Article
Dec 26, 2025
Complete Tax Guide: Canadian Residents Investing in Indian Mutual Funds
Introduction
If you’re a Canadian tax resident investing in India, you’re tapping into one of the world’s fastest-growing equity markets—but also navigating a more complex tax setup. Indian equities have delivered strong long-term returns (low double-digit annualized returns for large caps over the past decade, with small caps higher but more volatile). Still, many NRIs hesitate due to fears of double taxation.
Here’s the key point upfront: you may be taxed in both countries, but you are not taxed twice on the same income, provided you apply the Canada–India Double Taxation Avoidance Agreement (DTAA) correctly.
How taxation actually works
Canada taxes its residents on worldwide income. This means capital gains from Indian mutual funds must be reported in Canada, in Canadian dollars. At the same time, India taxes income generated within India. Under the DTAA framework, India typically taxes the income first as the source country, and Canada then allows a Foreign Tax Credit (FTC) for eligible taxes paid in India.
The credit is not unlimited—Canada allows a credit equal to the lesser of (a) foreign tax paid or (b) Canadian tax attributable to that foreign income. If Canadian tax rates are higher, the difference becomes payable in Canada.
An illustrative real-world example (with numbers)
Consider a Canadian tax resident who invested ₹10 lakh in Nippon India Small Cap Fund – Direct Growth in 2022 and redeemed the investment in 2025. During this period, the fund performed strongly and the investment value increased to approximately ₹19 lakh, implying a pre-tax CAGR of around 24 percent.
Step 1: Capital gain in India
Investment amount: ₹10,00,000
Redemption value: ₹19,00,000
Total capital gain: ₹9,00,000
Under current Indian tax law, long-term capital gains on equity mutual funds are taxed at 12.5 percent on gains exceeding ₹1.25 lakh.
Taxable LTCG: ₹9,00,000 − ₹1,25,000 = ₹7,75,000
Indian LTCG tax: 12.5% of ₹7,75,000 ≈ ₹96,875
Step 2: Capital gain in Canada (CAD terms)
For Canadian tax purposes, the transaction must be converted into Canadian dollars using Bank of Canada exchange rates. It is important to note that Canada doesn’t tax these investments on unrealized gains like the US does.
Purchase value in CAD (₹10,00,000 at ₹59/CAD): CAD 16,949
Redemption value in CAD (₹19,00,000 at ₹65/CAD): CAD 29,230
Capital gain in CAD: CAD 12,281
Canada taxes only 50 percent of capital gains.
Taxable capital gain: CAD 12,281 × 50% = CAD 6,140
Canadian tax before credits (at ~43% marginal rate): CAD 2,640
Canada allows a Foreign Tax Credit for Indian tax paid.
Indian tax paid ₹96,875 at ₹65/CAD) ≈ CAD 1,490
Net Canadian tax payable: CAD 2,640 − CAD 1,490 ≈ CAD 1,150
Illustrative outcome (will vary by individual)
Total tax paid (India + Canada): approximately CAD 2,640
Effective tax rate on gains in CAD: approximately 21 to 22 percent
Net CAGR after all taxes in CAD: approximately 16 to 17 percent
Even after accounting for taxation in both countries, the net return in this example remains significantly higher than typical after-tax returns from Canadian equity funds, which have generally delivered mid-single-digit returns over the same period.
Key forms to know (not as scary as they sound)
India
ITR-2 for reporting capital gains
Tax payment challans for Indian tax paid
Form 15CA/CB only if funds are being repatriated to Canada
Canada
Schedule 3 (Capital Gains)
Form T2209 (Federal Foreign Tax Credit)
Form T1135 if total cost of foreign assets exceeds CAD 100,000
Missing Form T1135 is one of the most common—and costly—compliance mistakes for Canadian NRIs.
Common pitfalls to avoid
Failing to claim the Foreign Tax Credit (this can create actual double taxation)
Using inconsistent or incorrect exchange rates (Bank of Canada rates are best practice)
Poor record-keeping of Indian tax filings and challans
Ignoring Adjusted Cost Base (ACB) tracking, especially for SIP investments
So, is it worth it?
For many investors, yes. Tax complexity alone should not be a reason to avoid India’s growth opportunity. With proper documentation, timely filings, and correct application of the DTAA, Indian equity investments can still play a powerful role in long-term wealth compounding for Canadian residents.
Bottom line
Tax rules add friction—but not a full stop. When done right, investing in India can still deliver strong post-tax outcomes for Canadian NRIs. The advantage lies not in avoiding taxes, but in understanding and planning for them.
Disclaimer
This article is for educational purposes only and does not constitute tax, legal, or investment advice. Tax outcomes depend on individual circumstances, province of residence, marginal tax rates, exchange rates, and changes in tax law. Consult qualified tax professionals in both Canada and India before making investment decisions.