Taxation of international funds in India

Taxation of international mutual funds in India changed fundamentally with the Finance Act 2023, which classified most internationally-oriented funds as “specified mutual funds” for units acquired on or after 1 April 2023. Before that date, international funds investing in overseas equity enjoyed the same 20%-with-indexation LTCG treatment as domestic debt funds (after a 36-month holding period). From 1 April 2023, gains on new units of international funds are treated as short-term capital gains regardless of holding period and are taxed at the investor’s income-tax slab rate with no indexation benefit.

Tax advice disclaimer. This article is for educational reference only and does not constitute professional tax or financial advice. Tax law changes frequently and individual circumstances vary widely. Readers should consult a qualified Chartered Accountant or tax adviser before making any investment or tax-filing decision.

Fund structure and SEBI classification

International mutual funds in India are typically structured as:

1. Fund of Funds (FoFs): Indian mutual fund schemes that invest all or most of their assets in foreign mutual funds or ETFs (e.g., a fund investing in the S&P 500 or Nasdaq-100 index ETFs in the US).
2. Feeder funds: Indian schemes that feed into a single offshore master fund managed by the AMC’s overseas affiliate.
3. Directly managed overseas schemes: Schemes that directly buy foreign equities (subject to SEBI’s aggregate overseas investment limit).

Regardless of structure, the key tax question is whether the fund invests more than 65% in domestic equity (equity-oriented under Section 112A(10)) or 35% or less (specified MF under Finance Act 2023). International funds, by definition, invest in foreign equity, which does not qualify as “equity shares of domestic companies” for the 65% test. They therefore fail the equity-oriented test and are classified as specified MFs.

Tax treatment for units acquired from 1 April 2023

For units of international funds acquired on or after 1 April 2023:

• All gains on redemption are short-term capital gains, regardless of holding period.
• Gains are added to total income and taxed at the investor’s applicable slab rate (10%, 20%, or 30%, plus surcharge and cess).
• No indexation is available.
• No separate LTCG rate applies.
• The Rs 1,25,000 annual LTCG exemption under Section 112A is not applicable (since there is no LTCG recognition for such units).

This means an investor who holds units of an international fund for 10 years and redeems them will still pay slab-rate tax on the entire gain.

Tax treatment for units acquired before 1 April 2023

Units acquired before 1 April 2023 retain the pre-amendment regime:

• Holding period under 36 months: STCG, slab rate.
• Holding period of 36 months or more: LTCG at 20% with indexation under Section 112.

The transitional rules are identical to those for domestic debt mutual funds. See debt mutual fund taxation (post-April 2023) for the full analysis.

Currency risk and taxation

International funds expose Indian investors to foreign-currency fluctuation. When the rupee depreciates relative to the fund’s base currency (e.g., USD), the rupee-denominated NAV rises even if the underlying assets are flat. This currency gain is embedded in the NAV and is therefore taxed as part of the capital gain. There is no separate currency-gain exemption or separate tax rate. Investors should be aware that the taxable gain includes currency movements.

Pre-April 2023 investors could partially mitigate this through indexation, which adjusted the rupee cost upward for domestic inflation. Post-April 2023, no such adjustment is available.

RBI overseas investment limits and SEBI guardrails

SEBI imposes an aggregate overseas investment ceiling on the mutual fund industry. From early 2022, SEBI paused fresh investments in international funds when the industry aggregate touched the USD 7 billion limit. Several international fund schemes were temporarily closed for new subscriptions. The pause has been partially lifted subsequently, but investors should check the current status of specific international fund subscriptions before investing.

These SEBI operational limits do not affect the tax treatment of existing holdings.

FoFs investing in international equity

Fund of Funds that predominantly invest in overseas equity funds (e.g., a domestic FoF investing in a Nasdaq ETF or a US S&P 500 fund) are treated as specified MFs for units acquired after 1 April 2023 and taxed at slab rates. The FoF taxation (revised 2024) article covers the broader FoF framework including the 2024 amendments that harmonised FoF treatment.

Reporting

Gains from international fund redemptions are reported in Schedule CG of ITR-2 or ITR-3. For units acquired post-April 2023, the gain is classified as “short-term capital gain on other assets” and forms part of total income. For pre-April 2023 LTCG units, it is reported under “LTCG other than equity and STT paid.” Reconciliation against the Annual Information Statement (AIS) and the AIS/TIS mapping is advisable.

See also

• Debt mutual fund taxation (post-April 2023)
• Fund of Funds taxation (revised 2024)
• Gold and silver ETF taxation
• Hybrid mutual fund taxation
• Indexation removal for debt MFs (Finance Act 2023)
• AIS/TIS mapping for MF transactions
• Capital gains tax in India
• ITR-2

References

1. Finance Act 2023 – specified mutual fund provisions.
2. Income Tax Act 1961, Section 112 – LTCG on non-equity assets.
3. Income Tax Act 1961, Section 112A(10) – equity-oriented fund definition.
4. SEBI Circular on overseas investment limits for mutual funds.
5. SEBI Circular on Categorisation and Rationalisation of Mutual Fund Schemes (October 2017).
6. Income Tax Act 1961, Section 48 – indexation.
7. Memorandum Explaining the Provisions of Finance Bill 2023.