Taxrelief Under Schedule 5 of the FEMA (Transfer or Issue of security by a Person Resident Outside India) Regulations, 2000, an NRI/PIO is allowed to purchase units of domestic mutual funds without any limits on a repatriation basis [Clause 2(1)(i)]. Under Clause 2(1)(ii) of the same Schedule, he is also permitted to acquire such units on a non-repatriation basis, along with units of a money market mutual fund, without any limit. Indirectly, this indicates that an NRI/PIO cannot acquire units of a money market mutual fund on a repatriable basis.

There is no other restriction as to the type of scheme that an NRI/PIO can invest in – equity, income, g-sec, balanced, etc., all are permissible. Though an NRI/PIO is not permitted to trade in derivatives on a repatriable basis, he can invest in a mutual fund scheme which deals in derivatives on a repatriable basis.

Permission has also been granted to NRIs/PIOs for tender of such units to the mutual fund for repurchase or redemption under clause 4 of the Schedule.

The income distribution by the mutual fund in respect of mutual fund units would be fully repatriable, irrespective of whether the units are acquired on repatriable basis or non-repatriable basis, being a current account transaction.

Units of mutual funds, being neither shares nor debentures, would not be eligible for computation of capital gains in terms of the foreign currency in which they were acquired, under the first proviso to section 48.

In case of equity oriented mutual funds, the long term capital gains arising on sale of the units after 30th September 2004 would be exempt from tax under section 10(38), since the transaction would be subject to Securities Transaction Tax, while the short term capital gains on transfer of such units would attract tax at 10% (plus SC and EC).

In case of other mutual fund schemes, the long term capital gains would be subject to tax at the lower of 20% (plus SC and EC) of the capital gains, or 10% of the gains computed without cost indexation under section 112.

The language of section 112 indicates one interesting difference in the computation of long term capital gains tax under section 112 of a non-resident from that of a resident. It appears that, in case a non-resident has other income less than the basic exemption, the unutilised portion of the basic exemption is not available for reducing the taxable capital gains, and the entire long term capital gains will be taxed at 20%, and not just the excess. This is on account of the fact that the proviso found to clause (a) of section 112(1) is not to be found in clause (c), which deals both with non-residents and foreign companies. A similar problem also seems to exist under section 111A in respect of short term capital gains.