Mutual Fund Gains for UAE NRIs: Tax-Free Wealth Under India-UAE DTAA

A Strategic Guide to Unlocking DTAA Benefits, Avoiding Pitfalls & Maximizing Wealth

As capital flows increase between the UAE and India, a growing number of UAE-based NRIs are leveraging Indian mutual funds for wealth creation. A recurring question, however, remains:

Are mutual fund capital gains taxable in India for UAE residents?

✅ Short Answer: No, provided the investment and compliance framework aligns with Article 13(5) of the India–UAE Double Taxation Avoidance Agreement (DTAA).

This article provides a clear, legally sound roadmap—covering law, interpretation, compliance, judicial guidance, and tax-optimised wealth strategies.

1. The Legal Backbone: DTAA Article 13(5) Demystified

The India–UAE DTAA is a bilateral tax treaty designed to avoid double taxation and ensure fair taxation based on residence.

✒ Article 13(5): Capital Gains Provision

“Gains from the alienation of any property other than those referred to in paragraphs 1 to 4 shall be taxable only in the Contracting State of which the alienator is a resident.”

 Interpretation:

• Paragraphs 1–4 cover:

  • Immovable property (Art. 13(1))

  • Permanent establishments (Art. 13(2))

  • Ships/aircraft (Art. 13(3))

  • Shares in a company (Art. 13(4))

✅ Mutual fund units do not fall under these paragraphs, so Article 13(5) applies.

✅ Thus, if you are a UAE tax resident, capital gains from Indian mutual fund units are not taxable in India—they are taxable only in the UAE (which presently does not levy personal income tax on such gains).

2. Mutual Fund Units ≠ Shares: The Legal Distinction

It is critical to distinguish mutual fund units from shares, as Article 13(4) covers shares and excludes them from the DTAA capital gains exemption.

✅ Legal and Regulatory Clarification:

Source	Position
SEBI Mutual Fund Regulations	Units represent beneficial interest in a trust
Indian Trusts Act, 1882	Units are not equity ownership instruments
Companies Act, 2013	Units ≠ Shares; mutual funds are not companies

Conclusion: Mutual fund units are not shares under Indian law—thus the tax exemption under DTAA Article 13(5) applies.

3. Supporting Judicial Precedents

Indian courts have consistently supported the interpretation that mutual fund units are not shares, and hence are not taxable under Indian law when DTAA Article 13(5) applies.

 Key Rulings:

• [2019] 108 taxmann.com 545 (Cochin ITAT)

  “Mutual fund units are not ‘shares’; capital gains on such units by UAE residents are not taxable in India under Article 13(5).”

• Satish Beharilal Raheja [2013] 37 taxmann.com 296 (Mumbai ITAT)

  Equity mutual fund gains for Swiss residents are not taxable in India.

• Anushka Sanjay Shah v. ITO, IT(IT)A No. 174/MUM/2025

  India–Singapore DTAA applied; MF units not being shares meant gains were taxable only in Singapore.

These judgments strongly validate the tax exemption for UAE NRIs.

4. Compliance Conditions: Don’t Miss These

To lawfully claim the DTAA benefit and avoid taxation, ensure the following:

 Checklist:

Requirement	Description
Valid TRC (Tax Residency Certificate)	Mandatory under Sec. 90(4) of the Income Tax Act
Form 10F	Must be filed electronically with Indian income tax authorities
PAN (Permanent Account Number)	Required for investment, repatriation, and reporting
No Permanent Establishment (PE) in India	Must not have business presence triggering Indian tax jurisdiction

Non-compliance = DTAA denial + TDS deduction + litigation exposure

5. Tax-Efficient Wealth Building for UAE NRIs

✅ Practical Investment Tips:

• Use Systematic Investment Plans (SIPs) for rupee-cost averaging

• Redeem units periodically to harvest tax-free gains

• Allocate across equity and debt funds for diversified exposure

• Maintain clean fund flow via NRE/NRO accounts

• Document DTAA eligibility annually to support your claim

A long-term, compounding investment with zero Indian capital gains tax, underpinned by a treaty structure.

6. Red Flags and When the DTAA Shield May Fail

Risk Factor	Consequence
No TRC or Form 10F	Denial of DTAA; gains taxable under domestic Indian law
Presence of PE or Business Operations	India gets taxing rights under Article 7
Incorrect classification of instruments	May bring gains under Article 13(4) (shares)
Category III AIF investments	Tax paid at fund level; no DTAA credit available
Future UAE tax law changes	Gains may become taxable in UAE

 Always align form, substance, and documentation to protect your position.

7. AIFs vs Mutual Funds: Taxability & DTAA Impact

Instrument Type	DTAA Benefit?	Tax in India	Suitability for NRIs
Mutual Funds	✅ Yes (Art. 13(5))	❌ No	✅ Highly Suitable
AIF Category I/II	⚠️ Conditional	✅ Taxed in investor’s hands	⚠️ Moderate
AIF Category III	❌ No	✅ Taxed at fund level	❌ Risky

Recommendation: For clear tax efficiency under DTAA, stick to mutual funds.

8. Final Thoughts: Think Strategically, Invest Legally

UAE NRIs have a unique and powerful opportunity—one that combines the economic strength of India with tax neutrality offered by the UAE and its DTAA.

✅ Summary of Advantages:

•  No Indian capital gains tax on mutual funds

•  Treaty-backed clarity with legal and judicial support

•  Scalable, SIP-friendly wealth creation with repatriation ease

•  Avoids complex structuring and opaque instruments

Maximise growth, minimise tax. Legally. Efficiently. Strategically.