A recent Income Tax Appellate Tribunal (ITAT), Mumbai ruling has held that capital gains earned by a Singapore tax resident from redemption/sale of units of Indian mutual funds can fall under the residuary capital gains clause of the India–Singapore DTAA, and therefore be taxable only in Singapore (subject to treaty conditions). itatonline.org+2ITB Steve Towers+2
This matters for NRIs and globally mobile executives who invest in Indian mutual funds while being tax resident in Singapore, especially where gains are significant and Indian withholding or scrutiny follows.
This is a tribunal ruling. It is persuasive but not equivalent to a High Court or Supreme Court decision, and the possibility of departmental appeal cannot be ruled out.
What happened in the case
- The taxpayer was an individual tax resident of Singapore who earned short-term capital gains (AY 2022–23) from redemption/sale of Indian mutual fund units, including equity-oriented and debt-oriented schemes. The Economic Times+2itatonline.org+2
- She claimed that, under the India–Singapore DTAA (Article 13), these gains should be taxable only in Singapore. itatonline.org+2ITB Steve Towers+2
- The Assessing Officer rejected the treaty claim; the DRP also upheld the rejection; the taxpayer succeeded before the ITAT Mumbai. The Economic Times+2itatonline.org+2
The legal issue the ITAT decided
The core question was whether mutual fund units should be treated as “shares” for purposes of the capital gains article in the DTAA.
- The ITAT noted that the DTAA provisions dealing with “shares” apply to shares in a company (and certain specified categories), whereas a residuary clause taxes “any other property” in the state of residence. itatonline.org+2ITB Steve Towers+2
- The tribunal accepted the position that mutual fund units are distinct from shares, and therefore the gains were covered by the residuary clause, which allocates taxing rights to the country of residence (Singapore). itatonline.org+2ITB Steve Towers+2
Why “mutual fund units are not shares” matters
A key part of the reasoning is that, under Indian regulatory framework, mutual funds are typically set up as trusts and units are not the same instrument as shares of a company.
Separately, the official DTAA compilation for Singapore on the Income Tax Department website reflects the capital gains provision which provides that gains from alienation of property (other than specified categories) are taxable only in the state of residence.
What this means for clients in practice
1) This is not a blanket “zero tax” rule
The outcome is treaty-driven and fact-specific. Benefits typically depend on:
- Valid Singapore tax residency for the relevant year (usually supported by a Tax Residency Certificate)
- Treaty eligibility documentation and correct disclosures in Indian filings/withholding processes
- No conflicting anti-avoidance outcomes on the facts (substance, beneficial ownership, etc.)
2) The ruling is supportive, but litigation risk remains
The decision is from the ITAT. While it is a strong authority at tribunal level, it is not final law in the way a High Court or Supreme Court decision is. The Economic Times report itself notes that public reporting may not always show whether an appeal is filed or pending.
3) Withholding and notice risk can still arise
Even where treaty protection is available, taxpayers can still face:
- TDS being applied conservatively by intermediaries
- AIS/26AS mismatches
- Treaty benefit scrutiny during processing or assessment
Who is most impacted
- NRIs / expatriates who are tax resident in Singapore and invest in Indian mutual funds
- Senior salaried professionals and founders with cross-border mobility and periodic redemptions
- Families using Singapore as a holding / residency jurisdiction with Indian financial assets
What clients should do now
A. Before redeeming or selling
- Confirm tax residency status for the year of sale (Singapore vs India can change with days of stay and ties)
- Evaluate whether the transaction could be treated differently if routed through a different instrument (mutual fund units vs listed shares vs unlisted shares)
B. At documentation stage
- Maintain Tax Residency Certificate and any treaty documentation required for claiming benefits (as applicable)
- Keep complete transaction trail: contract notes / redemption statements / bank advices
C. If tax has already been deducted or a notice is received
- Reconcile AIS / 26AS / TDS certificates with the return position
- Respond with a treaty-based, evidence-led submission, citing the DTAA clause and the ITAT reasoning where relevant
- Avoid casual “exempt under DTAA” claims without residency and paperwork support
What is still unclear or pending
- Whether the department has filed an appeal in this specific matter, and if yes, its current status. Public articles may not capture all pending appeals in real time.
- Whether future benches continue to apply the same reasoning consistently, especially if facts differ (for example, residency evidence, substance, or the nature of the fund/unit).