Sold Indian Mutual Funds as an NRI? Why TDS Hit Even Small Gains
You redeemed a few lakh of Indian mutual funds from abroad, and the credit in your NRO account was noticeably lower than the statement value. A resident friend who sold the same fund paid nothing.
That gap is TDS, and for many NRIs it is more than the tax actually owed. The rules are not hard, but three of them catch almost everyone: the TDS rates, the rebate that does not apply, and the treaty claim that has to be documented.
Quick answer: Fund houses must deduct TDS on an NRI's redemption gains: 20% on short-term equity gains, 12.5% on long-term equity gains, and usually 30% on debt fund gains, plus surcharge and cess. NRIs cannot use the section 87A rebate or set the basic exemption against these gains. Any excess TDS comes back only through an income tax return.
Contents
Why was TDS deducted when I redeemed?
Because the payer must withhold tax on any sum paid to a non-resident that is chargeable to tax in India. For mutual funds, the payer is the fund house, and the deduction is made on the capital gain, not on the whole redemption value.
Law: section 195 of the Income-tax Act, 1961, carried into section 393(2) (Table: Sl. No. 17) of the Income-tax Act, 2025, from 1 April 2026.
Rate: the "rates in force" under the Finance Act, or the rate in an applicable tax treaty if that is more beneficial and the documents are given.
Residents: no TDS is deducted on redemption gains of resident investors, which is why the same redemption looks so different.
Your residential status in the fund's records matters. If you became an NRI and never updated it, the TDS and later return can go wrong; see 182, 120 or zero days: when an NRI becomes a tax resident.
Which rate applies to which fund?
The rate follows the type of fund and how long you held the units. The fund house works out the gain using its own records of your purchase cost, unit by unit on a first-in, first-out basis.
Fund and holding | Treated as | Rate (before surcharge and cess) |
|---|---|---|
Equity fund, 12 months or less | Short-term, s.111A / s.196 | 20% |
Equity fund, more than 12 months | Long-term, s.112A / s.198 | 12.5% above ₹1.25 lakh |
Debt fund bought on or after 1 Apr 2023 | Deemed short-term, s.50AA / s.76 | Slab rates; TDS usually 30% |
Other non-equity fund, more than 24 months | Long-term, s.112 / s.197 | 12.5%, no indexation |
Other non-equity fund, 24 months or less | Short-term | Slab rates; TDS usually 30% |
Equity units bought before 1 February 2018 keep the grandfathered cost: the higher of actual cost and the lower of the 31 January 2018 value and the sale price. This rule was in section 55(2)(ac) and is now section 90(7) of the 2025 Act.
Worked example: same gains, resident vs NRI
Riya lives in London and has no other income in India. In tax year 2026-27 she redeems two equity funds:
Short-term gain of ₹2,00,000 on units held for eight months.
Long-term gain of ₹6,00,000 on units held for four years.
Her resident cousin has exactly the same gains and no other income. Both are in the new regime.
Step | Resident | NRI (Riya) |
|---|---|---|
Short-term gain at 20% | Absorbed by unused ₹4 lakh basic exemption | ₹40,000 |
Long-term gain after ₹1.25 lakh exemption | ₹4,75,000 less ₹2,00,000 shortfall = ₹2,75,000 | ₹4,75,000 |
Tax on long-term gain at 12.5% | ₹34,375 | ₹59,375 |
Rebate under s.87A / s.156 | Not available on special-rate gains | Not available |
Total with 4% cess | ₹35,750 | ₹1,03,350 |
Riya pays ₹67,600 more on identical gains. Nothing is wrong with the TDS; the law simply gives the basic-exemption adjustment to residents only.
Now the TDS side. The fund house deducts at 20% and 12.5% plus cess on the gains it computes. If it did not allow for the ₹1.25 lakh exemption, the long-term TDS would be about ₹78,000 against a final tax of ₹61,750 on that gain, and the difference is refunded only after she files her return.
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Why the ₹12 lakh rebate and basic exemption do not help
Many NRIs assume that with total Indian income under ₹12 lakh, there is no tax. That assumption comes from the rebate, and it does not carry over.
