1. Introduction
In a globalised investment landscape, cross-border investments in Mutual Funds, debentures and bonds have become increasingly common. For non-residents investors of country with whom India has entered into Double Taxation Avoidance Agreements (DTAAs) particularly where the Article on Capital Gains is modelled on the OECD Model Tax Convention, a key concern is determining whether the capital gains arising from such investments made in India are taxable in India or in their country of residence or both.
While the Indian Income Tax Act, 1961 lays down the general provisions for taxing such gains, the Double Taxation Avoidance Agreements (DTAAs) entered into by India with various countries often provide an overriding relief or specific allocation of taxing rights.
This article analyses the tax implications of capital gains arising from the transfer of Indian mutual fund units by non-residents who are tax residents of countries with which India has entered into DTAAs based on the OECD Model Convention such as the UAE, Switzerland, Singapore, Germany, France, Austria, Ireland, Mauritius etc. It provides an analysis of domestic tax provisions, key DTAA clauses aligned with the OECD Model, and relevant judicial precedents that offers clarity on whether India retains the right to tax such gains or must yield to the residence state under treaty obligations.
2. Issue at Hand:
To better understand the core issue, consider the case of Mr. Charlie, a non-resident Indian, who is a tax resident of Singapore. He has earned short-term capital gains from the redemption of equity-oriented & debt mutual fund units in India.
The key question is:
Are such capital gains taxable in India, being the source country or in Singapore, being his country of residence, or in both?
While the above example considers Singapore as country of residence of the investor. but the analysis that follows equally applies to investors from other countries with which India has entered into DTAAs modelled on the OECD Model Convention particularly in the context of capital gains taxation on mutual fund transfers.
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
To resolve this, it is essential to analyse:
- The relevant provisions of the Income-tax Act, 1961;
- Article 13 of the India–Singapore DTAA, which governs capital gains; and
- Judicial precedents that shed light on how such treaty provisions are interpreted in practice.
3. Chargeability of Capital Gains under the Income Tax Act, 1961:
3.1 As per the provisions of section 5 of the Income Tax Act,1961 (the Act), a non-resident person is liable to pay tax in India only in respect of income that is
- Received or deemed to be received in India; or
- Accrues or arises or deemed to accrue or arise in India.
The relevant portion Section 5 (2) have been reproduced below: Section 5. Scope of total income.
“(1)………
(2) Subject to the provisions of this Act, the total income of any previous year of a person
who is a non-resident includes all income from whatever source derived which-
(a) is received or is deemed to be received in India in such year by or on behalf of such
person; or
(b)accrues or arises or is deemed to accrue or arise to him in India during such year”.
3.2 Further, Section 9 of the Act, contains provisions as to when certain incomes shall be deemed to accrue or arise in India. As per Section 9(1)(i), any income accruing or arising from transfer of a capital asset situated in India is always deemed to accrue or arise in India. The relevant portion of Section 9 of the Act have been reproduced below:
Section 9. Income deemed to accrue or arise in India
“(1) The following incomes shall be deemed to accrue or arise in India:-
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India”
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
The Explanation 5 to Section 9(1)(i) extends the scope to indirect transfers. It states that an asset, being any share or interest in a foreign company or entity, shall be deemed to be situated in India if it derives its value substantially from assets located in India.
3.3 Accordingly, under Section 5(2) read with Section 9(1)(i), capital gains arising from the transfer of capital assets situated in India are deemed to accrue or arise in India and are taxable in the hands of a non-resident. In the context of units of mutual funds and debentures issued by Indian entities, such assets are generally regarded as capital assets situated in India. Therefore, gains arising from their transfer are deemed to accrue or arise in India and are taxable under the domestic law provisions, even when the recipient is a non-resident.
4. Taxability under Double Taxation Avoidance Agreements (DTAAs)
The chargeability of tax in India on the Capital Gains income of non-resident person also depends upon the Double Taxation Avoidance Agreement (DTAA) that India entered into with the country of residence of the taxpayer. The DTAAs allocate the taxing rights between the source country and residence country. As per Section 90(2) of the Income-tax Act, the provisions of the Act apply only to the extent they are more beneficial to the assessee. Thus, where the DTAA offers a more favourable tax treatment, it overrides domestic law.
5. Since Mr. Charlie, in the above example, is a tax resident of Singapore, let us now examine the relevant provisions of the India–Singapore DTAA, particularly Article 13, which deals with taxation of capital gains.
Article 13: Capital Gains
“1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State.
