When an NRI Pays Zero India Tax on Mutual Fund Gains: The DTAA Article 13 Carve-Outs Explained | RebaseNest

Assuming you are an NRI who has been quietly holding Indian equity mutual fund units for years, and the folio now shows a gain that would attract a serious tax bill at the domestic rate, the question that is worth asking is where the treaty between India and your country of tax residence fits in. The headline framing is that some NRIs pay zero India tax on mutual fund gains. The operative framing is that Section 90(2) of the Income-tax Act, 1961 lets a non-resident use the treaty rate where the treaty is more beneficial than the domestic rate, and Article 13 of most Indian DTAAs is the article that governs capital gains. What the domestic rate is, what the treaty says, and what paperwork stitches the two together are three distinct questions that need to be answered in that order.

1. The three-layer stack for any NRI capital gain in India

The stack is the same for every cross-border capital gain question, and skipping any layer produces the wrong answer:

Layer 1  Section 5 + Section 9        Is the gain chargeable in India at all
Layer 2  Section 111A / 112A / 50AA   If chargeable, at what domestic rate
Layer 3  Section 90(2) + DTAA Article 13   Does the treaty give a lower or nil rate

For an NRI, Section 5(2) says total income includes income received in India, deemed to accrue in India, or actually accrued in India. Section 9(1)(i) deems income accruing through the transfer of a capital asset situated in India as arising in India. Units of an Indian mutual fund are, on the settled view, assets situated in India. So Layer 1 says yes, chargeable in India at Layer 2 rates unless Layer 3 relieves it.

2. The domestic rate table post Finance (No. 2) Act 2024

Finance (No. 2) Act 2024 rewrote the capital gains regime for listed securities and specified mutual funds. The rates that apply to redemptions on or after 23 July 2024:

Asset class                                       Holding   Domestic rate
Listed equity, equity-oriented MF units           > 12 mo    12.5% on gains above Rs 1.25 lakh (Sec 112A)
Listed equity, equity-oriented MF units           <= 12 mo   20% (Sec 111A)
Other MF units, unlisted securities               > 24 mo    12.5% (Sec 112)
Specified MF (>65% debt / money-market)           any        Slab rate as STCG (Sec 50AA)

The 15% surcharge cap applies to Section 111A and Section 112A gains under both the old and new personal tax regimes. Cess is 4% on tax plus surcharge. For a non-resident payee, the AMC's withholding under Section 195 tracks the rates in force. Treaty relief flows through Section 90(2) if the payer accepts the treaty documentation; a Section 197 lower-deduction certificate is a strong operational tool for that outcome, not an absolute legal precondition in every DTAA case. The Section 50AA "specified mutual fund" definition has itself been adjusted more than once since it was introduced in 2023; the more-than-65% debt or money-market threshold as expressed above reflects the position understood as of the article date and remains subject to further Finance Act adjustments.

3. Where the treaty actually zeros the India rate

Article 13 of the India-Singapore DTAA, as amended by the Third Protocol notified by CBDT Notification No. 33/2017, sets the taxing pattern for capital gains between India and Singapore. Under paragraph 4A of the amended Article 13, gains from the alienation of shares of a company resident in India that were acquired before 1 April 2017 are taxable only in the state of residence of the alienator. That is the grandfathering clause. For shares acquired on or after 1 April 2017, the amended article restored the source-state taxing right, subject to a transitional concessional-rate period that ran into 2019 before full domestic rates applied.

The article's coverage of mutual fund units, as distinct from shares of a company, is the pressure point of the analysis. Article 13(4A) is drafted in terms of shares of a company. Whether an Indian mutual fund unit-holder can invoke that paragraph, the residual paragraph, or neither is fact-specific and depends on how the specific fund is structured and how the treaty is read in the specific case. This is precisely the kind of question a Section 197 application forces the department to take a position on, in writing, before redemption.

The India-UAE DTAA follows a different pattern. Article 13(5) provides that gains from the alienation of any property other than that referred to in the preceding paragraphs are taxable only in the state of which the alienator is a resident. There is tribunal authority reading Indian mutual fund units as falling outside the earlier paragraphs and into residual Article 13(5), which produces a nil source-state rate; the position is not universally settled in the absence of an on-point Supreme Court ruling. The prerequisite is a valid UAE tax residency for the individual, which turns on UAE Cabinet Decision No. 85 of 2022 domestic residency conditions and, where dual residence arises, on the DTAA tie-breaker in Article 4.

The Mauritius treaty follows a comparable Third-Protocol acquisition-date pattern for shares in a company resident in India, and Mauritius-resident applicants must clear a Limitation on Benefits test. The unit-holding versus share-holding question in a Mauritius fact pattern is the same fact-specific analysis as in Singapore and should not be assumed to be settled either way without an on-point authority.

4. The paperwork that makes the treaty rate operational

The treaty right does not self-execute. Section 90(4) of the Income-tax Act, 1961 makes a Tax Residency Certificate from the tax authority of the country of residence mandatory for a non-resident to claim treaty benefits. Section 90(5) read with Rule 21AB requires Form 10F if the TRC does not carry the particulars set out under Rule 21AB (assessee status, nationality, TIN in the residence country, period covered by the TRC, address in the residence country); those particulars trace to CBDT Notification No. 3/2013, and the Rule 21AB and Form 10F structure was later substituted by CBDT Notification No. 57/2013. Form 10F is filed electronically on the Income-tax e-filing portal.

