Taxation of Indian Mutual Funds for NRIs in Canada

Taxation of Indian Mutual Funds for NRIs in Canada

A Complete India–Canada DTAA & Compliance Guide (Updated)

If you are an NRI living in Canada and investing in Indian mutual funds, your returns are impacted by taxation in both India and Canada.

Unlike NRIs in tax-free jurisdictions such as the UAE, Canada-based NRIs face dual taxation, FX-driven tax effects, and strict foreign asset reporting rules. Without proper planning, these frictions can significantly reduce long-term returns.

This guide explains:

• How India taxes mutual funds for NRIs in Canada

• How the India–Canada DTAA actually works

• How Canada taxes Indian mutual fund income

• What forms must be filed, and when

Who This Guide Applies To

This guide is relevant if you:

• Are an NRI or OCI

• Are a tax resident of Canada

• Invest in Indian mutual funds via NRE or NRO accounts

• File Canadian income tax returns
  
  

How India Taxes Mutual Funds for NRIs in Canada

Under Indian tax law, tax is deducted at source (TDS) when NRIs redeem mutual fund units. Unlike residents, NRIs generally do not pay advance tax — TDS is mandatory.

Equity Mutual Funds (≥65% Indian Equity)

📌 The ₹1.25 lakh LTCG exemption applies even for NRIs.

Debt Mutual Funds (Post 1 April 2023 Rules)

⚠️ Major change: Indexation benefits are no longer available.

For all debt mutual funds purchased on or after 1 April 2023:

There is no long-term vs short-term distinction for debt funds anymore.

India–Canada DTAA: What It Really Means for Mutual Funds

The India–Canada DTAA does not exempt Indian mutual fund gains from Indian tax.

Key DTAA Outcomes for Canadian NRIs

• India retains taxing rights on capital gains from Indian mutual funds

• Canada also taxes the same gains as part of worldwide income

• Double taxation is avoided using the Foreign Tax Credit (FTC) method — not exemption

⚠️ This is a critical difference from Gulf countries, where local taxation is often nil.

How Canada Taxes Indian Mutual Fund Investments

Canada taxes residents on global income, including Indian investments.

Capital Gains in Canada

• Only 50% of capital gains are taxable

• The taxable portion is added to income and taxed at your marginal rate
  Example
  Capital gains from Indian mutual funds: CAD 20,000
  → CAD 10,000 added to taxable income in Canada.

How Canada Classifies Indian Mutual Funds

Indian mutual funds are treated as foreign investment funds, not Canadian mutual funds.

Implications:

• No Canadian MF tax concessions

• Distributions may be treated as income, not capital gains

• Detailed tracking and documentation required

This makes taxation more complex compared to investing in Canadian funds.

Currency Conversion & FX-Driven Tax Impact

Canada requires all foreign income to be reported in CAD.

This means:

• INR purchase and redemption values must be converted to CAD

• FX appreciation alone can create taxable capital gains

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

⚠️ FX movement is a real tax driver, not just an accounting detail.

Foreign Tax Credit (FTC) in Canada

Canada allows a credit for Indian taxes actually paid.

How FTC Works

• Indian TDS deducted at redemption can be claimed as credit

• Credit is capped at Canadian tax payable on that income

• Excess Indian tax may not always be recoverable

📌 Proper Indian documentation is essential.

Indian Tax Filing Requirements for NRIs in Canada

Even if TDS has already been deducted, filing an Indian income tax return is strongly recommended.

Why File an Indian ITR?

• Claim refunds if excess TDS was deducted

• Generate formal tax computation for Canadian FTC

• Maintain clean long-term compliance

Commonly Required Indian Documents

• PAN

• Capital gains statement from AMC / platform

• TDS certificates (Form 16A)

Canadian Reporting & Disclosure Obligations

Form T1135 – Foreign Income Verification Statement

You must file Form T1135 if:

• The total cost of foreign assets exceeds CAD 100,000

Reportable assets may include:

• Indian mutual funds

• Indian bank accounts

• Other Indian financial assets

⚠️ Penalties apply even if no tax is payable, so accuracy matters.

Common Tax Mistakes Made by Canadian NRIs

• Assuming DTAA eliminates Indian tax

• Ignoring Canadian taxation of Indian gains

• Underestimating FX-driven taxable gains

• Not filing Indian returns after TDS

• Missing Form T1135 disclosures

These mistakes quietly erode long-term returns.

Best Practices for Canadian NRIs

• Invest with a long-term horizon

• Avoid frequent redemptions

• Track returns in both INR and CAD

• Maintain complete tax documentation

• Use platforms built for NRI compliance

Summary: Indian Mutual Fund Taxation for NRIs in Canada

Key Takeaway

For NRIs in Canada, Indian mutual funds can be powerful long-term wealth builders, but post-tax outcomes depend heavily on correct structure, updated tax knowledge, FX awareness, and disciplined compliance.

Without planning, dual taxation and reporting friction can materially reduce real returns.

At Pivot Money, we help Canada-based NRIs invest in India with clarity around tax, structure, and long-term alignment. Our focus is not just returns, but reducing cross-border friction that compounds over time.