Background – Capital Gain Taxation on Mutual Funds – DTAA Between India and Singapore

Many Non-residents (NRIs, OCIs, Others) do investment in India in stock markets (Shares, Mutual funds). As per Income Tax Act of India, taxation on sale of shares or mutual funds is taxable under the head capital gains India. Under domestic law provisions, tax rates on this capital gain income vary according to long term or short term.  However, under India Singapore DTAA, taxation of Mutual Funds on its sale/redemption was subject matter of an interpretation issue. Recently, an ITAT judgement has clarified it that, as per India Singapore DTAA, capital gain on sale of mutual funds is not taxable in India for Singapore Tax Residents. This judgement and clarification is wrt capital gain income arising on sale of mutual funds only.

Interplay Between Domestic Tax Provisions and DTAA

In India, under the Income-tax Act, capital gains on sale/transfer of capital assets is liable for tax in India under Capital Gains head. Mutual funds are also defined as capital assets under Income Tax Act. Hence, capital gain tax applies on mutual funds under general provisions of Income Tax Act. However, under Income Tax Act, taxpayer has an option to choose from general provisions of Income Tax Laws or DTAA provisions. Hence, taxpayer has right to apply DTAA provisions if they are more beneficial. Therefore, in case of transactions arising to a tax resident of India/Singapore from source lying in other respective country, if the India–Singapore DTAA provides a more tax beneficial, then DTAA will overrides domestic law.

India Singapore Double Tax Avoidance Agreement (DTAA) – Article 13

Article 13 of India-Singapore DTAA provide the rules for the taxation of capital gains. It also provides clarify on taxation right of Residence Country and Source Country.  In connection with capital gains on capital assets where capital asset is in India (source country) and taxpayer is resident of Singapore (residence country), its tax allocation structure is as under:

Article No Capital Asset Covered Taxation Rights

(i.e. Taxable In)
Article 13(1) Immovable Property Source country (India)
Article 13(2) Business Assets (PE related) Source country (India)
Article 13(3) Ships/Aircraft Residence country (Singapore)
Article 13(4) Shares (Indian Company) Source country (India)
Article 13(5) Residual Clause Residence country (Singapore)

Hence, Article 13(5) covers all other assets which are not specifically covered under earlier clauses. And anything which will be covered by Article 13(5), its taxation rights will be exclusively with residence the country only, and source country will not have any right on its taxation.

Now, question arise that can mutual funds be covered under Article 13(4) (shares) or shall it be covered by Article 13(5) (residual category clause) only. Here, it is pertinent to understand that since Indian mutual funds are established as trusts, not companies, hence, investment in the mutual funds are held in the form of units and not as shares. Therefore, Mutual Fund units cannot be considered as shares, and clause 13(4) will not be applicable. Consequently, mutual funds will fall under the residual clause i.e. Article 13(5). Hence, mutual funds capital gain income will be taxable in Singapore (residence country) and not in India (source country).

Mumbai ITAT Judicial Pronouncement – Anushka Sanjay Shah Vs ITOI

The abovesaid interpretation and contention has been judicially affirmed by Mumbai Tribunal in the case of Anushka Sanjay Shah v. ITO, decided by the Income Tax Appellate Tribunal (ITAT), Mumbai.

Facts: Financial Year 2021-22. Assessment Year 2022-23. Assessee was a Non-resident in India in respective year and was a Tax Resident of Singapore. Filed ITR offering taxable income of Rs 453,768/- and claimed exemption under DTAA for short term capital gains on debt funds (Rs 88.75 Lakh) and equity funds (Rs 46.91 Lakhs). Hence, in total, assessee claimed exemption of Rs 1,35,66,368/- under clause 13(5) of India Singapore DTAA. ITR was picked up for scrutiny and AO has made addition for the clause 13(5) exemption claimed for capital gain income. Accordingly, AO issued draft order u/s 144C(1). Against that draft order assessee submitted objections with DRP. However, DRP uphold the taxability of capital gain in India. Accordingly, AO passed the final order u/s 143(3). Aggrieved by AO order, assessee filed appeal with ITAT Mumbai and submitted that capital gain income should not be taxable in India under clause 13(5) of India-Singapore Tax Treaty. Assessee Ld. AR has also submitted and placed reliance on the decision of the co- ordinate bench in the case of ITO v/s Satish Beharilal Raheja (2013) 137 Page |4 IT(IT)A No. 174/Mum/2025 A.Y. 2022-23 Anushka Sanjay Shah taxmann.com 296. Assessee learned AR has pointed out that in this judgement also issue is similar under Article 13(6) of Indo-Swiss DTAA. It is submitted that Article 13(6) of India-Swiss DTAA which is identical to Article 13(5) of India-Singapore DTAA. Hence, the findings of the co-ordinate bench in this case should apply to the present case accordingly.