The rebate in section 87A of the 1961 Act, now section 156 of the 2025 Act, applies only to "an individual resident in India". A non-resident gets nothing from it.
Even for residents, the rebate is limited to tax at normal slab rates, so it does not cover tax on short-term equity gains or long-term gains.
The basic exemption adjustment is also resident-only. Sections 196(2), 197(2) and 198(3) of the 2025 Act (earlier sections 111A, 112 and 112A) let only a resident individual or HUF reduce these gains by the unused exemption.
What an NRI does get: normal slab rates, including the nil band, on income taxed at slab rates, such as interest or debt fund gains. That is where refunds on 30% debt fund TDS usually come from.
Can a tax treaty make the gains tax-free in India?
Sometimes. India's domestic law taxes the gain, but section 90 of the 1961 Act, now section 159 of the 2025 Act, lets you apply the treaty where it is more beneficial.
Singapore: in Anushka Sanjay Shah v. ITO (IT) (ITAT Mumbai, ITA No. 174/Mum/2025, order dated 26 March 2025, AY 2022-23), gains of ₹1.35 crore on equity and debt fund units were held taxable only in Singapore under Article 13(5), because units of a mutual fund trust are not shares.
UAE: the Cochin Tribunal took the same view of fund units under the India-UAE treaty in DCIT v. K.E. Faizal (2019).
Many treaties, including those with the US and the UK, let India tax such gains anyway, so the claim depends entirely on the wording of your treaty.
The claim needs a tax residency certificate (section 159(8)(a), earlier 90(4)) and Form 41 details (earlier Form 10F) under Rule 75 of the Income-tax Rules, 2026. See Form 41 and DTAA documentation.
These are Tribunal rulings, not a settled Supreme Court position. Expect questions in processing or scrutiny, and keep the file ready.
Treaty residence itself can be contested where you are resident in both countries; the DTAA tie-breaker then decides which treaty country you belong to.
How to get excess TDS back
Download the capital gains statement from the fund house or the registrar for the full tax year.
Check that the TDS appears against your PAN in Form 26AS and the AIS. The fund house reports it in its non-resident TDS statement; see Form 144, the non-resident TDS return.
File the return in ITR-2 (not ITR-1, which non-residents cannot use), reporting each gain in the capital gains schedule.
Claim the ₹1.25 lakh exemption, slab rates on debt gains, or the treaty position with the TRC and Form 41 filed.
Give a pre-validated bank account for the refund and verify the return within the time allowed.
Before large future redemptions, consider applying for a lower or nil deduction certificate under section 197, now section 395(1) of the 2025 Act (Form 128), so less tax is locked up.
Once the tax is settled, moving the money from the NRO account abroad has its own steps; see NRI repatriation from NRO and NRE accounts.
Checklist before and after you redeem
Update your residential status, address and bank details with every fund house before redeeming.
Know the purchase dates: crossing 12 months on equity units moves the rate from 20% to 12.5%.
Separate debt funds bought on or after 1 April 2023; they are short-term whatever the holding period.
If you rely on a treaty, obtain the TRC for the right period and file Form 41 before the redemption.
Spread large long-term redemptions across tax years where it makes sense, to use the ₹1.25 lakh exemption each year.
After year-end, reconcile the gains statement with Form 26AS and the AIS before filing.
Common mistakes
Not filing a return because "TDS has already been cut". Excess TDS stays with the government, and exempt or slab-rate claims are never made.
Assuming the ₹12 lakh no-tax limit applies to NRIs.
Claiming a treaty exemption without a TRC, or with a TRC for the wrong period.
Treating every country's treaty like Singapore's. Check the actual capital gains article.
Redeeming while the fund house still shows you as resident, then facing a mismatch in the return.
Leaving the return past the belated return deadline. A refund cannot be claimed through an updated return.
Practitioner insights
The largest avoidable cost is often not the TDS rate but unfiled returns: debt fund TDS at 30% for an NRI with little other Indian income is often largely refundable.
