1. The Problem: Tax Deducted First, Relief Claimed Later

When an NRI redeems units of an Indian mutual fund, the Asset Management Company (AMC) or its registrar (commonly CAMS or KFintech) is required to withhold tax at source on the capital gain — currently at rates of 20% for short-term gains and 12.5% for long-term gains on equity-oriented funds, with different rates for debt funds. This happens by default, regardless of where the NRI actually lives or what tax treaty India has with that country.

The Double Taxation Avoidance Agreement (DTAA) between India and the NRI's country of residence may entitle them to pay less tax, or no tax at all, on this gain in India. But this relief is never automatic — the fund house will not apply it unless the NRI proactively provides the right documentation before redemption, or the NRI claims it later through an Indian tax return.

2. The Tax Residency Certificate (TRC) — What It Is and Why It's the Starting Point

A Tax Residency Certificate (TRC) is an official document issued by the tax authority of the NRI's country of residence (for example, the UAE Ministry of Finance/Federal Tax Authority, or the Inland Revenue Authority of Singapore), certifying that the individual was a tax resident of that country during a specified period.

The TRC matters because Section 90(4) of the Income Tax Act makes it a precondition for claiming DTAA relief — without a valid TRC covering the relevant period, the Indian tax authorities will not accept a claim that income is taxable only in the country of residence, regardless of how clear the underlying treaty article might otherwise be.

Timing matters. The TRC must cover the period in which the income (the capital gain, in this case) arose. For gains earned in the Indian financial year 1 April 2024 to 31 March 2025, for instance, a UAE-based NRI would typically need a TRC covering the UAE calendar year 2024 (since UAE TRCs are issued on a calendar-year basis) — meaning the TRC application should be planned well ahead of the Indian tax filing deadline, not as an afterthought.

3. Form 10F and the Self-Declaration — Completing the Documentation

The TRC alone is not sufficient. Indian tax law also requires:

  • Form 10F — a self-declaration (filed electronically via the Indian income-tax e-filing portal) confirming details such as nationality, the foreign tax identification number, the period of residence, and a declaration of no permanent establishment in India in connection with the income
  • A self-declaration letter addressed to the mutual fund's registrar (CAMS/KFintech), explicitly stating residence in the treaty country and the specific DTAA article being relied upon

Submit before redemption, not after. Some AMCs will accept the TRC, Form 10F, and self-declaration before a redemption is processed, and apply the reduced/nil TDS rate at source — avoiding the need to claim a refund later entirely. This is operationally far simpler than redeeming first and then filing an Indian tax return to claim a refund of over-withheld tax, which can take months to process.

Every field in Form 10F must match the TRC exactly — a mismatch in name spelling, address format, or tax identification number is one of the most common reasons these claims get rejected or delayed at the fund house level.

4. Why Mutual Funds Specifically — The 2025 ITAT Ruling

The most significant recent development in this area is a ruling by the Income Tax Appellate Tribunal (ITAT), Mumbai, in the case of Ms. Anushka Sanjay Shah, a Singapore-based NRI who had earned approximately Rs. 1.35 crore in capital gains from redeeming Indian mutual fund units. The Income Tax Department sought to tax this gain in India; the taxpayer claimed exemption under the India-Singapore DTAA, and the Tribunal ruled in her favour.

The legal reasoning matters. Most DTAAs have a specific article dealing with capital gains on shares of companies, which often preserves India's right to tax such gains, particularly where the company's value derives substantially from Indian assets. The Tribunal's key insight was that mutual fund units are not shares of a company — they are units issued by a trust (since Indian mutual funds are structured as trusts under SEBI regulations), and therefore do not fall within the shares-specific article of the DTAA at all.

Instead, gains on mutual fund units fall under the treaty's residual "other income" clause — typically Article 13(4) or similarly numbered in most Indian DTAAs — which generally allocates taxing rights solely to the country of residence of the person earning the income. For an NRI resident in Singapore, the UAE, or other jurisdictions with no domestic tax on this category of capital gain, this analysis can result in a genuinely nil tax outcome — not a deferral, not a credit against tax paid elsewhere, but no tax payable in either country.

This is not an isolated case — a similar outcome was reached in a separate matter involving a UAE-resident NRI (Saket Kanoi), reinforcing that this is becoming an established line of reasoning rather than a one-off result, though as with any tribunal-level ruling, it remains open to challenge in higher courts and the position could evolve.

5. Is It Legitimate to End Up Paying Tax Nowhere?

For many NRIs, the idea of a gain being taxable in neither country understandably raises the question of whether this is even legitimate. The answer, on the current state of the law and tribunal rulings, is yes — provided the underlying residency and the treaty interpretation are genuine:

It is the treaty working as designed. DTAAs deliberately allocate taxing rights between two countries for specific categories of income. Where a treaty allocates the right to tax a particular type of gain solely to the country of residence, and that country happens not to tax that category of income domestically (as is the case for personal capital gains in the UAE or Singapore), the result is a legitimate "nil" outcome — this is a feature of how the treaty was negotiated, not an exploitation of a loophole.

Genuine residency is the non-negotiable condition. The protection above only holds if the NRI is a bona fide tax resident of the treaty country — actually living there, actually meeting that country's own residency tests (commonly 183+ days for UAE TRC purposes), and not merely holding a residence visa while spending most of the year in India. Indian tax authorities can invoke the General Anti-Avoidance Rule (GAAR) to disregard arrangements that lack genuine commercial or personal substance and exist primarily to obtain a tax advantage.

This applies specifically to mutual fund units, not all Indian investments. Direct equity shares, real estate, and other asset classes are governed by different, often more India-favourable, treaty articles — so the "taxed nowhere" outcome described above should not be assumed to extend automatically to other categories of NRI income or gains without a separate, asset-specific analysis.

6. If TDS Was Already Deducted — Claiming It Back

Where the documentation wasn't submitted before redemption and TDS was deducted at the standard rate, the gain doesn't disappear — it has to be actively claimed back:

File an Indian Income Tax Return (ITR-2, typically), even with no tax payable. The Income Tax Department does not proactively refund DTAA-eligible amounts — the NRI must file a return, report the capital gain, claim the treaty exemption with reference to the specific article, and attach (or have available on request) the TRC, Form 10F, and supporting documents.

Keep a clean documentation trail. This includes the TRC for the relevant period, proof of the redemption transaction, the capital gains statement from the AMC/registrar, and evidence of the NRE/NRO banking trail for the original investment — all of which support the genuineness of both the residency claim and the transaction itself if the claim is scrutinised.

Processing takes time. Refund claims of this nature are not instantaneous — building in several months between filing and an eventual refund is realistic, which is again why securing the lower/nil TDS rate at the point of redemption (Section 3 above) is operationally preferable wherever the AMC supports it.

This article is for informational purposes only and does not constitute legal, tax, or financial advice. Please consult with a qualified professional for advice specific to your situation. Maroon Advisors would be delighted to assist — get in touch.