%.
● Debt mutual funds: Investments made on or after April 1, 2023, will be taxed according to the income tax slab, and indexation benefit will not be allowed, irrespective of the period of holding (plus applicable surcharge and cess).
● Indexation removal: The previous tax favour on long-term debt investments has been eliminated, equalising the tax with fixed-income investments.
● No major change in Budget 2026: The taxation structure remains unchanged from prior amendments, ensuring continuity for investors.
These updates make taxation more uniform across asset classes, but they also reduce the earlier tax advantage available on certain mutual fund categories.
Know More About: What is Mutual Fund?
How Are Mutual Funds Taxed for NRIs?
The taxation of mutual funds for NRIs depends on the type of fund, holding period, and applicable TDS rules. While there are no completely tax-free mutual funds, the tax structure varies across categories.
● Equity funds: Short-term gains taxed at 20%; long-term at 12.5% above ₹1.25 lakh
● Debt funds: Taxed as per income slab (no indexation as of 2026)
● Dividends: Added to income and taxed as per the slab
● TDS: Deducted at applicable rates during redemption
Tax Implications for NRIs Investing in Mutual Funds
1. Tax on Capital Gains
When NRIs invest in Indian mutual funds, they are subject to capital gains tax. The tax treatment depends on the type of mutual fund investment and the holding period:
● Equity mutual funds: If an NRI holds equity mutual funds for over one year, the capital gains are considered long-term and are taxed at a rate of 12.5% above ₹1.25 lakh. Short-term capital gains (held for one year or less) are taxed at a rate of 20%.
● Debt mutual funds: Gains from debt mutual funds (investments made on or after April 1, 2023) are taxed as per the individual’s income tax slab, regardless of holding period, with no indexation benefit (plus applicable surcharge and cess). Short-term capital gains from debt mutual funds are taxed as per the individual's income tax slab.
● Hybrid mutual funds: Tax treatment for hybrid funds depends on the proportion of equity and debt in the portfolio. The rules mentioned above for equity and debt funds will apply accordingly to the respective portion of the fund.
2. Dividend Distribution Tax (DDT)
Before the Union Budget 2020, mutual funds in India used to deduct a dividend distribution tax before paying dividends to investors. However, post-Budget 2020, the dividend income received by NRIs is taxed at their applicable income tax slab rate in India.
This change shifted the tax liability to investors, and the overall tax impact depends on the individual’s income tax slab. DCWs are now taxed at slab rates with TDS at 20% (plus surcharge and cess) for NRIs.
3. Tax Deducted at Source (TDS)
TDS is applicable when NRIs redeem mutual fund units. The rate of TDS depends on the type of mutual fund and the holding period:
● Equity mutual funds: If the units are held for over one year, TDS at 12.5% on LTCG and 20% on STCG for equity-oriented funds.
● Debt mutual funds: TDS at 30% applies since fund don’t know the investor’s actual slab rate. In case of lower slab rate, investors can claim a refund while filing the return.
Read More: Debt vs Equity Funds
Benefits of Investing in Mutual Funds for NRIs
● Diversification: Mutual funds offer NRIs the opportunity to diversify their investments across various asset classes, sectors, and geographies. This diversification reduces risk and enhances the potential for better returns.
● Professional management: Mutual funds are managed by professional fund managers who have expertise in selecting and managing investments. NRIs can benefit from the knowledge and experience of these experts.
● Liquidity: Mutual funds provide liquidity as NRIs can easily buy or sell units at the prevailing Net Asset Value (NAV) on any business day. This flexibility is especially useful for NRIs who may have uncertain financial needs.
● Tax benefits: While there are tax implications, mutual funds also offer certain tax benefits for NRIs. For example, long-term capital gains on equity mutual funds are taxed at 12.5% above ₹1.25 lakh, and debt mutual funds are taxed as per income tax slab without indexation benefit.
● Convenience: Investing in mutual funds is convenient, as NRIs can invest online, track their investments, and receive regular updates on fund performance. Many fund houses offer dedicated NRI services for seamless transactions..
● Regular income options: Mutual funds offer various options for NRIs seeking regular income, such as Systematic Withdrawal Plans (SWP) and dividend payout schemes. These can provide a consistent cash flow for NRI investors.
Key Terms to Remember About Mutual Funds Taxation for NRIs
Here are some important terms to understand when dealing with NRI mutual fund taxation:
● Capital gains tax: Tax on profit earned from selling mutual fund units, classified as short-term or long-term based on holding period
● TDS: Tax deducted at source during redemption, depending on fund type and gains
● LTCG: Gains on investments held beyond the specified period, taxed at applicable long-term rates
● STCG: Gains on investments held for a shorter duration, taxed at higher rates
● IDCW: Income payout option where investors receive periodic distributions from the fund
Conclusion
Mutual fund investments can help NRIs participate in India’s financial markets, but understanding the tax rules is essential. Taxation varies based on the type of fund, holding period, and applicable regulations. With changes like the removal of indexation benefits on debt funds, it becomes important to stay updated. A clear understanding of these rules can help NRIs manage tax impact better and make more informed investment decisions.
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