Indians living and working abroad, do invest regularly in India equity market. These Non-residents invest their money in Shares, Mutual Funds, Fixed Deposits in India. As per domestic law provisions of India, taxation of return on these investments lie in India. However, taxation of mutual fund capital gains has been a contentious issue. Reference domestic laws provisions, mutual fund capital gains are taxable in India, however, as per DTAA between India and many other countries (e.g. UAE, Singapore, Oman, Germany etc) tax position changes. It is also important to understand here that as per Income Tax Act in India, taxpayer has an option to apply DTAA if DTAA provisions are beneficial. In such cases, DTAA will override the domestic tax law provisions. However, interpretation of DTAA caused a litigation between taxpayer and tax authorities. Hence, mutual fund capital gain tax has remained a matter of litigation as far as DTAA benefit is to be availed. In some recent court rulings (DCIT Intl Tax Vs K E Faizal \u2013 India UAE DTAA) (Anushka Sanjay Shah Vs ITO \u2013 India Singapore DTAA) courts have held that reference residual clause of capital gain (article 13) under DTAA between India and these countries, taxation rights of Mutual Fund capital gain lies with residence country (i.e UAE, Singapore etc) and not the source country (i.e India). <\/p>\n\n\n\n
India UAE Tax Treaty Article 13 define and distribute the taxation rights of capital gain income on various transactions. It says<\/p>\n\n\n\n
Hence, as per the residual clause Article 13(5) tax rights are exclusively with country of residence (i.e. UAE in case of NRIs OCIs investment in India).<\/p>\n\n\n\n
Here, the litigation is, whether mutual funds shall be categorised under Article 13(4) or 13(5). The Income tax department has always chosen to consider it under Article 13(4). Hence, this is a subject matter of litigation.<\/p>\n\n\n\n
In July 2019, in case of K E Faizal Vs CIT Intl Tax (ITA No 423\/Coch\/2018\/AY 2012-13), Cochin ITAT has discussed and decided the issue in detail.<\/p>\n\n\n\n Hereunder are some other cases, where similar issue decided in favor of assessee.<\/p>\n\n\n\n Similar to India-UAE Tax Treaty, many other DTAA are also there where capital gain taxation rights are distributed similar to India UAE DTAA. Some of those countries are<\/strong><\/p>\n\n\n\n In case of abovementioned countries also, under DTAA between India and these countries, under capital gain Article, taxation right for shares are generally given to the source country. However, since no separate clause for mutual funds so the same gets place in residual clause where tax rights are distributed to the country of residence. Hence, no taxation in India on mutual funds capital gain.<\/p>\n\n\n\nK E Faizal Vs CIT Intl Tax <\/strong>(ITA No 423\/Coch\/2018\/AY 2012-13)<\/strong> <\/td><\/tr> Facts<\/strong><\/td> Cochin ITAT Decision<\/strong><\/td><\/tr> Assessee, K E Faizal, was a Non-resident in AY 2012-13.Filed ITR. Claimed exemption for short term gain (Rs 1,34,99,407) on Equity oriented mutual funds under Article 13(5) of India UAE DTAA.AO made assessment u\/s 143(3).AO considered short term capital gain taxation in India under clause 13(4) of India UAE Tax Treaty.AO argued that Mutual Fund units are nothing but shares only and should be taxable under clause 13(4).Aggrieved by AO order, assessee filed appeal with first appellate authority i.e. CIT Appeal. CIT decided the case in favor of assessee considering short term gain exempt under clause 5 of Article 13.In response, deptt filed appeal with ITAT against CIT Appeal order. <\/td> There is no denial by the AO on assessee status as Non-resident.AO agreed assessee eligibility for India UAE DTAA.Only question is that whether mutual funds unit can be categorised under clause 13(4) (which deals with