Non-resident Indians (NRIs), particularly those residing in the United Arab Emirates (UAE), enjoy significant tax benefits on their investments in mutual funds (MFs) in India. These benefits stem from a Double Taxation Avoidance Agreement (DTAA) signed between India and the UAE, providing relief from capital gains taxation. However, navigating these benefits requires a thorough understanding of the treaty’s clauses and may involve complexities that not all investors or professionals are familiar with. Check out the specifics of these tax benefits, eligibility criteria, investment implications, and the challenges associated with claiming them.
Understanding the Tax Benefits
Exemption from Capital Gains Tax
NRIs from the UAE are exempt from paying capital gains tax in India on their investments in MFs, as per the DTAA signed in 1992. This exemption applies to gains from assets such as MFs, corporate bonds, and government securities.
DTAA Provisions
The DTAA specifies that gains on certain assets, including MFs, will be taxed only in the country of residence (UAE), where personal income tax is not levied, making the gains tax-free for NRIs.
Eligibility Criteria
To avail of these benefits, NRIs must meet certain criteria, including proving their residency status in the UAE by fulfilling the 183-day presence requirement and obtaining a tax residency certificate. Additionally, filing Form 10F with the tax authorities is mandatory.
Implications for Different Asset Classes
Stocks and Immovable Property
While gains from stocks and immovable property are subject to taxation in India under the DTAA, specific provisions exist for taxation in the country of residence.
Portfolio Management Services (PMS)
Taxation on gains from PMS depends on the nature of underlying assets. Gains from shares are taxable, while other securities may be exempt from capital gains tax.
Alternative Investment Funds (AIFs)
Tax treatment varies based on the category of AIFs. Category-2 AIFs’ income is pass-through and taxable in the hands of recipients, while Category-3 AIFs’ income is exempt for investors.
Challenges and Considerations
Awareness and Expertise
Many investors and professionals, including chartered accountants, may lack awareness of the DTAA benefits and its implications. Understanding the treaty’s clauses and navigating its complexities requires specialized knowledge.
Documentation and Compliance
Claiming benefits under the DTAA necessitates proper documentation, including tax residency certificates and filing Form 10F. However, convincing asset management companies (AMCs) to refrain from deducting tax at source can be challenging.
Scrutiny and Litigation:
Claiming benefits under the DTAA may attract scrutiny from tax authorities, especially if not all officials are familiar with its provisions. This could lead to litigation and additional costs for investors.
Also Read: Complete Guide On Income Tax Declaration
Conclusion
After parallel reading and legal interpretation between the Indian Income Tax Act and DTAA, the tax will be leviable on NRIs in the UAE on the capital gains arising from the sale of Shares and Immovable properties. However, as per Article 13 of the DTAA agreement between India and UAE, the sale of Indian MFs by NRI in UAE shall be taxable only in the contracting state of which a person is a resident. NRI in UAE is a resident of the contracting state UAE. Thus, it will be taxable in UAE and not India. However, the UAE does not levy income tax on individuals and hence, it will also become exempt in the UAE.
