Mutual Fund Tax Ruling Opens Doors & Questions

The ruling, which places mutual funds under residual categories taxed only in the investor’s home country, could boost foreign interest in Indian mutual funds. However, experts urge caution, noting the Income Tax Department may challenge the ruling, and that tax strategies should not hinge on a single judgment. Investors are advised to seek professional advice before making decisions based on DTAA interpretations

Going by the recent verdict of Income Tax Appellate Authority (ITAT), capital gains on mutual fund (MF) units can't be taxed in India under the tax treaties with specific countries like Singapore, UAE, Mauritius and Netherlands.

Thus, no tax is payable in India for Singapore residents on their short-term and long-term capital gain both from debt and equity mutual funds. It is taxable only in the country of residence.

Double Taxation Avoidance Agreements (DTAA) with various countries plays important role in determining taxability from the income earned in the case of residents/non-residents of respective countries and is designed in such a way that same income is not taxed twice. If we analyze the India-Singapore DTAA then its Article 13 deals with income from capital gains.

First four points of Article 13 deals with specific assets and their point of taxation as the case may be but fifth point states that ‘gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the contracting State of which the alienator is a resident’ meaning thereby all capital gain arising from other assets will be taxed in the country of which the seller of that assets is a resident. As point 5 was for residual items and no name of any specific asset was there, there was uncertainty regarding mutual funds.

Talking to Bizz Buzz, Ashish Niraj, partner, ASN & Company, Chartered Accountants, said, “With this ITAT judgement in which it ruled that mutual funds cannot be categorised as ‘shares’ for which point 4 is there and MF’s will fall under residual item in point 5. So, after this judgement the ambiguity regarding classification of mutual funds in assets category will become more clear and more Singapore residents will claim tax exemption of LTCG and STCG from sale of mutual funds from tax in India on basis of DTAA.”

Not only Singapore, some other countries also have DTAA with clause that residual items will be taxed in country of resident. So now Indian mutual funds will become more lucrative for residents of those countries whose DTAA has likewise residual clause for taxation purposes, he added.

However, another section of experts feels that tax strategies should not rely solely on ITAT rulings, as jurisdictional nuances, treaty interpretations, factual differences, and practical challenges often come into play.

A tax expert from Gurugram, Abhishek Aneja said, “The Income Tax Department is likely to challenge such rulings before the High Court, and if upheld by the High Court or Supreme Court, an entire tax strategy could unravel.”

Taxpayers are advised to seek independent professional guidance rather than act solely on news reports, he said.