UAE does not levy capital gains tax on its tax residents. However, what about capital gains taxes charged by the Indian tax authorities, for investments made in assets based out of India?
This is where the India-UAE DTAA (Double Tax Avoidance Agreement) comes in. This DTAA defines the country where capital gains tax is applicable, based on the type of investments being made (described in greater depth in article 13 of the DTAA).
- Assets taxed in India: immovable property, shares, movable property of a business, shares of a company whose primary business is in immovable assets
- Assets taxed in the UAE (mentioned under Article 13(5) of the DTAA): gains from sale of property not includes in Clauses 1-4 of article 13 of the DTAA (points covered above)
Accordingly, any capital gains from Indian Mutual Funds, are taxable in the UAE (no capital gains) and not in India. This makes Indian Mutual Funds effectively a tax-free investment for UAE residents.
- Capital gains from PMS's taxable in India: For Equity PMS's, the investor directly holds the underlying shares (having only given the PMS provider a PoA to execute trades on his/her behalf). Capital gains will acordingly be on equity shares, which under Article 13(4) of the India-UAE DTAA will be taxable in India.
- Cat III AIFs: Category 3 AIF's are taxed at the fund level, and not in the hands of the investor. Since taxes are paid at the fund level, and not by the investor, the UAE tax residency does not have any relevance and taxes will be paid on all capital gains at the fund level.
- Cat 1-2 AIFs: Cat 1 & 2 AIFs are considered pass-through vehicles, with all forms of income being taxed at the investors levels as if this income was generated by them. Accordingly for Equity & Real Estate AIFs, Article 13(5) does not apply and capital gains will be taxable in India.
Steps Required to apply for no Capital Gains on Indian Mutual Funds for UAE Tax Residents
In order to qualify for no capital gains on your Indian Mutual Funds as a UAE tax resident under Article 13(5) of the India-UAE DTAA, you need to ensure that you have the following:
- Tax Residency Certificate (TRC): for the relevant financial year
- File Indian Income taxes: declaring the capital gains, but claiming exemption under the DTAA.
- Submit for 10F and a self-declaration: stating that you are a UAE tax-resident
- Upload TRC, Form 10 F and self-declaration: along with your income tax returns, while filing your taxes in India.
As long as all your documents are in order, this should make you eligible for no taxes in India for capital gains from mutual funds. Any TDS that may have been deducted and not utilised for other tax requirements, will be refunded to your account.
Can you avoid TDS deduction on your Mutual Fund Capital gains?
As a UAE tax-resident, you do not have to pay taxes on capital gains from Indian mutual funds (and accordingly TDS should also ideally not apply). However, while there is a process to inform MFs about the non-applicability of TDS in your case), the process can be operationally complex with several operational challenges.
The process to avoid TDS is broadly the same as the process to claim no capital gains tax with the Indian income tax department. Essentialy, an investor needs to submit the same set of documents (the TRC, form 10F submitted on the Income tax portal and a self-declaration) to each AMC (who retain the right to ask for further clarificatory documents). If all documents submitted meet the requirements of the AMC, the TDS will not be deducted on the gains as well.
In practical experience, trying to avoid TDS altogether can be operationally intensive and AMCs often ask for multiple rounds of additional clarificatory documents. Getting the TDS as a refund is often a lot easier with a more clearly defined process, as compared to trying to avoid the TDS payment altogether.