Why NRIs in UAE enjoy tax benefits on MF investments

A tax treaty provides special benefits, but there are real-life challenges in implementation

- Sashind Ningthoukhongjam

The going has always been good for non-resident Indians (NRIs), particularly those based out of the United Arab Emirates (UAE). For one, they do not have to pay any income tax in that country. Two, they can also take advantage of a double taxation avoidance agreement (DTAA) signed between the UAE and India, and thus avoid capital gains taxes on investments made here, say financial experts.

To be sure, India has signed DTAAS with multiple countries, but not all of them have the same two conditions mentioned above.

Typically, If an investor were to put in 10,000 every month in an equity mutual fund (MF) for 20 years, they would get around   ₹1 crore assuming an annual growth rate of 12%. However, the gains would be subject to 10% long-term capital gains taxation, which would be around  ₹7.6 lakh. Debt MFs are taxed at a higher rate based on the investor's income tax slab rate. But an NRI from the Emirates is exempt from paying any capital gains tax, thanks to the DTAA signed between India and the UAE in 1992 to avoid double taxation of residents of both countries on the same income. "This treaty alleviates the burden on taxpayers and promotes cross-border economic activities," said Sagar Soman, a chartered accountant (CA) whose practice caters to NRI clients who are mostly high-net-worth individuals.