Summary
NRIs need to pay TDS when redeeming or transferring their investment, depending on the tax rate, holding periods, and the category of gain.
It involves certain documents, such as address proof, PAN card, NRE/NRO account, self-declaration, and other such documents to determine their eligibility.
What is TDS on Mutual Fund Redemption for NRIs?
Tax Deducted at Source (TDS) is a mechanism through which tax is collected from a source of income, before the recipient receives it. TDS on mutual fund redemption means tax collected by Asset Management Companies (AMCs) before giving the redeemed amount to NRI investors. It is a portion of their investment gains.
However, NRI mutual fund taxation is a broader concept that includes different tax rates for long-term and short-term capital gains, indexation, and other important aspects.
When Does TDS Apply to Mutual Fund Redemptions?
TDS applies to mutual funds only when investors earn capital gains. The deduction is applicable in situations such as partial withdrawal, full redemption, systematic withdrawal plans, and switching from one scheme to another. However, in case of capital loss, no TDS is deducted, since there might not be any taxable amount to tax.
Although both dividends and capital gains are taxable amounts, dividends have different tax provisions that are not treated under redemption-related TDS provisions.
TDS on Equity Mutual Funds vs Debt Mutual Funds for NRIs
Capital gains earned from redeeming either equity or debt funds are subject to TDS under the tax provisions of NRIs. The aspects that differentiate them are listed below.
| Aspects | Equity Mutual Funds | Debt Mutual Funds |
| Primary Investment | Atleast 65% of holdings in shares of listed companies | Debt securities such as government securities, bonds, and market securities |
| Holding period | Short-term (units holding up to 12 months); Long-term (units holding exceeding 12 months) | No separate long-term treatment since the recent tax amendments in April 2023- most of them are treated as short-term gains |
| Indexation benefit | Not applicable | Removed under current capital-gains provisions |
| How are they taxed | Long-term or short-term rate, depending on its holding period | Often deducted at the investor’s applicable slab rate |
Although there are several differences between them, they also share a similarity. They are both applicable to the Double Taxation Avoidance Agreement (DTAA). If the investor’s country has a DTAA agreement with India, they may qualify to claim tax benefits under the applicable provision.
TDS Rates for NRIs on Different Types of Mutual Funds
For NRIs, the applicable TDS rate is influenced by the nature of the mutual fund and the duration of investment. These rates are subject to applicable surcharge and cess. The treatment may also differ for foreign companies, FPIs, and investors eligible for treaty relief.
| Fund category | Holding period | Gain type | Base TDS rate |
| Equity-oriented mutual fund | Up to 12 months | Short-term | 20% |
| Equity-oriented mutual fund | More than 12 months | Long-term | 12.50% |
| Specified mutual fund acquired on or after 1 April 2023 | Any period | Deemed short-term | 30% |
| Other non-equity fund — listed units | Up to 12 months | Short-term | 30% |
| Other non-equity fund — listed units | More than 12 months | Long-term | 12.50% |
| Other non-equity fund — unlisted units | Up to 24 months | Short-term | 30% |
| Other non-equity fund — unlisted units | More than 24 months | Long-term | 12.50% |
| Specified mutual fund acquired before 1 April 2023 | More than 12 months if listed; more than 24 months if unlisted | Long-term | 12.50% |
How Capital Gains Are Calculated Before TDS Deduction
To determine the TDS, the deductor needs to calculate the net capital gain earned in a financial year. The capital gain earned by investors can be determined by applying the following formula.
Capital gain = Sales – (purchase cost + cost of improvement)
Many investors assume incorrectly that the tax is deducted from the entire redemption amount. Rather, it is deducted from the remaining redemption amount after subtracting the purchase cost and any additional costs incurred while the units were held.
