I live in Australia with my family. Sometime in mid-2020, I invested in liquid mutual funds that I had purchased in March this year to book profits. TDS (Tax Deducted at Source) has been deducted at the time of redemption. I have read that NRIs (Non-Resident Indians) in the UAE do not have to pay capital gains tax at the time of redemption. Are the same benefits also available to Australian NRIs? If not, what is the sales taxation?
— Name withheld upon request.
I assume you are a non-resident under Indian tax law. Liquid funds typically invest in a portfolio of money market and short-term debt securities, and because investments in shares of domestic publicly traded companies constitute less than 35% of the total portfolio, they do not meet the criteria for an equity fund. For non-equity mutual fund units, the holding period is three years to qualify as long-term capital assets. The retention period according to your facts exceeds three years. For debt mutual funds, the TDS for long-term capital gains for NRIs is 10% without the benefit of indexation (plus applicable surcharge and tax), as is the final tax.
Certain changes have been introduced in the Finance Bill 2023 whereby capital gains from the sale of debt mutual funds are treated as short-term capital gains regardless of the holding period. However, the amendment applies to all premises purchased after April 1, 2023, so it will not apply in your case.
Under the India-UAE Double Taxation Avoidance Agreement (DTAA), mutual fund units qualify as “property” which is not described in other paragraphs of the capital gains article under the DTAA. Therefore, in accordance with the residual clause of Art. 13 section 5, the exclusive rights to tax the sale of mutual funds are vested in the UAE. However, the capital gains article in the India-Australia DTAA is worded slightly differently from the article in the India-UAE DTAA. First, we need to determine whether mutual fund units qualify as ‘corporate interests’ comparable to shares, since taxation rights relating to ‘comparable corporate interests’ (in the case of shares) are shared between India and Australia under Art. 13 section 5). Only if mutual fund units do not qualify as “comparable corporate interests” will they become “property” that is not described in other paragraphs of the capital gains section under the DTAA, and therefore the only taxable rights will be assigned to Australia in accordance with Article 13 section 6 of the India-Australia DTAA (which is similar to Article 13(5) of the India-UAE DTAA).
A “company” is defined under the Indian-Australian DTAA as a body corporate or an entity treated as a body corporate for tax purposes. For the purposes of the Mutual Fund Regulations of the Securities and Exchange Board of India, a mutual fund means a fund established in the form of a trust. An investment fund that is a trust is not a company or other legal entity. Therefore, mutual units do not qualify as “corporate interests” comparable to shares of stock.
They therefore qualify for treatment as “property” under Art. 13 section 6 of the DTAA for India and Australia and are taxable only in Australia. TDS deducted in India can be claimed back by filing your tax return in India and you will have to pay capital gains tax in your home country i.e. Australia. Indian TDS cannot be considered as foreign tax credit in Australia.
Harshal Bhuta is a partner in the licensed accounting firm PR Bhuta and Co.
Posted: Jun 10, 2024 16:38 EST