Why the gain is income, not a capital gain
This is the trap that catches almost every UK resident with Indian funds. UK tax splits offshore funds into reporting funds, whose gains are capital gains, and non-reporting funds, whose gains are taxed as income. To be a reporting fund, the fund must apply to and report to HMRC, and Indian mutual funds essentially never do, so they are non-reporting funds.
The consequence is that when you sell an Indian fund, the profit is an offshore income gain, charged to income tax at your marginal rate, up to 45%, not the lower capital-gains rates. You also lose the annual capital-gains exemption, because this is not a capital gain at all, and the gain stacks on top of your income, which can push you into a higher band. There is even an asymmetry that hurts: if a fund falls and you sell at a loss, that loss is treated as a capital loss, so it cannot be set against the income gains on your winning funds. So the upside is taxed as income and the downside is trapped as a capital loss.
The India side and the dividends
India taxes the same 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 are taxed at your slab rate. The fund house deducts TDS on an NRI's redemption, which a tax residency certificate and Form 10F can reduce where the treaty helps, and any excess is reclaimed on an Indian return.
Dividends from the funds are taxed in the UK at the dividend rates, up to 39.35%, with only the small £500 dividend allowance, and the UK credits India's dividend withholding at the treaty rate. On the capital side, the UK gives credit for the India tax on the redemption too, but here is the sting on top of the sting: the India tax was charged as capital-gains tax at 12.5% or 20%, while the UK is charging income tax at up to 45% on the offshore income gain, so the India credit frequently falls well short of the UK bill. A practising CA computes the Indian gain and TDS correctly, reclaims any excess, and gives your UK accountant the India-tax-paid figures, but the offshore-fund status itself is a UK-side fact worth planning around before you invest.