International mutual funds taxation – Explained
Investing in international mutual funds is a good way to diversify your investments. These funds invest in companies located outside of India and provide numerous advantages such as diversification, exposure to global markets, and higher returns. Yet, it is critical to understand the tax ramifications while investing in overseas mutual funds in India. The Indian government has tax requirements for international mutual funds that any investor should be aware of. Read on to learn more about tax implications of international mutual funds in India.
Taxation of international funds in India
Investment in international mutual funds is taxed in India. The tax consequences vary according to whether the investment was made through a resident or non-resident Indian (NRI) account. NRIs face different tax rules than residents. The following are the tax consequences for both:
The capital gains tax (CGT) is a tax levied on profits obtained from the sale of investments. When you sell international mutual funds in India, you are liable to CGT. The CGT is determined depending on the investment’s holding period. The holding period is the number of years that an investor keeps an investment before selling it.
The CGT is calculated as follows for residents:
STCG (short-term capital gains) tax: The profit is liable to STCG tax if the holding period is less than 36 months. The tax rate is set at 15%.
Tax on long-term capital gains (LTCG): The profit is liable to LTCG tax if held for longer than 36 months. The tax rate is 20%, with a 4% surcharge.
The CGT is calculated differently for NRIs. The following are the tax rates:
STCG tax: The tax rate is 30% if the holding period is less than 36 months.
LTCG tax: If the holding period exceeds 36 months, the tax rate is 20% plus a 4% cess.
Taxation of dividends from international mutual funds
Dividends earned from international mutual funds are taxed in India. The tax rate is different depending on whether the investor is a resident or an NRI. The tax rate for inhabitants is 10% + surcharge + cess. The tax rate for NRIs is 20% + surcharge + cess.
It is vital to remember that if the dividend income in a fiscal year exceeds Rs. 5,000, the mutual fund company deducts tax at source (TDS) before distributing the dividend amount to the client. TDS is 10% for residents and 20% for non-residents.
Investing in international mutual funds can be a profitable way to diversify your portfolio and acquire exposure to international markets. However, before investing in these funds, it is critical to understand the tax ramifications. If you are thinking about investing in overseas mutual funds in India, you should speak with a tax specialist to help you negotiate the tax rules and ensure you are following the Indian tax legislation.