A treaty claim on fund gains is strongest when the facts are clean: a TRC, Form 41 filed in time, no permanent establishment in India, and treaty residence beyond doubt.
For a planned large redemption, the lower deduction certificate route takes time; start well before the sale date.
If the return is picked up and the treaty claim is denied, the response follows the usual notice and appeal path; see how an NRI can reply to an income tax notice.
Keep the fund house's gains statement, the TDS certificates and the treaty papers together for each year; they are what any later notice will ask for.
Old and new section numbers
Point | 1961 Act | 2025 Act |
|---|---|---|
TDS on payments to non-residents | Section 195 | Section 393(2) (Table: Sl. No. 17) |
Lower or nil deduction certificate | Section 197 | Section 395(1), Form 128 |
Short-term equity gains (20%) | Section 111A | Section 196 |
Long-term gains (12.5%) | Section 112 | Section 197 |
Long-term equity gains above ₹1.25 lakh | Section 112A | Section 198 |
Debt fund gains deemed short-term | Section 50AA | Section 76 |
Grandfathered cost (31 Jan 2018) | Section 55(2)(ac) | Section 90(7) |
Rebate for residents | Section 87A | Section 156 |
Treaty relief; TRC | Sections 90 and 90(4) | Sections 159 and 159(8)(a) |
Treaty information form | Form 10F, Rule 21AB | Form 41, Rule 75 |
Frequently asked questions
Is TDS deducted when an NRI redeems mutual funds?
Yes. When a non-resident redeems units, the fund house must deduct tax on the capital gain under section 195 of the 1961 Act, now section 393(2) (Table: Sl. No. 17) of the 2025 Act. Residents face no TDS on redemption gains, so this is the main practical difference.
What is the TDS rate on equity mutual fund redemption for NRIs?
20% on short-term gains (units held 12 months or less) and 12.5% on long-term gains, plus surcharge where applicable and 4% cess. Surcharge on these gains is capped at 15%.
What is the TDS rate on debt mutual funds for NRIs?
Gains on debt funds bought on or after 1 April 2023 are treated as short-term whatever the holding period and taxed at slab rates. Because slab rates are not known to the fund house, TDS is usually deducted at 30% plus surcharge and cess.
Can an NRI claim the section 87A rebate on capital gains?
No. The rebate under section 87A, now section 156 of the 2025 Act, is available only to a resident individual. Even for residents it does not reduce tax on gains taxed at special rates.
Can an NRI use the basic exemption limit against capital gains?
No for special-rate gains. Only a resident individual or HUF may set the unused basic exemption against short-term equity gains under section 111A or long-term gains under sections 112 and 112A. A non-resident pays the full special rate on these gains.
Are mutual fund gains of an NRI in Singapore or the UAE taxable in India?
Tribunals have held that mutual fund units are not shares, so the residuary capital gains clause of some treaties applies and the gains are taxable only in the country of residence. The leading ruling is Anushka Sanjay Shah v. ITO (ITAT Mumbai, 2025) under the India-Singapore treaty. A TRC and Form 41 details are needed, and the department may still dispute it.
How does an NRI get a refund of excess TDS on mutual funds?
By filing an income tax return for the year, reporting the gains, claiming the ₹1.25 lakh exemption, slab rates or treaty relief, and matching the TDS shown in Form 26AS and the AIS. The refund is issued after the return is processed.
Related reading
Sources
Income-tax Act, 1961: sections 50AA, 55(2)(ac), 87A, 90, 111A, 112, 112A, 195 and 197; Income-tax Act, 2025: sections 76, 90(7), 156, 159, 196, 197, 198, 393(2) and 395 (text on incometaxindia.gov.in); Income-tax Rules, 2026: Rule 75 and Form 41; Anushka Sanjay Shah v. ITO (IT), ITAT Mumbai, ITA No. 174/Mum/2025, 26 March 2025; DCIT v. K.E. Faizal, ITAT Cochin, 2019. Figures are illustrative, using new-regime rates for tax year 2026-27 and ignoring surcharge. Educational content only, reflecting the law as of 5 November 2026; check the treaty and current law for your facts.
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