Suppose you sold a mutual fund at ₹7,50,000. The purchase price of the units was ₹3,25,000, and you made no additional changes to the fund. Then at redemption. The TDS will be calculated after deducting the purchase cost, i.e., ₹7,50,000 – ₹3,25,000 = ₹4,25,000. Therefore, tax will be calculated on ₹4,25,000.
How DTAA Benefits Affect TDS on Mutual Fund Redemption
The Double Taxation Avoidance Agreement (DTAA) is a tax treaty between two countries that helps eligible taxpayers avoid being taxed by two different countries. More than 90 countries have entered into this agreement with India. Therefore, if the resident country of an NRI taxpayer has an agreement with India, they can benefit from a low tax rate, tax credit in their resident country, relief from double taxation, and reduced tax burden.
Eligible taxpayers can simply submit the necessary documents, including the Tax Residency Certificate, Form 10F, and self-declaration certificate, to claim the tax relief.
Documents Required for NRI Mutual Fund Redemption
Redemption of mutual funds for NRIs requires certain documents to determine the taxpayer’s eligibility.
| Documents | Reason |
| Pan Card | For reporting tax and deducting TDS |
| NRE or NRO account | Redemption proceeds are credited to the registered bank account maintained in India |
| KYC documents | Verifying the investor’s identity and its compliance with SEBI regulations |
| FATCA declaration | To confirm compliance with international tax regulations |
| Tax Residency Certificate (TRC) | For claiming DTAA |
| Residency Proof | Passport or address proof to verify the investor’s residence and NRI status |
| Self-declaration | For supporting treaty benefits, if certain details are not available in the TRC |
Moreover, it is important to submit the updated documents. Any incorrect or outdated documents may lead to process delays or failure.
How to Verify Deduction of TDS on Mutual Fund Redemption
NRI taxpayers can verify the TDS deduction of redemption to check whether the amount deducted is correct. They can simply check on the income tax portal or through the mutual fund registrars.
- Verify via the income tax portal ( Form 26AS): Taxpayers can check the deduction by logging into the e-filing portal and reviewing Form 26AS. It is the consolidated tax statement that facilitates the overview of tax deductions against their PAN, including TDS after mutual fund redemptions.
- Review the AIS: The income tax e-filing also allows taxpayers to access the Annual Information Statement (AIS). It includes all the required documents related to the investment, taxes, and other important information. This allows taxpayers to compare the TDS records to the statement to ensure that all deductions have been correctly reflected.
- Obtain the TDS Certificate: The TDS certificate issued by the registrar of mutual funds usually includes all the TDS-related necessary information, which can help taxpayers check their deduction report.
Can NRIs Reduce or Claim a Refund of Excess TDS?
Yes. The TDS deducted at the time of redemption for NRIs is not necessarily the final tax payable. Normally, if the tax liability is lower than the tax already paid, you may request a refund by filing your tax return.
An NRI may be eligible for a refund under the following scenarios.
- When benefits under DTAA were not considered, while processing TDS deductions.
- When the applicable surcharge was less than assumed.
- When the capital losses are eligible to offset the capital gains.
- When your total tax bill is less than the tax deducted.
Common Mistakes NRIs Make During Mutual Fund Redemption
Many NRIs tend to overlook tax implications and focus only on the redemption amount. By avoiding a few common mistakes, one can save money and time.
- Ignoring the holding period: Redemption without checking, if incomes fall under long-term or short-term capital gain, may result in negative tax consequences.
- Assuming TDS as the final tax: Some investors believe that TDS deducted from their income would cover all their liabilities. However, the actual tax due is calculated only after the total income computation.
- Not utilising DTAA benefits: Sometimes, eligible investors fail to submit specific required documents, such as TRC and Form 10F, and end up paying higher TDS. However, from April 1, 2026, Form 41 has replaced the earlier Form 10F.
- Ignoring capital loss adjustments: Capital losses on investments can be set off against profits, reducing tax liability. Avoiding this may cause unnecessary expenses in tax computation.
