How Indian equity funds are taxed for NRIs
When you sell an Indian equity mutual fund, India taxes your gain. The rate depends only on how long you held it.
| How long you held it | Tax on the gain |
|---|---|
| More than 12 months (long-term) | 12.5%, on gains above ₹1.25 lakh a year |
| 12 months or less (short-term) | 20% |
These are the same rates residents pay, under Section 112A for long-term and Section 111A for short-term. The first ₹1.25 lakh of long-term gains each year is tax-free.
Here's how it works out. Say you redeem with a ₹5 lakh long-term gain. The first ₹1.25 lakh is free, and you pay 12.5% on the remaining ₹3.75 lakh, so about ₹47,000, plus cess.
Your fund house deducts this when you redeem, and you settle the exact figure in your tax return. One thing to know: your tax treaty does not cut this. India gets to tax capital gains on Indian shares at source (Article 13), so the 12.5% is simply the cost. The only exception is older holdings for Singapore and Mauritius residents, covered in the questions below.
US NRIs: the PFIC trap
If you live in the US, stop before you buy an Indian mutual fund. The IRS treats every foreign fund as a PFIC (a Passive Foreign Investment Company), and PFICs are taxed harshly.
Leave it alone and the default US rules apply: your gain gets spread back across every year you held the fund and taxed at the top rate for each of those years, plus an interest charge. The effective rate can top 50% on a long-held fund.
The usual way out is the mark-to-market election. You report each fund's gain every year based on its 31 December value, and you file Form 8621 for every fund, every year. Make the election in the first year you own the fund.
Honestly, most US NRIs are better off skipping Indian mutual funds altogether. Direct Indian shares are not PFICs, and a US-based India or emerging-markets fund gives you similar exposure without the paperwork. Canada has a milder version of this under Section 94.1, so Canadian NRIs should take local advice too.
Can US and Canada NRIs buy them?
It's a mixed picture. Plenty of Indian fund houses won't take on new investors who live in the US or Canada, because of the FATCA reporting it triggers, but a good number still do. If a house you want is closed to US or Canada residents, and you held a fund there before you moved, that folio usually stays redeem-only: you can sell, but not add.
If you want Indian equity exposure from the US, direct listed shares through an NRO or PIS demat account are the cleaner route.
NRE or NRO: it decides how easily you get the money out
Where you invest from decides how freely you can take the proceeds abroad.
NRE-funded: your redemption lands back in your NRE account and is freely repatriable, with no annual cap.
NRO-funded: it lands in NRO, which is capped at USD 1 million a year for repatriation.
The Indian tax is the same either way. So if you'll want to move the money abroad later, invest from NRE where you can. NRE can only be topped up with money sent from overseas, so this works for foreign-currency surplus, not for money already sitting in NRO.
Where equity funds fit
Equity funds are a growth holding, not a safe one. They swing hard from year to year, so they suit a horizon of five years or more and money you won't need soon.
For Gulf, Singapore and Hong Kong NRIs they're clean: no PFIC issue, usually no tax back home, just the Indian 12.5% to manage. For US NRIs the PFIC friction makes them a poor fit. For anything shorter than five years, a deposit is the safer home.
| Where to park it | Risk | Indian tax |
|---|---|---|
| Equity mutual fund | High | 12.5% long-term, above ₹1.25 lakh |
| NRE fixed deposit | Low | None |
| FCNR (USD) deposit | Low | None |
Most portfolios hold both: deposits for what you'll need soon, equity funds for long-term growth.