Tax Implications of Investing in Global Funds for Indian Investors

Indian investors are sending more money abroad than ever, hoping to benefit from US tech stocks, global blue-chips and diversified international funds. But while global funds can balance a portfolio, the tax rules around them have changed sharply in the last two years. Budget changes, new holding-period rules and higher tax rates mean that how and when an investor redeems units now has a clear impact on post-tax returns.

Classification of Global Funds for Taxation Purposes 

In India, ‘global’ or international mutual funds usually mean:

• India-domiciled mutual funds or fund-of-funds (FoFs) that invest in overseas equity or ETFs (for example, a US index fund or global technology fund).
• Direct foreign mutual funds / ETFs / stocks, bought abroad using the Liberalised Remittance Scheme (LRS).

These funds are treated as capital assets under the Income Tax Act, 1961, in the same manner as unlisted securities. Unlike Indian equity mutual funds, which qualify as ‘equity-oriented’ if they hold at least 65% in listed Indian shares, overseas funds do not meet this threshold. They are therefore not classified as equity-oriented schemes. Instead, they are treated as non-equity mutual funds or foreign securities, which places them in the same category as debt funds, gold ETFs.

Given their categorisation, global funds fall outside the special concessional regime under Section 112A.  

How International Mutual Funds Are Taxed?

When you sell units of global or international mutual funds, the gains are now taxed at the investor’s applicable slab rate, regardless of the holding period. The earlier distinction between short-term capital gains (STCG) and long-term capital gains (LTCG) international mutual fund taxation with a 20% rate plus indexation benefits has been removed. Unlike domestic equity funds, global funds do not qualify for the concessional LTCG rate of 12.5% or the annual ₹1.25 lakh exemption. These benefits remain exclusive to equity-oriented funds that invest at least 65% in Indian equities.  

Dividend Taxation on International Mutual Funds

As of FY 2025–26, dividends distributed by India-domiciled global mutual funds are taxed in the hands of investors as Income from Other Sources under the Income Tax Act, 1961. There is no Dividend Distribution Tax (DDT) since its abolition in April 2020; instead, investors pay tax at their applicable slab rates. For resident individuals, this means dividends are added to total income and taxed at marginal rates ranging from 5% to 30% plus surcharge and cess. 

Tax Deducted at Source (TDS) applies at 10% for residents and 20% for non-residents on such distributions. Importantly, global mutual funds are categorised as ‘other than equity schemes,’ so dividend taxation does not enjoy concessional equity treatment.  

The indirect foreign impact arises because underlying overseas companies whose shares are held by the global fund often pay dividends subject to foreign withholding tax in their source country. These taxes are deducted before dividends are distributed to the Indian fund, thereby reducing distributable income. Investors in India cannot directly claim foreign tax credit (FTC) on these withholdings because the tax is borne at the fund level, not individually. Thus, the effective dividend yield for investors is lower than headline foreign dividend rates. 

For example, if a US stock pays a $100 dividend, after 25% withholding, only $75 flows into the fund; when distributed in India, the investor pays slab-rate tax again, creating a two-tier taxation effect.

Tax Rules For International Mutual Funds: Foreign Tax Withholding & DTAA

When you directly purchase overseas securities, such as stocks, bonds, or mutual funds, the source country levies a withholding tax on dividends, interest, or royalties before remittance. 

For example, if the US-listed company declares a dividend, a 25% withholding tax applies, but under the India–US Double Taxation Avoidance Agreement (DTAA), this is reduced to 15%. Similarly, many European jurisdictions cap withholding at 10% or lower under their respective treaties. 

DTAA ensures that investors are not taxed twice on the same income: once abroad and again in India. Also, when filing your tax returns, you can claim a foreign tax credit (FTC) in India for taxes paid overseas and offset your domestic liability under Section 90.

To enjoy reduced-rate benefits, it is important to obtain a Tax Residency Certificate (TRC) from Indian authorities and submit relevant forms, such as IRS Form W‑8BEN for US investments, to foreign brokers or custodians to avail of reduced DTAA rates. Without these, higher default withholding may apply, though credits can still be claimed later.

Reporting Global Investments in ITR

Here is what the law requires for reporting global investments:

Schedule FA – Mandatory for Direct Foreign Investments

As per the tax rules for international mutual funds, Resident and Ordinarily Resident (ROR) taxpayers should report foreign assets and income, such as overseas accounts, shares, bonds, and land or buildings, in Schedule FA. As an ROR, having indirect interests, such as beneficial ownership or signing authority in foreign accounts, also requires disclosure.

If you avoid disclosure, be prepared to face consequences under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, including a penalty of ₹10 lakh per undisclosed asset. In addition, prosecution provisions may apply in cases of deliberate concealment.  

Reporting for India-Domiciled Global Funds

If you have invested in India-domiciled mutual funds or ETFs with global exposure, such as feeder funds that invest in US or European equities, you don’t need to report them on Schedule FA, since the funds themselves are registered in India. 

Such investments require disclosure under Schedule CG (Capital Gains) or Schedule OS (Other Sources), depending on the type of income. 

Set-Off and Carry-Forward of Losses

As per the Income-tax Act, you can set off short-term capital losses against both short-term and long-term capital gains. However, long-term capital losses can be offset only against long-term capital gains. 

It is important to note that capital losses cannot be set off against earnings from other heads, such as salary, house property, or business. Also, if you have unutilised capital losses, they can be carried forward for up to 8 assessment years, provided the return of income is filed on or before the due date under Section 139(3). 

Understanding TCS on International Remittances under LRS

Under Section 206C(1G) of the Income Tax Act, effective April 1, 2025, Tax Collection at Source (TCS) applies to foreign remittances under the Liberalised Remittance Scheme (LRS) once the annual threshold of ₹10 lakh is crossed.

For education and medical remittances, TCS is charged at 5%. However, it is nil if the education is funded by an education loan from a specified institution. For other purposes, such as investments or gifts, the rate is 20%.

In the case of overseas tour packages, TCS applies at 5% up to ₹7 lakh and 20% beyond, without the LRS threshold. TCS does not apply to remittances outside LRS, which refers to non-residents or entities other than individuals, or where tax has already been deducted at source under other provisions.  

Practical Checklist for Investors 

If you are investing in global funds, keep the following checklist handy:

• Check the classification of the international mutual fund, whether it is India-domiciled or a foreign direct investment.
• Maintain records of purchase cost, redemption value, and holding period.
• If receiving dividends, treat them as taxable income (slab rate) when you receive them.
• For direct overseas investments under LRS, track cost in INR (at spot rate), remittance details (for TCS), foreign withholding taxes, and consider DTAA benefits if applicable.
• Report your investment correctly in the ITR; for direct investment, disclosure in Schedule FA is required.
• If you incur losses, retain documents, as you will need them to offset or carry forward losses per law.

Conclusion

Investing in global funds can broaden a portfolio, but the tax implications can directly affect your overall gains. These funds are taxed like unlisted assets, and any profit on sale is added to income and taxed at slab rates. Not only that, but dividends are also taxed at slab rates, often after foreign withholding, which lowers real returns. 

To comply with the law, it is important to report overseas holdings under Schedule FA to avoid penalties. Since loss offsetting and foreign tax credits are available on global funds, keep clear records when filing your tax returns.