Real-World Example: NRI Redeeming Mutual Funds
To understand the redemption process better, let us consider a real-world example.
Rajeev is a citizen of India, working in Canada. Five years back, he invested ₹5 lakhs in an equity fund using his NRE account. After 5 years, the worth of his investment has increased to ₹11 lakhs. Therefore, he decided to redeem the entire investment.
So, the capital gain earned by Rajeev = ₹11,00,000 – ₹5,00,000 = ₹6,00,000.
The AMC calculated the capital gain and deducted TDS according to the necessary tax regulations before transferring the remaining amount to his bank account.
As Canada has signed an agreement for the DTAA with India, Rajeev had already submitted the TRC and other necessary documents. This helped him claim the benefits of the agreement wherever necessary. After filing the income tax return in India, Rajeev checked the TDS deducted through Form 26AS and discovered that the taxes paid are more than the actual tax liability. So, after filing the return, he claimed the refund successfully.
Managing NRI Investments Efficiently and Tracking Tax Impact
Effective investment management indicates efficient selection and planning of the right mutual fund investment. Consistent tax planning provides taxpayers with the opportunity to improve their returns and avoid any discrepancies.
Some of the important tips for maintaining investment and planning taxes efficiently are listed below.
- Maintain a track record for all the purchases and redemptions.
- Maintain records of account statements and tax reclaims.
- Monitor and check the Form 26AS and AIS periodically.
- Ensure updating your KYC details and other necessary details immediately after a change.
- Professional guidance is advisable to manage the investment portfolio effectively.
Final Thoughts
Redeeming mutual fund investments by NRIs includes more than just selling off the units. Understanding the effect of various other factors, such as DTAA regulations, tax rates, and the calculation of capital gains are also required for proper planning, since TDS is deducted during the process of redemption.
While TDS ensures its compliance with the required tax regulations, it does not represent the final tax liability. Maintaining and monitoring the records and filing the tax return on time will help taxpayers to get their eligible reliefs and minimise tax liability.
FAQs
Yes. NRIs are liable to pay tax on capital gains earned from mutual fund investments in India. The tax rate depends on the type of mutual fund, the holding period, and the applicable provisions under the Income-tax Act.
If the TDS deducted exceeds the actual tax liability, the NRI can file an Indian Income Tax Return (ITR) and claim the excess amount as a refund. The deducted tax should first be verified through Form 26AS or the Annual Information Statement (AIS).
For equity-oriented mutual funds, long-term capital gains (LTCG) of up to ₹1.25 lakh in a financial year are exempt from tax. Any gains above this threshold are taxed at the applicable LTCG rate. Debt mutual funds do not have this exemption.
Yes. Every SIP instalment is treated as a separate investment with its own holding period. If redeeming SIP units results in taxable capital gains, the AMC will deduct TDS on the applicable gains.
No. TDS is mandatory on taxable capital gains earned by NRIs at the time of redemption. However, eligible investors may reduce their effective tax liability by claiming benefits under the Double Taxation Avoidance Agreement (DTAA) and can claim a refund if excess TDS has been deducted.
TDS is deducted only on the taxable capital gain, not on the entire redemption amount. The purchase cost and eligible acquisition expenses are first deducted to arrive at the taxable gain.
Yes. If the NRI resides in a country that has a Double Taxation Avoidance Agreement (DTAA) with India, they may claim treaty benefits by submitting documents such as a Tax Residency Certificate (TRC), Form 10F/Form 41 (where applicable), and a self-declaration.
If more TDS is deducted than the actual tax payable, the excess amount can be claimed as a refund by filing an Income Tax Return in India. The Income Tax Department processes the refund after verifying the return and supporting records.
Yes. A DTAA can reduce your overall tax burden by providing lower tax rates, tax credits, or relief from double taxation, depending on the treaty between India and your country of residence. To avail of these benefits, you must submit the prescribed documents before or during the redemption process.
