TDS on MF redemption for NRIs (Section 195)

Tax Deducted at Source (TDS) on mutual fund redemptions for Non-Resident Indians (NRIs) is governed by Section 195 of the Income Tax Act 1961. Unlike resident investors who are not subject to TDS on capital gains from mutual fund redemptions, NRI investors are subject to TDS withheld by the fund house (AMC) at the time of redemption, before the net proceeds are credited to the investor’s NRE or NRO account. The TDS rate depends on the type of capital gain (short-term or long-term) and the fund classification (equity-oriented or non-equity), and is applied on gross redemption proceeds without deducting the Rs 1,25,000 annual LTCG exemption. Excess TDS can be reclaimed by the NRI by filing an income-tax return in India.

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.

Who is an NRI for Section 195 purposes

Section 2(30) of the Income Tax Act 1961 refers to a non-resident as a person who is not a resident in India. Section 6 provides the conditions for residency: broadly, a person who spends 182 days or more in India in a financial year is a resident. For Section 195, the status of the investor at the time of the redemption determines whether TDS applies. A person of Indian origin (PIO) holding an NRE or NRO account, or an Overseas Citizen of India (OCI) cardholder who is non-resident per Section 6 tests, is subject to Section 195 TDS.

Fund houses rely on the account type and KYC declaration furnished by the investor. NRI investors who are KYC-compliant under the Prevention of Money Laundering Act (PMLA) and FATCA/CRS frameworks are identified by their NRE or NRO account mapping.

TDS rates under Section 195 (post-Finance Act 2024)

The Finance Act 2024, effective 23 July 2024, revised rates for capital gains, which are the basis for Section 195 TDS deduction. The applicable rates:

Equity-oriented mutual funds

Note: TDS on LTCG is deducted at 12.5% on the full gross gain without deducting the Rs 1,25,000 annual exemption. The exemption is only claimable at the time of filing the return of income.

Non-equity / specified mutual funds (post-April 2023)

For specified mutual funds (funds with equity allocation of 35% or below), all gains are treated as short-term. TDS is deducted at the applicable rates under Section 195 for short-term capital gains:

For non-equity funds where gains would have been LTCG under the pre-April 2023 regime (units acquired before 1 April 2023), TDS is at 20% on LTCG (before indexation benefit, which is claimable at return stage).

Surcharge on TDS

The TDS computed on the base rate is enhanced by a surcharge and Health and Education Cess:

• Surcharge: 10% for income/gains exceeding Rs 50 lakh; 15% for income exceeding Rs 1 crore; 25% for income exceeding Rs 2 crore; 37% for income exceeding Rs 5 crore (capped at 15% for Section 111A gains as per Finance Act 2023 provisions).
• Health and Education Cess: 4% on TDS plus surcharge.

In practice, where the nature of income at the time of TDS is not determined precisely (i.e., the AMC cannot predict the investor’s total income), many AMCs deduct TDS at the applicable base rate plus maximum surcharge unless the investor provides a lower-deduction certificate.

Section 195: mechanism and responsibility

Payer obligation

Section 195 imposes an obligation on the payer (the AMC or the Registrar and Transfer Agent acting on behalf of the AMC) to deduct TDS before crediting the redemption amount to the investor. The obligation arises at the time of payment or crediting, whichever is earlier. AMCs fulfil this obligation through their back-office systems, which flag NRI accounts and compute TDS based on the holding period and the gain computation.

NRE vs NRO accounts

• NRE (Non-Resident External) account: FEMA permits investment in Indian mutual funds from NRE accounts. Redemption proceeds are fully repatriable. Section 195 TDS is withheld before remittance.
• NRO (Non-Resident Ordinary) account: Investments from NRO accounts are also permitted. NRO account redemption proceeds are subject to TDS and may be repatriated up to USD 1 million per financial year under RBI’s remittance scheme after tax compliance.

Form 15CA and 15CB

For remittances abroad (including to NRE accounts remitted outside India) above certain thresholds, the following forms are required:

• Form 15CA: A declaration by the remitter (or the authorised payer) certifying that TDS has been deducted at the correct rate or that no tax is payable. It is filed online on the Income Tax Department portal before making the remittance.
• Form 15CB: A certificate from a Chartered Accountant certifying the nature of the remittance, the applicable tax rate, and the TDS deducted. Required for remittances above Rs 5 lakh (other than exempted list under Rule 37BB).

AMCs typically handle Form 15CA/15CB for routine mutual fund redemption remittances on behalf of NRI clients.

DTAA relief and lower TDS

Claiming DTAA benefit

India has Double Taxation Avoidance Agreements (DTAAs) with over 90 countries. Under DTAA provisions, the NRI investor may be entitled to a lower TDS rate on capital gains or dividend income from Indian mutual funds. Key provisions:

• If a DTAA assigns exclusive taxation rights over capital gains to the country of residence (as many older DTAAs do), the NRI may claim exemption from Indian capital gains tax entirely.
• If the DTAA provides a reduced rate on dividends (IDCW), the IDCW TDS under Section 194K may be reduced.