Even with the TRC and Form 10F in hand, an Indian AMC's operational default is typically to withhold at the domestic rate under Section 195 rather than the beneficial DTAA rate, because the payer bears withholding-liability risk if the treaty analysis is later contested. Section 195 permits withholding at the rates in force, which can include the treaty rate under Section 90(2) where the payer accepts the treaty documentation, but many payers prefer the certainty of a Section 197 lower-deduction certificate before applying a rate below the domestic default. The NRI files Form 13 with the jurisdictional Assessing Officer of the international-taxation charge, sets out the treaty basis for the lower or nil rate, attaches the TRC, Form 10F, PAN, KYC, and the folio-level acquisition proof, and requests a certificate covering the redemption amount and period. The AMC withholds at the certified rate on production of the certificate.

Where the Section 197 certificate is not obtained in time and the payer's policy is to withhold at the domestic default, the NRI recovers the treaty differential through the return-of-income route, filing an ITR-2 or ITR-3 that reports the gain at the treaty rate and claims the refund of excess TDS. That path works but blocks liquidity for the AY cycle.

5. What is regularly misread in this area

Common misreadings that a Section 197 conversation with an experienced international-taxation AO tends to sharpen:

• The DTAA rate is a ceiling on the source-state rate, not a nil default. Where the treaty says gains are taxable in both states with a source-state cap, the cap applies. Only where the article says "shall be taxable only in the state of residence" does the source-state rate become zero.
• Treaty grandfathering under the Singapore and Mauritius Third Protocols is drafted in terms of shares in a company and runs by acquisition date of the asset, not by disposal date. Whether Indian mutual fund units fall within the same grandfathering, within the residual paragraph, or outside both, is a fact-specific reading of the specific fund and the specific treaty language.
• A TRC without Form 10F is insufficient for treaty relief where the TRC lacks the Rule 21AB particulars. Getting the TRC re-issued with the missing fields or filing Form 10F is not optional.
• Section 50AA on specified mutual funds is a domestic-law re-characterisation that treats certain funds' gains as short-term regardless of holding period. Whether the treaty overrides that re-characterisation in the source state is a fact-specific question and not something to assume based on the treaty's general capital gains article alone.
• Form 15CA and Form 15CB under Rule 37BB are remittance-reporting compliance for foreign-currency remittances by the payer; they do not, on their own, sanction a lower TDS rate. The Section 197 certificate does.
• LOB tests in the Singapore and Mauritius treaties are strict on annual expenditure thresholds and shell-company screens for corporate holders. For individual NRIs the test is less onerous but still requires demonstrable substantive tax residence in the treaty partner state.

6. What the operational picture looks like

For an NRI who is genuinely resident for tax purposes in Singapore, the UAE, or a Third-Protocol jurisdiction, and who is testing the treaty position on an Indian mutual fund redemption, the operational answer turns on the specific fund, the specific acquisition date, the specific treaty article, and the LOB / substance test in the relevant treaty. In favourable fact patterns the treaty rate can compress the India source-state tax materially, in some cases to nil. The paperwork stack in every case is the same: TRC, Form 10F on the e-portal, a Section 197 lower-deduction application before redemption where the amounts justify it, and a return filing that reports the treaty position transparently.

For an NRI whose acquisition is post-2017 in a Singapore or Mauritius fact pattern involving shares, the domestic Section 112A / 111A / 50AA rate is the operative rate and the treaty typically adds no source-state relief on top. In that case the relief pathway is Foreign Tax Credit in the country of residence, not a nil rate at source in India.

The distinction between the two outcomes is not judgment. It is acquisition date, treaty text, LOB test, and paperwork.

A note on what this is. This article is one returnee's working notes, not personalised advice. Numbers age. Rules change. The only person who can sign off on your specific case is a qualified cross-border chartered accountant looking at your full facts. Use this as a checklist of questions to take to that conversation, not as the answer.

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Sources:

• Income-tax Act, 1961 (full text): https://www.indiacode.nic.in/bitstream/123456789/2435/1/a1961-43.pdf
• Income-tax Department portal (DTAA text, forms, current rates): https://www.incometax.gov.in/iec/foportal/
• Income-tax e-filing portal (Form 10F, Form 13, ITR filing): https://eportal.incometax.gov.in/
• CBDT Notification No. 33/2017 (Third Protocol to India-Singapore DTAA), notified by the Central Board of Direct Taxes
• CBDT Notification No. 3/2013 read with Notification No. 57/2013 (Rule 21AB and Form 10F structure)
• India-Singapore DTAA, Article 13 (Capital Gains), as amended by the Third Protocol, published by the Income-tax Department in the DTAA section of its portal
• India-UAE DTAA, Article 13 (Capital Gains) and Article 4 (Residence), published by the Income-tax Department in the DTAA section of its portal
• India-Mauritius DTAA, Article 13 (Capital Gains) as amended by protocol, published by the Income-tax Department in the DTAA section of its portal
• RBI Master Direction on Deposits and Accounts (FED Master Direction No. 14/2015-16): https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10198