Understanding Taxation on Indian Offshore Mutual Funds
In India, all foreign mutual funds—including those investing in global equities, index ETFs, or thematic funds—are classified as debt-oriented funds for capital gains taxation. This is because their underlying investments are in foreign-listed stocks, making them ineligible for equity fund tax treatment. This classification affects both the holding period and tax rates when you redeem or sell your units.
Short-Term vs Long-Term Capital Gains
For international mutual funds, the minimum holding period is 36 months.
- Short-Term Capital Gains (STCG): If units are sold within three years of investment, the gains are treated as short-term and taxed according to your marginal income tax slab.
- Long-Term Capital Gains (LTCG): Units held for more than three years qualify as long-term. LTCG is taxed at 20% with indexation, which adjusts the acquisition cost for inflation, reducing the taxable gain.
Step-by-Step Guide to Calculating Tax
- Capture purchase and sale details: Record purchase date, redemption/sale date, number of units, and NAV at the time.
- Determine holding period: Calculate the exact number of months between purchase and sale to classify gains as short- or long-term.
- Compute gains:
- STCG: Selling price – Acquisition cost (without indexation)
- LTCG: Selling price – Indexed cost of acquisition
- Indexed cost = Cost of acquisition × (CII of year of sale ÷ CII of year of acquisition)
- Apply tax rate: Use your marginal slab for STCG and 20% with indexation for LTCG.
- Include cess and surcharge: Add 4% health and education cess and applicable surcharge.
Tax on Dividends from Foreign Funds
Dividends from overseas mutual funds are taxable as part of your income under your applicable slab rate. Following the abolition of Dividend Distribution Tax (DDT) in April 2020, investors must pay tax themselves rather than the fund house.
Reporting and Compliance
Declare foreign mutual fund gains and dividends in your Income Tax Return (ITR) under the appropriate heads: “Capital Gains” and “Income from Other Sources.” Investments in foreign securities must also be reported under Schedule FA (Foreign Assets), even if invested through an Indian AMC. Proper documentation from your broker or fund house simplifies this process.
Frequently Asked Questions (FAQs)
Q1: Can losses in foreign mutual funds be offset against other income?
- Yes. Short-term losses can offset both long- and short-term gains, while long-term losses offset only long-term gains.
Q2: Are international mutual funds subject to double taxation?
- Indian capital gains are not. However, overseas dividends may incur withholding tax, which can sometimes be recovered as a foreign tax credit under DTAA agreements.
Q3: Is indexation always beneficial for LTCG?
- Yes. Indexation significantly reduces taxable gains, particularly in high-inflation years, lowering your overall tax liability.