3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident.
4. 1[***]
4A. Gains from the alienation of shares acquired before 1 April 2017 in a company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident.
4B. Gains from the alienation of shares acquired on or after 1 April 2017 in a company which is a resident of a Contracting State may be taxed in that State.
4C. However, the gains referred to in paragraph 4B of this Article which arise during the period beginning on 1 April 2017 and ending on 31 March 2019 may be taxed in the State of which the company whose shares are being alienated is a resident at a tax rate that shall not exceed 50% of the tax rate applicable on such gains in that State.
5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident.”
Based on the above, since Mr. Charlie has sold units of a mutual fund which are neither immovable property nor shares, and do not fall under any paragraphs of Article 13(1) to 13(4C) of India Singapore DTAA, the gains thus fall within the residuary clause of Article 13. Accordingly, the capital gains shall be taxable only in the state of residence, i.e., Singapore, and not in India.
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents 6. Judicial Interpretation of Capital Gains Taxation under OECD-Aligned DTAAs
Judicial precedents have provided valuable clarity on the taxation of capital gains from the sale of mutual fund units by non-residents. Indian courts and tribunals have consistently held that where the DTAA grants exclusive taxing rights to the state of residence, India cannot tax such gains. These rulings reinforce the treaty-based relief available to investors from OECD-aligned jurisdictions and serve as authoritative guidance in cross-border tax matters.
6.1 In the case of Satish Beharilal Raheja v. ACIT [2013] 37 taxmann.com 296 (Mumbai ITAT), the Tribunal observed that the assessee is a non-resident individual based in Switzerland. He sold units of Mutual Fund in India and claimed that the capital gain arising on account of sale of mutual fund units was not taxable in India under the provisions of article 13(6) of the Indo-Swiss treaty.
The AO treated the units of mutual fund units as “shares” of Indian Company and held that said gain is taxable in India under article 13(5) of the Indo-Swiss treaty.
The Tribunal examined the issue and held that mutual fund units are not equivalent to shares under either domestic law or the DTAA. Therefore, the capital gain on redemption of Mutual funds falls under the residuary clause Article 13(5), which allocates taxing rights solely to the country of residence in this case, Switzerland.
6.2 The Hon’ble Apex Court in the landmark case of Apollo Tyres Ltd v. CIT [2002] 122 Taxman 562 (SC) addressed whether the purchase and sale of UTI units by the assessee constituted a speculative business under the Explanation to section 73 of the Income-tax Act. The Revenue contended that UTI units were “shares”, and therefore, trading in them should be treated as speculative. The Apex Court, however, upheld the High Court’s view and rejected the Revenue’s argument, holding that units of UTI are not equivalent to “shares”. Therefore, transactions involving UTI units do not amount to speculation business under section 73. The Supreme Court held as under:
“Even though the said section creates a fiction to make the UTI as a deemed company and distribution of income received by the unitholder as a deemed dividend, by virtue of these deemed provisions, it cannot be said that it also makes the unit of the UTI a deemed share. A deeming provision of this nature, as found in section 32(3), should be
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
applied for the purpose for which the said deeming provision is specifically enacted, which in the instant case was confined only to deeming the UTI as a company and the income from the units as a dividend. If as a matter of fact, the Legislature had contemplated making the unit as also a deemed share, then it would have stated so. In the absence of any such specific deeming in regard to the units as shares, it would be erroneous to extend the provisions of section 32(3) to the units of the UTI for the purpose of holding that the unit is a share. For these reasons, the finding of the High Court on this point was to be upheld”
6.3 In the case of DCIT (International Taxation) v. K.E. Faizal [2019] 108 taxmann.com 545 (Cochin ITAT), the Tribunal examined whether capital gains from the sale of mutual fund units by a UAE resident were taxable in India under the India–UAE DTAA.
The Revenue contended that such gains were taxable under Article 13(4), which applies to gains from the transfer of shares in an Indian company. However, the Tribunal noted that mutual fund units are not shares, and therefore, do not fall within the scope of Article 13(4).
Since the term “share” is not defined in the DTAA, the Tribunal referred to Article 3(2) of the tax treaty, which provides that terms not defined should be interpreted as per the domestic law of the country applying the tax. As the Income-tax Act, 1961 does not define “share”, the Tribunal turned to other allied Indian laws:
- Section 2(84) of the Companies Act, 2013, which defines a “share” as a share in the share capital of a company.
