The case involved A Shah, a Singapore tax resident, who declared capital gains of Rs 88.75 lakh from debt mutual funds and Rs 46.91 lakh from equity mutual funds for the financial year 2021–22. In her income tax return, she claimed exemption for these gains under the residual clause of Article 13 of the India-Singapore tax treaty, asserting that such gains are taxable only in her country of residence, Singapore.
Also Read | Inflows in sectoral and thematic mutual funds decline by 97% in March. Panic or profit-booking?However, the Income Tax officer rejected her claim, arguing that the mutual fund units derived substantial value from Indian assets and were therefore subject to taxation in India. The dispute escalated to the ITAT, where Shah contended that mutual fund units are issued by trusts and not companies, and thus should not be equated with ‘shares’ under the Income Tax Act and the tax treaty provisions.
The ITAT, referencing prior legal reasoning, agreed with Shah’s position, stating that units of Indian mutual funds are indeed issued by trusts and not companies, and therefore cannot be classified as ‘shares’. Consequently, the tribunal held that the residual clause applies, and the gains from the sale of mutual fund units are taxable only in the investor’s country of residence, in this case, Singapore.
Tax expert Gautam Nayak, a partner at CNK & Associates, highlighted that this ruling underscores an aspect of the India-Singapore tax treaty—and other similar treaties—that many NRIs might not be aware of. He noted that under such treaties, capital gains from the sale of mutual fund units are taxable only in the country of residence. This benefit extends to tax treaties with countries like the UAE, Mauritius, Netherlands, Spain, and Portugal, where assets other than immovable property and company shares fall under the ‘residual clause’, making the gains taxable solely in the seller’s country of residence, Nayak added.Also Read | Every debt mutual fund category sees outflow in March. Here is whyThis decision provides clarity and potential tax relief for NRIs investing in Indian mutual funds, emphasizing the importance of understanding the provisions of applicable tax treaties.
Based on this exemption, Nilesh Shah of Kotak Mutual Fund said that, “US levies hefty exit tax on citizens becoming non-resident. India is incentivising citizens to shift tax residency and save on capital gains tax liability.”
US levies hefty Exit tax on citizens becoming non-resident.
India is incentivising Citizens to shift tax residency and save on capital gains tax liability.
If you have significant capital gains tax liability on eligible securities, shift to UAE for more than 183 days.
Your… pic.twitter.com/PPkqT7ixFc
— Nilesh Shah (@NileshShah68) April 13, 2025
Shah further mentioned that if one has significant capital gains tax liability on eligible securities, shift to UAE for more than 183 days then their family holiday abroad will be funded from the savings on capital gains tax.
While comparing this with a dialogue of a movie, Shah said आम के आम गुठलियों के दाम (Get mangoes and their seeds for the same price) and emphasised to amend the laws immediately to ensure that tax is paid in the host country and credit is taken in the reciprocal country.
“The path of fiscal prudence runs through taxes. Tax compliance depends on an equitable distribution of the burden. Equitable distribution of tax burden will not happen if high taxpayers are incentivised to move abroad. Today it might be a small amount but tomorrow it could open a flood gate. Let us give a fair, level playing field to both honest, tax-paying citizens of India and non-resident Indians,” Shah posted on social media.
