NRI Woman Wins Tax Exemption on Rs 1.35 Crore Mutual Fund Gains

A Mumbai-based woman, who is a tax resident of Singapore, faced a significant legal challenge when she sold her debt and equity mutual fund investments in India. Despite claiming tax exemption on the capital gains under Article 13 of the India-Singapore Double Taxation Avoidance Agreement (DTAA), she received an income tax notice from the Indian tax department. The department initially rejected her claim, and the Dispute Resolution Panel (DRP) upheld this decision. However, the taxpayer did not give up and appealed to the Income Tax Appellate Tribunal (ITAT) Mumbai.

The taxpayer argued that a comparable case under the India-UAE DTAA, where the ITAT Cochin had granted capital gains relief to an Indian resident of UAE, should also apply to her situation. The ITAT Mumbai thoroughly examined the India-Singapore DTAA and ultimately ruled in her favor, granting the capital gains exemption.

Summary of the Judgment

Chartered Accountant Suresh Surana explained the case to ET Wealth Online. In the given case (No.174/MUM/2025, March 26, 2025), the assessee, an individual and a tax resident of Singapore, earned short-term capital gains during the Assessment Year 2022-23 from the redemption/sale of Indian mutual fund units. These units included both equity-oriented and debt-oriented mutual funds. While filing her income tax return in India, the assessee claimed exemption from Indian tax on such capital gains by invoking Article 13 of the India–Singapore DTAA, contending that the gains were taxable only in Singapore.

The Assessing Officer rejected her claim, arguing that the mutual fund units derived substantial value from assets located in India. The Dispute Resolution Panel (DRP) upheld the Assessing Officer’s view, leading the assessee to appeal before the Income Tax Appellate Tribunal (ITAT).

The core issue before the ITAT was whether capital gains arising for a Singapore tax resident from the transfer or redemption of Indian mutual fund units could be taxed in India, or if such gains were covered by the residuary clause of Article 13(5) of the India–Singapore DTAA and thus taxable only in the country of residence, i.e., Singapore.

ITAT Mumbai's Ruling

The ITAT Mumbai examined Article 13 of the India–Singapore DTAA, which governs the taxation of capital gains. Article 13(4) specifically applies to gains arising from the transfer of shares in a company, whereas Article 13(5) acts as a residuary provision covering gains from the alienation of property not specifically dealt with in the preceding paragraphs. The Tribunal emphasized that mutual fund units are distinct from shares of a company. Under Indian law, mutual funds are constituted as trusts under SEBI regulations and not as companies, and their units cannot be equated with shares in a company.

The ITAT Mumbai relied on settled judicial precedent, including earlier coordinate bench decisions under similarly worded treaties (such as India–Switzerland and India–UAE DTAAs), which consistently held that mutual fund units are not “shares” for treaty purposes. Article 3(2) of the DTAA does not define the term “shares,” and thus it must take its meaning from Indian domestic law. Under the Companies Act and securities law framework, shares and mutual fund units are recognized as separate and distinct instruments. Consequently, gains from mutual fund units do not fall within Article 13(4) but are squarely covered by Article 13(5).

The taxpayer succeeded because the Tribunal accepted that capital gains from mutual fund units are not gains from shares of an Indian company. Since such gains are not expressly covered by Articles 13(1) to 13(4), they fall under Article 13(5) of the India–Singapore DTAA. Article 13(5) allocates exclusive taxing rights to the state of residence of the alienator. As the assessee was a tax resident of Singapore, India did not have the right to tax the gains. The Tribunal also reiterated the binding nature of earlier coordinate bench rulings on identical treaty language and held that the lower authorities erred in disregarding those precedents.

In applying the India–Singapore DTAA, the Tribunal reaffirmed that treaty benefits override domestic law under Section 90(2) of the Income-tax Act, 1961, where they are more beneficial to the taxpayer. Since the DTAA restricted India’s taxing rights in respect of capital gains from mutual fund units, the domestic provisions could not be invoked to tax such income. Accordingly, the Tribunal allowed the assessee’s appeal and held that the short-term capital gains from Indian mutual fund units were not taxable in India but only in Singapore.

ITAT Cochin Judgement Extract

The ITAT Mumbai in the present case reproduced an extract from the ITAT Cochin judgment in the K. E. Faizal (India-UAE DTAA) case, which helped in this ruling:

- “As per Article 13(5) of the Tax Treaty, income arising to a resident of UAE from the transfer of property other than shares in an Indian company, are liable to tax only in UAE. On the other hand, Article 13(4) of the Tax Treaty provides that income arising to a resident of UAE from the transfer of shares in an Indian company other than those specifically covered within the ambit of provisions of other paragraphs of Article 13 may be taxed in India. - Article 13(4) of the Tax Treaty covers within its purview capital gains arising from the transfer of shares and not any other property. Therefore, Article 13(4) of the Tax Treaty cannot be applied in the instant case unless the units of the mutual funds transferred by the assessee qualify as shares for the purpose of the Tax Treaty. - The term 'share' is not defined under the Tax Treaty. As per Article 3(2) of the Tax Treaty, any term not defined under the Tax Treaty shall, unless the context otherwise requires, have the meaning which it has under the laws of the country whose tax is being applied. - Therefore, the term 'share' would carry the meaning ascribed to it under the Act, and if no meaning is provided under the Act, then the meaning that the term carries under the other allied Indian laws would need to be applied. - The Act does not define the term 'share'. However, section 2(84) of the Indian Companies Act, 2013 defines the term 'share' to mean 'a share in the share capital of a company and includes stock'. Further, the term 'company' has been defined to mean a 'company incorporated under the Companies Act, 2013 or under any previous company law'. - Under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1995, mutual funds in India can be established only in the form of 'trusts', and not 'companies'. - Therefore, the units issued by Indian mutual funds will not qualify as 'shares' for the purpose of the Companies Act, 2013. Further, under the Securities Contract (Regulation) Act, 1956, a security is defined to include inter alia shares, scrips, stocks, bonds, debentures, debenture stock or other body corporate and units or any other such instrument issued to the investors under any mutual fund scheme. From the above definition of 'securities', it is clear that 'shares' and 'units of a mutual fund are two separate types of securities. - Applying the above meaning to the provisions of the Tax Treaty, the gains arising from the transfer of units of mutual funds should not get covered within the ambit of Article 13(4) of the Tax Treaty, and should consequently be covered under Article 13(5) of the Tax Treaty. - Therefore, the assessee, who is a resident of UAE for the purposes of the Tax Treaty, STCG arising from the sale of units of equity-oriented mutual funds and debt-oriented mutual funds should not be liable to tax in India in accordance with the provisions of Article 13(5) of the Tax Treaty.”