shares) or 13(5) (residual clause).Since mutual funds are not defined anywhere in Income Tax Act, meaning has to be borrowed from other allied laws in India.References taken from Companies Act 2013, Securities Contract (Regulation) Act 1956 and SEBI Mutual Fund Regulation 1995.Accordingly, \u2018shares\u2019 and \u2018unit of mutual fund\u2019 are two different type of security. Hence, unit of mutual fund cannot be classified as \u2018share\u2019.Hence, unit of mutual fund cannot be categorised under Article 13(4) of India UAE Tax Treaty. Hence, Article 13(5) shall apply on mutual funds.Income from sale of mutual funds (be it equity oriented or debt oriented) is not taxable in India under residual clause 13(5) of India UAE DTAA. Appeal allowed in favour of assessee.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Other Judicial Pronouncements \u2013 Interpretation of DTAA Capital Gain Residual Clause<\/h2>\n\n\n\n
Mumbai ITAT Judicial Pronouncement \u2013 Anushka Sanjay Shah Vs ITO<\/strong> <\/strong><\/td><\/tr> Facts<\/strong><\/td> Mumbai ITAT Decision<\/strong><\/td><\/tr> AY 2022-23, Assessee was tax resident of Singapore and a non-resident in India. Claimed exemption for short term capital gain on debt funds (Rs 88.75 Lakh) and equity funds (Rs 46.91 Lakhs) under Article 13(5) of India Singapore DTAA. AO and DRP denied exemption. Treated it like share and applied Article 13(4).Assessee filed appeal with ITAT. <\/td> ITAT held that taking reference from various allied laws, Mutual fund unit cannot be considered as \u2018Share\u2019.Article 13(4) specifically deals with share only.Hence, Article 13(5) (residual clause) shall apply to Mutual fund capital gain income.Assessee being tax resident of Singapore, eligible for DTAA benefit.Mutual fund income is not taxable in India as per India Singapore DTAA.Appeal allowed in favor of assessee (Anushka Sanjay Shah).<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Mumbai ITAT Judicial Pronouncement \u2013 Satish Beharilal Raheja [2013] 37 taxmann.com 296 AY 2004-05, ITA No 6549\/Mum\/2013<\/strong> <\/strong><\/td><\/tr> Facts<\/strong><\/td> Mumbai ITAT Decision<\/strong><\/td><\/tr> AY 2004-05, Assessee tax resident of Switzerland and a non-resident in India. Claimed exemption for short term and long term capital gain on sale of mutual fund units under Article 13(6) of India Switzerland DTAA.AO applied DTAA but argued that mutual funds need to categorised as \u2018share\u2019 under Article 13(5)(b). Hence, taxation rights will remain with India.Matter reached to ITAT on filing appeal with with Mumbai ITAT. <\/td> Mumbai Inc Tax Tribunal decided that Mutual fund unit cannot be considered as \u2018Share\u2019.Article 13(5) specifically deals with share only.Hence, Article 13(6) (residual clause) shall apply to Mutual fund capital gain income.Assessee being tax resident of Switzerland is clearly eligible for DTAA benefit.Appeal allowed in favour of assessee.Mutual fund income is not taxable in India as per India Switzerland DTAA.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n DTAA between India And Other Countries \u2013 No Tax In India on Mutual Funds Gain<\/h2>\n\n\n\n
India DTAA With<\/strong><\/td> Article No<\/strong><\/td><\/tr> Singapore<\/td> 13(5)<\/td><\/tr> Oman<\/td> 15(6)<\/td><\/tr> Ireland<\/td> 13(6)<\/td><\/tr> France<\/td> 13(6)<\/td><\/tr> Saudi Arabia<\/td> 13(6)<\/td><\/tr> Kuwait<\/td> 13(6)<\/td><\/tr> Germany<\/td> 13(5)<\/td><\/tr> Qatar<\/td> 13(6)<\/td><\/tr> Switzerland<\/td> 13(6)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Important Conclusions \u2013 Claiming of India DTAA Benefit<\/h2>\n\n\n\n
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FAQs \u2013 Whether Mutual Funds Gains Are Taxable In India \u2013 DTAA Between India Vs UAE, Singapore, Switzerland, Other Countries<\/h2>\n\n\n