Holding Indian mutual funds as an Australian tax resident

The reassuring headline first: Australia does not have the punishing foreign-fund regime the United States applies. Australia repealed its foreign investment fund rules in 2010, and never replaced them with a PFIC-style annual mark-to-market or anti-deferral tax. So your Indian mutual funds are ordinary Australian tax assets, not caught in a special regime, and the US framing you may have read simply does not apply here.

What that means in practice: the fund's distributions are assessable in Australia in the year you receive them, and when you redeem, ordinary capital gains tax applies. There is no need to report unrealised fund gains each year or to navigate a penal regime. The controlled-foreign-company rules do not bite either, because you do not control a retail mutual fund. So the Australian side is straightforward, just distributions and a capital gain on sale.

When you became an Australian resident, your Indian fund units were treated as acquired at their market value on that day, an arrival-day cost-base reset. So Australia taxes only the gain from your arrival value to the sale price, not the growth from when you originally bought the units in India. If your funds had already risen a lot before you moved, that earlier growth is outside the Australian net.

On top of that, if you have held the units for more than 12 months, measured from that arrival day, you get the 50% capital gains discount, so only half the post-arrival gain is taxed. Between the reset and the discount, the Australian tax on a fund redemption is often modest. The flip side is that Indian dividends from the funds carry no Australian franking credits, franking is a purely domestic Australian mechanism, so those dividends are fully assessable in Australia with only a foreign income tax offset for any Indian dividend tax.

India taxes the redemption in its own right. For equity funds, long-term gains over ₹1.25 lakh are taxed at 12.5% and short-term gains at 20%, for sales on or after 23 July 2024. Debt funds bought on or after 1 April 2023 are taxed at your slab rate with no long-term concession. The fund house deducts TDS on an NRI's redemption, commonly 12.5%, 20% or 30% depending on the fund and holding, which a tax residency certificate and Form 10F can reduce where the treaty helps.

The two sides then meet through the offset: Australia taxes the post-arrival gain and credits the India tax you paid. Because India taxes the whole gain from your original cost while Australia taxes only the smaller post-arrival slice, the India TDS can exceed your real India liability, so an Indian return to reclaim the excess is common, and on debt funds the 30% India tax can be more than the Australian offset can absorb. A practising CA computes the Indian gain, reclaims the over-deducted TDS, and gives your Australian accountant the figures for the offset.