Maximizing Mutual Fund Returns: NRI-Friendly Tax-Saving Strategies

 For Non-Resident Indians (NRIs), India offers a dynamic investment landscape, and mutual funds are a preferred choice due to their flexibility, liquidity, and growth potential. But no matter how well your portfolio performs, taxation can significantly reduce your overall returns—especially if you're unaware of how to optimize it.

Fortunately, the Indian tax system provides several legal avenues for NRIs to reduce or avoid taxes on mutual fund gains. This blog covers key strategies and tips to help NRIs maximize post-tax returns on mutual fund investments in India.


Understanding Taxation on Mutual Fund Gains

Before we get into save tax on mutual fund gains as an NRI tips, let’s review how mutual fund gains are taxed for NRIs:

Equity Mutual Funds:

  • Short-Term Capital Gains (STCG): Sold within 12 months – taxed at 15%.

  • Long-Term Capital Gains (LTCG): Held for 12 months or more – tax-free up to ₹1 lakh, and 10% on the excess.

Debt Mutual Funds:

  • As of April 1, 2023, all gains are treated as short-term, regardless of holding period.

  • Taxed as per applicable income tax slab, with TDS at 30% for NRIs.

Hybrid Funds:

Taxation depends on equity exposure. If equity > 65%, they are taxed like equity funds. Otherwise, they’re treated as debt funds.

TDS for NRIs:

  • India deducts TDS on all mutual fund capital gains for NRIs:

    • 15% for equity STCG

    • 10% for equity LTCG

    • 30% for debt funds

This makes tax planning even more important to avoid over-taxation.

Top Tax-Saving Strategies for NRIs

1. Harvest Long-Term Capital Gains Annually

One of the most effective strategies is LTCG harvesting. If your equity mutual fund investments have appreciated, redeem a portion of them each year up to ₹1 lakh of LTCG. Since this amount is tax-exempt, you can lock in profits without paying any tax and even reinvest the proceeds.

Doing this consistently over time will help you optimize returns and stay tax-efficient.

2. Reinvest Using Systematic Transfer Plans (STPs)

Pair LTCG harvesting with a Systematic Transfer Plan (STP) to reinvest your redeemed amount. This ensures your investment stays in the market and continues compounding. Over the years, it builds a disciplined and tax-smart investing habit.

3. Opt for the Growth Option, Not IDCW

Many NRIs still invest in mutual funds using the IDCW (dividend) option, not realizing it can be tax-inefficient. IDCW payouts are taxed at 30% TDS for NRIs. In contrast, the growth option compounds your returns over time, and you pay capital gains tax only when you redeem.

By opting for growth plans, you maintain greater control over taxation timing and amount.

4. Use the DTAA to Lower TDS or Avoid Double Tax

India has signed Double Taxation Avoidance Agreements (DTAA) with many countries. These treaties help ensure you're not taxed twice—once in India and again in your country of residence.

To benefit, submit:

  • Tax Residency Certificate (TRC)

  • Form 10F

  • A signed self-declaration to the AMC

This allows you to claim a lower TDS rate or get tax credit in your resident country for taxes paid in India.

5. File Income Tax Return (ITR) in India

Even if you don’t live in India, it’s a good idea to file ITR if you’ve earned capital gains. Why?

  • You may be eligible for a TDS refund if your income is below the basic exemption limit (₹2.5 lakh).

  • Filing ensures proper documentation if you ever face queries from tax authorities in India or abroad.

  • It shows intent to comply with Indian tax laws, enhancing your financial credibility.

6. Use NRE Accounts for Investment and Repatriation

Ensure your mutual fund investments are made through NRE accounts, especially if you plan to repatriate the money. NRE-linked mutual fund redemptions are freely repatriable, and investments made through this route make compliance smoother.

Also, make sure your KYC and FATCA declarations are updated with NRI status to avoid issues with fund houses and banks.

7. Spread Redemptions Across Financial Years

If you're planning a large withdrawal, consider splitting it across two financial years. For instance, redeem half in March and the other half in April (of the next financial year). This way, each year’s LTCG stays under the ₹1 lakh exemption, and you avoid paying any tax.

It’s a simple yet effective move for NRIs with long-term holdings.

Final Thoughts

Tax on mutual fund gains can be significant, but with thoughtful planning, NRIs can save a good portion of it. By using strategies like LTCG harvesting, leveraging DTAA, opting for growth funds, and filing tax returns in India, you can ensure that more of your hard-earned returns stay with you.

Every rupee saved in tax is a rupee earned in returns. So don’t let taxation undermine your investment goals—stay informed, compliant, and strategic.

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