Tax on Indian Mutual Funds for NRIs in Canada

Introduction

If you are an NRI living in Canada and investing in Indian mutual funds, your returns are affected by taxation in both India and Canada. Unlike NRIs in UAE or Saudi Arabia, Canada-based NRIs face dual taxation, currency conversion effects, and strict foreign asset reporting requirements.

This guide explains how Indian mutual funds are taxed for NRIs in Canada, how the India–Canada DTAA works, and what you must do to stay compliant while maximising long-term returns.

Who This Guide Applies To

This page is relevant if:

• You are an NRI or OCI

• You are a tax resident of Canada

• You invest in Indian mutual funds through NRE or NRO accounts

• You file Canadian income tax returns

How India Taxes Mutual Funds for NRIs in Canada

Indian tax law applies to all NRIs regardless of country of residence. Tax is deducted at source when you redeem mutual fund units.

Tax on Equity Mutual Funds in India

Equity mutual funds are schemes that invest at least 65 percent in Indian equities.

Tax on Debt Mutual Funds in India

Debt mutual funds include liquid funds, bond funds, gilt funds, and other non-equity schemes. Tax is deducted as TDS by the mutual fund house, and redemption proceeds are paid after tax deduction.

⚠️ TDS applies at redemption for NRIs. Indexation reduces taxable gains for long-term holdings.

India–Canada DTAA Explained for Mutual Fund Investors

India and Canada have a Double Taxation Avoidance Agreement (DTAA). However, this treaty does not exempt Indian mutual fund capital gains from Indian tax.

Key DTAA Outcome for Canadian NRIs

• India retains the right to tax capital gains from Indian mutual funds

• Canada also taxes these gains as part of worldwide income

• Double taxation is avoided using the foreign tax credit method, not exemption

⚠️ This is a critical difference compared to Gulf countries, where NRIs often face no local taxation. Canadian NRIs must navigate a more complex tax landscape.

How Canada Taxes Indian Mutual Funds

Canada taxes its residents on global income, including income and gains from India.

Capital Gains Taxation in Canada

Only 50 percent of capital gains are taxable. The taxable portion is added to your income and taxed at your marginal rate.

Example

If you earn CAD 20,000 in capital gains from Indian mutual funds, CAD 10,000 is added to your taxable income in Canada.

Canadian Tax Classification of Indian Mutual Funds

Indian mutual funds are treated as foreign investment funds under Canadian tax law. This means:

• They do not receive Canadian mutual fund tax benefits

• Distributions may be treated as income rather than capital gains

• Detailed reporting may be required depending on structure

⚠️ This classification increases tax complexity for Canadian NRIs compared to investing in domestic Canadian funds.

Currency Conversion and FX Impact on Taxation

Canada requires all foreign income to be reported in Canadian dollars.

Important implications:

• Purchase price and redemption value must be converted from INR to CAD

• Exchange rates at the time of transaction affect taxable gains

• You may owe Canadian tax even if INR returns appear modest

⚠️ FX movement alone can create taxable capital gains in Canada. This is often overlooked and can significantly affect your after-tax returns.

Foreign Tax Credit for Indian Taxes Paid

To prevent double taxation, Canada allows a foreign tax credit for Indian taxes paid.

How it works:

• Indian TDS deducted on redemption can be claimed as a credit

• Credit is capped at the Canadian tax payable on that income

• Excess Indian tax may not always be recoverable

⚠️ This makes accurate Indian tax reporting essential. Without proper documentation, you may not be able to claim the full credit you are entitled to.

Indian Tax Filing Requirements for NRIs in Canada

If you invest in Indian mutual funds, you should file an Indian income tax return even if TDS has already been deducted.

Benefits of Filing

• Claim refunds if excess TDS is deducted

• Correctly report capital gains

• Support foreign tax credit claims in Canada

Commonly Required Documents

• PAN card

• Capital gains statement from AMC

• TDS certificates

• Proof of Canadian tax residency

Canadian Foreign Asset Disclosure Requirements

Canada has strict rules for reporting foreign assets. If the total cost of your foreign assets exceeds CAD 100,000, you may need to file Form T1135 Foreign Income Verification Statement.

Indian mutual funds and Indian bank accounts may be reportable.

⚠️ Failure to disclose can result in penalties even if no tax is payable. Take this requirement seriously and maintain accurate records of all your foreign holdings.

Common Tax Mistakes Made by Canadian NRIs

• Assuming DTAA eliminates Indian tax

• Ignoring Canadian taxation of Indian investments

• Underestimating FX-related taxable gains

• Not filing Indian returns after TDS deduction

• Missing foreign asset disclosures in Canada

These errors often reduce long-term returns through avoidable tax friction.

Best Practices for Canadian NRIs Investing in Indian Mutual Funds

• Prefer long-term investing to reduce tax churn

• Avoid frequent redemptions

• Track FX impact alongside investment returns

• Align Indian investments with global asset allocation

• Use platforms that provide clear tax reporting and compliance support

Summary: Indian Mutual Fund Taxation for NRIs in Canada

Key Takeaway

For NRIs in Canada, Indian mutual funds offer strong long-term growth potential, but tax efficiency depends on structure, holding period, and compliance discipline. Without planning, dual taxation and FX effects can materially reduce real returns.