- The SEBI (Mutual Funds) Regulations, 1995, which clarify that mutual funds in India are constituted as trusts, not companies.
- The Securities Contracts (Regulation) Act, 1956, which distinguishes between “shares” and “units of mutual funds” as separate types of securities.
Based on this analysis, the Tribunal held that units of mutual funds cannot be equated with “shares”, and thus do not come under Article 13(4). Instead, such capital gains fall under the residuary clause—Article 13(5)—which states that gains from the alienation of property not covered by earlier paragraphs shall be taxable only in the country of residence. Accordingly, the Tribunal concluded that the short-term capital gains earned
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
by the assessee, a UAE resident, from the sale of equity-oriented and debt-oriented mutual fund units, were not taxable in India.
6.4 In the case of Emerging India Focus Funds, Apex Financial Services (Mauritius) Ltd [2025] 175 taxmann.com 1013 (Delhi – Trib.), the Delhi Tribunal examined the issue pertaining to taxability of capital gains on sale of equity-oriented mutual funds under Article 13(3A) of the India–Mauritius DTAA. The Tribunal observed that the assessee, Mauritius-based entity, earned capital gains from sale of equity-oriented mutual fund units in India.
The Assessing Officer (AO) held that since the mutual fund primarily invested in shares, the gains should be treated as arising from the alienation of shares, and 65% of such gains should be taxed in India under Article 13(3A) of the India–Mauritius DTAA.
The Delhi ITAT observed the following:
- The DTAA must be strictly construed and where treaty language is clear, literal interpretation must be followed. The Purposive or beneficial interpretations are only relevant where the treaty terms are ambiguous, which was not the case here.
- Article 13(3A) inserted via 2016 Protocol, applies only to Capital gains arising from the sale of shares of Indian Companies. The Protocol and PIB release dated 10.05.2016 clarify that the amendment targets treaty abuses through share transactions and aims to tax capital gains arising from shares, not from other securities
- Under Article 3(2) of the DTAA, since the term “shares” is not defined, its meaning is derived from Indian domestic law. As per the Securities Contracts (Regulation) Act, 1956, shares and mutual fund units are distinct types of securities. While shares represent ownership in a company with voting and dividend rights, mutual fund units are held in a trust structure regulated by SEBI, offering no ownership in a company. The rights, returns, and regulatory framework for both differ significantly.
- The equity mutual funds may be equated with shares under domestic provisions (e.g., Sections 10(38) or 112) for concessional taxation, this does not extend to treaty interpretation. The DTAA benefits cannot be denied by equating mutual fund units with shares through inference or analogy.
- The Tribunal held that since the gain from Mutual Fund don not fall under Article 13(1) to 13(3A), they fall under the residuary clause- Article 13(4), which gives
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
exclusive taxing rights to the country of residence (Mauritius) and thus held that capital gains will not be liable to tax in India
6.5 In the case of Vanguard Emerging Markets Stock Index Fund v. ACIT [2025] 172 taxmann.com 515 (Mumbai – Trib.), the issue before the Mumbai Tribunal was whether capital gains earned by an Irish company from the sale of Rights Entitlement (RE) to subscribe to shares of an Indian company were taxable in India under Article 13(5) of the India-Ireland DTAA (which covers gains from shares) or exempt under the residuary Article 13(6).
The Assessing Officer and DRP had taxed the gains under Article 13(5), equating REs with shares. However, the Tribunal disagreed and held:
- “As per the provisions of section 62 of the Companies Act, 2013, “rights entitlement” are not equity shares because the section provides shareholder in whose favour an “offer” to subscribe to shares is made, may either accept the offer or exercise the right to renounce the offer or transfer the right to any other person. Ergo, a shareholder obtains an exercisable right to subscribe to shares which is different from shares in the Indian Company”
- Further as per SEBI and NSE Circulars, REs is credited separately in demat accounts account of the investor and it is an asset, which is different from shares of the company and therefore, a separate ISIN is given for rights entitlement. Thus, RE’s are traded and taxed differently (STT applied as an “option in securities”), reinforcing their distinct nature.
- The Tribunal also relied upon the judgment of the Hon’ble Supreme Court in the case of Navin Jindal v. Asstt. CIT [2010] 187Taxman 283/320 ITR 708 (SC) wherein it was held that when a company offers right to the shareholders, the shareholder obtains an exercisable right to subscribe to shares which is different from the shares in the Indian company.