ITAT Held: Mumbai Income Tax Appellate Tribunal held the judgement in favor of assessee on following grounds

  • Since there is no definition of term ‘Share’ given in Treaty or Income Tax Act, hence, meaning shall be taken from allied acts. As per the provisions of Companies Act and SEBI Regulations, mutual funds in India are structured as Trusts, not Companies. Hence, ‘unit’ of trust cannot be termed as share which is legally different from share in a company.
  • Since, mutual funds are not share. Hence, article 13(4) of India Singapore Treaty cannot be applied and residual clause 13(5) shall prevail, where taxation rights are given to residence country i.e. Singapore in the given case.
  • As per provisons of section 90(2), DTAA will override domestic tax law.
  • Hence, as per India Singapore Treaty, short term capital gain income from sale of debt and equity funds is not taxable in India.

What To Do To Avail Treaty Benefit – Steps for Non-resident Taxpayer

To avail the benefit of DTAA, non-resident taxpayer is required to comply the provisions and requirements of Income Tax Law. Here are few steps, which needs to be taken by taxpayer:

  • Obtain a Tax Residency Certificate (TRC) from their Residence Country i.e. Singapore
  • File Form 41 (earlier Form 10F) with the Income Tax department online
  • File Income Tax Return in India and claim DTAA benefit

Non-compliance with these procedural requirements will disallow the Treaty benefit, and taxation will fall under domestic tax provisions.

India DTAA With Other Countries – Taxation Rights Are With Residence Country

Similar to India-Singapore Treaty, there are various other treaties where taxation rights are not with source country but with the Residence Country. Here are few countries

Country Article No
India UAE DTAA 13(5)
India Oman DTAA 15(6)
India Qatar DTAA 13(6)
India Saudi Arabia DTAA 13(6)
India Kuwait DTAA 13(6)
India Germany DTAA 13(5)

In above countries tax treaties, taxation rights for shares are mentioned. However, mutual funds are in the residual clause, where taxation rights are given to residence country.

Further, nn case of India UAE DTAA, in July 2019, in the case of K E Faizal Vs DCIT Intl Tax Kochi ITA No 423/Coch/2018/AY 2012-13 case, Cochin ITAT, while placing reliance on judicial precedence in case of ITO Vs Satish Beharilal Raheja (2013) 37 Taxmann.com 296, upheld that Mutual Funds are not shares. Hence, mutual funds cannot be categorised under Article 13(4) of India UAE Treaty, hence, article 13(5) will prevail. Accordingly, in case of a person who is tax resident of UAE, tax rights for mutual funds capital gain income will be with UAE. Hence, it will not be taxable in India.

FAQs – Mutual Funds Capital Gain Taxability In India – India Singapore Treaty

Q – I am a non-resident and employed and living in Singapore since last 7 years. I am a tax resident in Singapore. I have investments in India in shares and mutual funds. During filing of ITR in India, should I claim exemption for Mutual Funds capital gains under clause 13(5) of India Singapore Treaty?

Ans – Though as per Mumbai Tribunal ruling in Anushka Sanjay Shah case, it is very clear that Mutual Fund are not shares. Hence, tax rights on mutual funds capital gain will be taxable in Singapore under the treaty. However, considering amount of capital gains, a decision can be taken to avoid system generated litigation. Yes, if the amount of capital gains are significant, then applying Treaty clause would be advisable.

Q – Whether article 13(5) of India Singapore Treaty is applicable for long term capital gains or short-term capital gains from sale of mutual funds? Also, does it has restriction that the gain is arising from debt fund or equity fund?

Ans – There is no restriction wrt long term or short term. Hence, any type of capital gain is covered under clause 13(5). Further, it also does not differentiate between equity fund or debt fund. In fact, in Anushka Sanjay Shah case, the taxpayer had short term capital gains from equity as well debt funds. Hence, all type of capital gains on sale of a mutual funds are covered under clause 13(5) of India Singapore Treaty.

Q – What are the litigation risks around claiming Mutual Funds Capital Gain income exemption under article 13(5) of India Singapore Treaty?

Ans – Though there are judicial pronouncements at ITAT level, however, Income Tax Department always intend to litigate such claims. Hence, litigation from income tax department can be expected till the time matter is more conclusively decided by the higher courts.

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