TDS on Mutual Fund Redemptions for NRI Investors — Complete Guide

A resident investor redeeming an equity fund pays tax only when they file their return. An NRI redeeming the exact same fund has tax withheld at the point of redemption itself, before the money even reaches their account — and getting the applicable rate wrong, in either direction, is a common and costly mistake.

Why NRIs Face TDS on Every Redemption, Unlike Residents

Resident investors generally face no TDS on mutual fund capital gains at all — tax is simply computed and paid at the time of filing the annual return. For non-resident investors, the tax framework works differently by design: because NRIs may be difficult for the tax department to track and hold accountable once funds have been repatriated abroad, TDS is deducted by the Asset Management Company at the time of redemption, under the withholding framework applicable to non-resident payments.

The Rates That Actually Apply — By Fund Category and Holding Period

The AMC deducts TDS at the rate corresponding to the actual applicable capital gains treatment for the specific fund and holding period, not a single blanket percentage:

• Equity-oriented fund, short-term (12 months or less): TDS at 20% under Section 111A, matching the resident STCG rate.
• Equity-oriented fund, long-term (more than 12 months): TDS at 12.5% under Section 112A. Note that for TDS deduction purposes, the AMC generally applies this rate to the computed long-term gain without factoring in the ₹1.25 lakh exemption at source in every case — meaning an NRI may see tax withheld even where their eventual actual liability (after applying the exemption on filing) is lower, recoverable only via a refund on the ITR.
• Debt-oriented / "specified mutual fund" units under Section 50AA: TDS at the investor's applicable slab rate, mirroring the resident treatment of all-short-term-deemed gains with no indexation.
• Non-equity units outside Section 50AA (post-FY 2025-26 gold funds, most international funds, etc.): TDS at 12.5% on eligible long-term gains, following the same listed/unlisted 12-month/24-month distinction that applies to residents.

All these rates are subject to applicable surcharge and health and education cess, which increase the effective withholding rate meaningfully at higher income levels — surcharge in particular can push the effective rate well above the headline percentage for larger redemptions.

Why Blanket "30% Flat TDS" Claims Are Outdated

A considerable amount of older and generic content online still quotes a flat 30% (or 31.2% with cess) TDS rate on all NRI mutual fund redemptions. This does not reflect the current, category-specific framework described above, which ties the withholding rate to the actual capital gains treatment applicable to the specific fund and holding period. NRIs relying on older articles or outdated advisor guidance risk either being surprised by a lower-than-expected deduction (and under-planning their cash flow) or assuming an incorrect flat rate that doesn't match what the AMC will actually withhold.

Section 195 vs Section 196A — Which Provision Applies

TDS on capital gains from mutual fund redemption for a non-resident is generally deducted under Section 195, the general withholding provision applicable to payments to non-residents. TDS on IDCW (dividend) distributions to non-resident unit-holders is instead governed by Section 196A, generally at 20% (plus surcharge and cess), a distinction covered in more depth in our companion article on IDCW taxation. Investors should not conflate the two — they apply to genuinely different types of payout from the same fund.

The Foreign Currency Computation Rule Under Section 48

For NRIs who originally purchased units using foreign currency remitted from abroad, Section 48 permits capital gains to be computed by first converting both the purchase cost and sale consideration into the original foreign currency, and only then computing the gain — a mechanism designed to shield the investor from taxable "gains" that are purely an artefact of rupee depreciation against their home currency, rather than genuine investment appreciation. This is a genuinely valuable but frequently overlooked provision, and it doesn't apply automatically — it requires the investor to specifically claim this computation method.

Claiming DTAA Relief

Where India has a Double Taxation Avoidance Agreement with the NRI's country of residence, the treaty may provide for a lower withholding rate than the domestic rate described above. To claim this, the NRI must furnish a Tax Residency Certificate (TRC) from their country of residence, along with any additional documentation (commonly a self-declaration in the prescribed format, and their foreign Tax Identification Number) the AMC requires before applying the treaty rate rather than the domestic rate.

Applying for a Lower or Nil Deduction Certificate

Where an NRI's actual tax liability is genuinely lower than what the standard TDS rate would withhold — because of losses available for set-off, treaty relief, or simply a lower effective tax position overall — they can apply to the Assessing Officer under Section 197 using Form 13 for a certificate authorising a lower (or nil) rate of TDS. This is filed and processed through the TRACES portal and, once obtained, is presented to the AMC to apply the certified rate going forward, avoiding the need to wait for a refund after over-withholding.

Claiming a Refund Where TDS Exceeds Actual Liability

Where none of the above pre-emptive steps were taken and TDS was deducted at the standard rate despite a lower actual liability, the only remaining route is filing an Indian income tax return and claiming the excess as a refund — a process that can take months, making the Form 13 lower-deduction route considerably more cash-flow-efficient wherever it's genuinely available in advance of a planned large redemption.

Planning Redemptions With the Withholding Framework in Mind

For NRIs planning a significant mutual fund redemption, understanding which rate will actually apply — and whether a lower-deduction certificate or DTAA relief is worth pursuing in advance — can materially change how much cash actually reaches their account on day one versus what has to be recovered later through a refund. We help NRI investors plan redemptions with this framework in mind, rather than discovering the withholding impact only after the money has already been deducted.

This article reflects the law as understood at the time of writing for FY 2026-27 (AY 2027-28) and is for general informational purposes only. It does not constitute tax advice specific to any individual's circumstances — please consult a qualified Chartered Accountant before making a filing or redemption decision.