How is your investment in international mutual fund taxed in India

Apr 21, 2025

1. What is an International Mutual fund?

An international mutual fund is a type of mutual fund that invests in securities (stocks, bonds, or a combination) issued by companies or governments outside the investor's home country. These funds provide diversification by investing in a variety of international markets and can help investors gain exposure to global opportunities and spread risk across different regions and industries.

2. Benefits of International Mutual Fund

TAXATION OF INTERNATIONAL MUTUAL FUND

In India, the taxation of international mutual funds depends on their classification and the holding period of the investment. International mutual funds, which primarily invest in equities of companies listed outside India, are not treated as equity-oriented funds for tax purposes because they do not invest predominantly (i.e., more than 65%) in Indian equity shares. Instead, they are taxed similarly to debt mutual funds or "non-equity" funds as per section 50AA-Special Provision for Taxation of Specified Mutual Funds.

1. Classification:

International mutual funds are considered "non-equity" funds because their equity exposure is in foreign stocks, not Indian equities. For a fund to qualify as an equity-oriented fund (which enjoys preferential tax treatment), it must invest at least 65% of its assets in equity shares of domestic (Indian) companies. Since international funds focus on foreign equities, they fall under the debt fund taxation category.

2. Holding Period and Capital Gains:

The tax treatment depends on how long you hold the investment (holding period) and the date of purchase, as rules have evolved over time, particularly with the Finance Act 2023 and Budget 2024 changes.

Investments Made Before April 1, 2023

(i) Short-Term Capital Gains (STCG): If you redeem the units within 36 months (3 years), the gains are classified as short-term capital gains. These are added to your taxable income and taxed at your applicable income tax slab rate (e.g., 5%, 20%, 30%, etc., depending on your total income).

(ii) Long-Term Capital Gains (LTCG): If you hold the units for more than 36 months, the gains are long-term. Until July 23, 2024, LTCG was taxed at 20% with the benefit of indexation (adjusting the purchase cost for inflation using the Cost Inflation Index). After July 23, 2024 (per Budget 2024), the holding period for LTCG was reduced to 24 months (2 years), and the tax rate became 12.5% without indexation.

Investments Made On or After April 1, 2023

The Finance Act 2023 removed indexation benefits for debt funds (including international mutual funds) purchased on or after April 1, 2023. These funds are now treated as "specified mutual funds" under Section 50AA of the Income Tax Act if they invest less than 35% in Indian equities.

1. Before April 1, 2025:

Regardless of the holding period, all gains (short-term or long-term) are taxed at your applicable income tax slab rate. There’s no distinction between STCG and LTCG, and no indexation benefit applies.

2. On or After April 1, 2025 (per Budget 2024):

STCG: If held for less than 24 months, gains are taxed at your slab rate.

LTCG: If held for more than 24 months, gains are taxed at 12.5% (no indexation).

3. Dividends:

Dividends from international mutual funds are taxed as "Income from Other Sources" under the Income Tax Act. Since the abolition of Dividend Distribution Tax (DDT) in 2020, dividends are added to your taxable income and taxed at your applicable slab rate. This applies irrespective of when the investment was made.

4. Additional Taxes:

Dividends from international mutual funds are taxed as "Income from Other Sources" under the Income Tax Act. Since the abolition of Dividend Distribution Tax (DDT) in 2020, dividends are added to your taxable income and taxed at your applicable slab rate. This applies irrespective of when the investment was made.

Practical Implications

1. Pre-2023 Investments: If you invested before April 1, 2023, holding for over 24 months (post-July 23, 2024) gives you a lower tax rate (12.5%) compared to slab rates, making long-term holding beneficial.

2. Post-2023 Investments: For investments made on or after April 1, 2023, taxation at slab rates applies until April 1, 2025. After that, holding for over 24 months reduces the rate to 12.5%, incentivizing longer-term investments.

3. Tax Planning: High-income individuals (e.g., in the 30% slab) face a higher tax burden on STCG or pre-2025 redemptions, so timing your exits is key.

Example

Does this Effect all the International Mutual Funds in the Market?

Even though the revised taxation policy will affect most of the International Mutual funds in the Market, there will still be some specified funds that will not be affected. It is important to note that not all international mutual funds will be impacted by the new rule. Only those funds with not more than 35% exposure in Indian equities will be subject to the new proposed rule. If the fund has more than 35% exposure in Indian equities, it will be treated as an equity-oriented fund, and the new tax rule for specified mutual funds will not apply. Therefore, it is essential to examine the exposure of the international mutual fund in equities to determine whether it will be impacted by the proposed changes.

CONCLUSION

International Mutual funds Provide Indian Investors the Option to diversify their portfolio and manage risk. Some international funds have 100 per cent exposure to foreign equities while some of them have limited exposure to global equities. Such Funds with less than 35% exposure to foreign equities will be an Excellent alternative to Pure International Mutual funds as they will still be able to Diversify their Portfolio and will not be taxed as Debt Funds or Fixed Income funds. A few Examples of Funds with less than 35% exposure to foreign equities are-