To claim DTAA benefit, the NRI must furnish a Tax Residency Certificate (TRC) from the tax authority of the country of residence and submit it to the AMC / fund house along with a self-declaration (Form 10F where required). The AMC will then apply the DTAA rate instead of the domestic Section 195 rate.

Lower deduction certificate (Section 197)

An NRI investor who believes that the TDS to be deducted will exceed the actual tax liability (for instance, because the Rs 1,25,000 LTCG exemption will eliminate most of the taxable gain) may apply to the jurisdictional Assessing Officer for a lower TDS certificate under Section 197. The certificate specifies the applicable TDS rate, and the AMC deducts TDS at the certified lower rate.

TDS on IDCW (dividend) income

IDCW (renamed from dividend) distributed by mutual funds to NRI investors is subject to TDS under Section 195 (not Section 194K, which applies only to residents). The applicable rate is 20% plus surcharge and cess, unless a DTAA provision reduces the rate. The DTAA benefit for NRI MF investors article discusses country-wise DTAA rates in detail.

Refund of excess TDS

Where TDS has been deducted at a rate higher than the actual tax liability – for example, because the Rs 1,25,000 LTCG exemption was not factored in at the TDS stage, or because the DTAA provides a full exemption, or because losses from other capital-gains transactions reduce the net taxable gain – the NRI investor can claim a refund by:

1. Filing an income-tax return in India for the relevant financial year in ITR-2 or ITR-3 before the applicable due date.
2. Claiming the TDS credit (as appearing in Form 26AS and the Annual Information Statement (AIS)) against the computed tax liability.
3. Declaring the net refund in the return; the refund will be processed by the Centralised Processing Centre.

NRI investors must apply for a Permanent Account Number (PAN) in India to file the return and claim the TDS credit. Without PAN, TDS may be deducted at a higher rate (Section 206AA).

Section 206AA: higher TDS for non-PAN investors

Section 206AA provides that if the payee (NRI investor) does not furnish their PAN to the deductor, TDS shall be deducted at the higher of the applicable rate or 20%. For NRI mutual fund investors, this means that not furnishing PAN results in TDS at 20% (or higher if the applicable rate is already above 20%, e.g., 30% on non-equity STCG). NRI investors should ensure their PAN is registered with the AMC and updated in KYC records.

Reporting and compliance

AMC-level reporting

AMCs report all NRI investor transactions, including TDS, in their TDS returns (Form 26Q for domestic withholding; Form 27Q for NRI withholding). The TDS information is mapped to the NRI’s PAN and is visible in Form 26AS and AIS.

Investor-level reporting

NRI investors with Indian-source income (including capital gains from mutual funds) must file an Indian income-tax return if their income exceeds the basic exemption limit, even if TDS has been correctly withheld. The return must be filed on the Income Tax Department’s portal using ITR-2 (no business income) or ITR-3 (with business income).

Income from Indian mutual funds must also be declared in the country of residence, and credit for Indian TDS should be claimed under the DTAA or domestic foreign-tax-credit rules of that country.

Special considerations for returning NRIs (RNOR status)

Individuals who return to India after a long absence may have a “Resident but Not Ordinarily Resident” (RNOR) status under Section 6(6) for two years. During this period, foreign-source income is not taxed in India, but Indian-source income (including gains from Indian mutual funds) is taxable. TDS under Section 195 does not apply to RNOR investors since they are tax residents of India; Section 194K applies to their IDCW income if they hold mutual fund units.

See also

• DTAA benefit for NRI MF investors
• Equity mutual fund taxation in India
• Debt mutual fund taxation (post-April 2023)
• STCG on equity MFs (Section 111A)
• LTCG on equity MFs (Section 112A)
• MF IDCW TDS for residents
• Annual Information Statement
• AIS/TIS mapping for MF transactions
• Capital gains tax in India
• ITR-2

References

1. Income Tax Act 1961, Section 195 – TDS on payments to non-residents.
2. Income Tax Act 1961, Section 111A – STCG on equity-oriented funds (rate revised by Finance Act 2024).
3. Income Tax Act 1961, Section 112A – LTCG on equity-oriented funds (rate revised by Finance Act 2024).
4. Income Tax Act 1961, Section 206AA – TDS at higher rate for non-PAN payees.
5. Income Tax Act 1961, Section 197 – lower TDS certificate.
6. Finance Act 2024, clauses revising capital gains TDS rates.
7. Income Tax Act 1961, Section 6 – residency conditions.
8. CBDT Circular No. 7/2014 on DTAA and TRC requirements.
9. Rule 37BB of the Income Tax Rules 1962 – exempted remittances for Form 15CA/15CB.
10. RBI Master Direction on Investment by Non-Residents in Indian Mutual Funds.