How to calculate tax on gains from international mutual funds

Tax provisions of Indian offshore mutual funds

In India, all foreign mutual funds, irrespective of whether they invest in global stocks, index ETFs, or theme funds, are considered debt-oriented funds for capital gain taxation. The reason is that their equity is in foreign-listed stocks and hence do not fall under equity fund taxation. This affects both the holding period and the rate of tax on gains when you sell or redeem your units.

Short-term vs long-term capital gains

Minimum holding period is 36 months for international mutual fund. If you redeem units within three years from the date of investment, the gains are short-term capital gains (STCG) and taxed as per your marginal income tax slab rate. If you keep units for more than three years, the gains are long-term capital gains (LTCG), taxed at 20% with the indexation benefit—allowing you to add the cost of acquisition for inflation, hence reducing the tax on gain.

Calculating your tax – step-by-step

1. Capture purchase and sale data – Capture date of purchase, date of sale/redemption, units sold, and NAV at the time.

2. Calculate the holding period – Calculate the exact number of months between purchase and sale to ascertain if it’s short- or long-term.

3. Compute gains –
STCG: Selling price – Acquisition cost (excluding indexation).

LTCG: Price of sale – Indexed cost of acquisition, where indexed cost = cost of acquisition × (CII of year of sale ÷ CII of year of acquisition).

4. Include the tax rate – Slab rate for STCG, 20% indexed for LTCG.

5. Add cess and surcharge – Add corresponding health and education cess (4%) and surcharge on total income.

Imposition of foreign funds dividends taxation

If your overseas mutual fund distributes dividends, they form part of your taxable income and are taxed at your slab rate. From April 2020, however, dividend distribution tax (DDT) has been abolished, so the fund house is no longer paying tax before distributing dividends—investors must pay and report the tax themselves.

Reporting and compliance

Declare foreign mutual fund dividends and capital gains in your Income Tax Return (ITR) in the income from other sources and capital gains heads, respectively. If you have made an investment in foreign securities, declare such investments under the Schedule FA (Foreign Assets) part of your ITR, even if you had invested in an Indian AMC. Proper documentation by your fund house or broker will facilitate this.

FAQs

Q1: Is loss in foreign mutual funds allowable against other income?

Yes, short-term capital losses can be offset against both long-term as well as short-term gains, whereas long-term capital losses can be offset against long-term gains only.

Q2: Are double taxation problems concerned with international mutual funds?

Not applicable to Indian capital gains. Overseas dividend is, however, subject to withholding tax overseas, which at times is recoverable as foreign tax credit under Double Taxation Avoidance Agreements (DTAAs).

Q3: Is indexation always beneficial for LTCG in such funds?

Yes, in general, indexation slashes the taxable gain by a large extent, particularly in high-inflation years, thus reducing your overall tax bill.