- Article 13(5) of the India-Ireland DTAA, even post-MLI amendment, refers only to shares, and does not cover REs and even Article 13(4) specifically defined “comparable interest” to include interest in partnership or trust. Thus, the rights entitlements are not included in article 13(5) even after its amendment in 2019 post MLI.
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
- Thus, the Tribunal concluded that REs does not fall under Articles 13(4) or 13(5) but are covered under the residuary Article 13(6). Therefore, the capital gains on sale of REs are taxable only in Ireland, not in India.
6.6 In the case of Anushka Sanjay Shah v. ITO [2025] 173 taxmann.com 570 (Mumbai – Trib.), The Mumbai ITAT dealt with the taxability of short-term capital gains (STCG) earned by the assessee, a non-resident Indian and tax resident of Singapore, from the sale/redemption of equity mutual fund & debt mutual fund units in India. The assessee claimed exemption under Article 13 of the India–Singapore DTAA, arguing that such gains were not taxable in India.
However, the Assessing Officer and DRP held that since the mutual fund units derived substantial value from Indian assets, the gains were taxable in India under Article 13(4) of the DTAA.
The Tribunal disagreed and relied on earlier decisions in:
- ITO v. Satish Beharilal Raheja [2013] 37 com 296 (Mumbai),
- DCIT v. K.E. Faizal [2019] 108 com 545 (Cochin).
It held that mutual fund units are not “shares” of a company, and therefore, Article 13(4) (which covers gains from shares deriving substantial value from Indian assets) does not apply. Instead, such gains fall under Article 13(5), which deals with capital gains from other property and assigns taxing rights to the country of residence—in this case, Singapore. Accordingly, the Tribunal concluded that STCG arising from sale of equity and debt mutual fund units is not taxable in India under the India–Singapore DTAA, and the assessee is entitled to exemption.
6.7 In the case of Saket Kanoi [2024] 168 taxmann.com 418 (Delhi – Trib.), the Delhi ITAT upheld the CIT(A)’s order and ruled that the capital gains earned by the assessee, a tax resident of the UAE, from the sale of mutual fund units in India were not taxable in India. Relying on Article 13(5) of the India–UAE DTAA, which grants exclusive taxing rights to the country of residence for capital gains not covered under earlier paragraphs, the Tribunal concluded that only the UAE had the authority to tax such gains, thereby exempting them from Indian taxation.
Conclusion
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents The evolving jurisprudence and consistent tribunal rulings make one point abundantly clear: mutual fund units are not equivalent to shares, either under Indian allied laws or for the purposes of DTAA interpretation. Several Appellate tribunals have held that gains from mutual fund units fall under the residuary clauses of respective DTAAs. These provisions typically allocate exclusive taxing rights to the country of residence of the investor.
As per Indian tax laws, capital gains arising from the sale of Indian mutual fund units by non-residents are taxable in India. However, if the non-resident is eligible to claim relief under a Double Taxation Avoidance Agreement (DTAA), and the DTAA follows the OECD Model, the right to tax such gains usually lies only with the country of residence. In such cases, India cannot tax the capital gains, provided the treaty benefits are properly claimed. In conclusion, effective tax planning and proper treaty application can ensure legitimate exemption from Indian capital gains tax on mutual fund redemptions, underscoring the crucial role of DTAAs in cross-border investment taxation.
Tips for NRIs Investing in Indian Mutual Funds:
√ Check DTAA before investing: Understand capital gains taxation between India and your country of residence—most treaties offer exemption.
Keep your documentation in order:
- TRC from foreign tax authority
- Form 10F (filed online on the Income Tax Portal)
- PAN in India (recommended for easier compliance)
Avoid assumptions: Mutual fund units ≠ shares under most treaties. Don’t assume taxability based on Section 112A or domestic concessional rates.
Consult your tax advisor before redemption or large withdrawals to structure the exit efficiently.
Disclose correctly in your Indian tax return (if required), and claim DTAA benefit carefully using the correct ITR form and TRC.
Disclaimer:
This article is intended for informational purposes only and does not constitute legal or tax advice. The insights
Demystifying DTAA Taxation on Mutual Fund Gains for Non-Residents
and interpretations provided are general in nature and may not apply to specific individual circumstances. Readers are advised to consult with a qualified tax professional or legal advisor before taking any action based on the contents of this article.
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Author: CA Samruddhi Mehta, a practicing Chartered Accountant and Partner at A M S M Associates, Chartered Accountants, Pune. Co-authored with fellow partner, CA Ankur Mehta.
CA Samruddhi Mehta |
CA Ankur Mehta |
