Why New Zealand taxes funds you have not sold
New Zealand does not have a general capital gains tax, but it does tax foreign shares and funds in an unusual way, through its foreign investment fund rules. Your Indian mutual funds and Indian company shares fall inside these rules.
Under the common method, the Fair Dividend Rate, you are taxed each year on a deemed income equal to 5% of the value of the holding at the start of the year, at your normal rate, whether or not you sold anything and whether or not the fund paid a dividend. There is an alternative method that taxes the actual movement in value instead, and you effectively pay on the lower of the two, with nothing due in a year the holding fell. But the headline is that you can owe New Zealand tax on Indian funds you have simply held.
The reliefs: the 4-year window and the small-holdings limit
Two reliefs matter. The first is the transitional-resident exemption. If you are new to New Zealand and were not resident there in the previous ten years, you get about four years during which most of your foreign income, including this foreign-fund income, is exempt from New Zealand tax. It is a once-in-a-lifetime window, so a recent migrant often has room to plan sales before it closes.
The second is the de minimis threshold. The foreign investment fund rules do not apply at all if the total cost of your foreign shares stays under the threshold, currently 50,000 New Zealand dollars, with a proposed rise to 100,000 dollars from April 2026 that is not yet law. Cross the line, though, and the rules apply to the whole holding, not just the excess.
Where the Indian tax clashes
The clash with India comes down to timing. India taxes gains on Indian mutual funds and shares only when you actually sell, at 12.5% on long-term gains above the yearly exemption, with tax withheld on redemption under Section 195, which becomes Section 393 from FY 2026-27. New Zealand, by contrast, has been taxing you a little each year on the deemed 5%, and does not tax the eventual sale.
So the two taxes never line up. In the years you simply hold, New Zealand charges the deemed tax but India charges nothing, so there is no Indian tax to credit. In the year you sell, India charges its capital gains tax but New Zealand, having already taxed you yearly, charges little on the sale, so there is no New Zealand tax that year to absorb an Indian credit. The result is that the treaty credit usually cannot neutralise the overlap, and you can end up bearing both. Because the exact outcome depends on the method you use and when you sell, this is one to plan with a cross-border specialist, and we handle the Indian side of it.
A worked example
Sunita moved to Auckland two years ago and holds Indian mutual funds worth about 80,000 New Zealand dollars. Because that is over the de minimis limit, the foreign investment fund rules apply, but she is still inside her four-year transitional-resident window, so New Zealand is not taxing the deemed income yet.
She uses the window: she plans to realise gains, or restructure, before it closes, because once it does, New Zealand will tax her 5% deemed income every year she holds, with no Indian tax in those years to offset it. When she does sell, India will tax the gain at 12.5% and withhold on redemption, and she will file her Indian return to settle it. Timing the sale around the window, rather than drifting past it, is the whole game.