Even though international funds invest in stocks (equities) outside India, for taxation purposes, the capital gains in international funds are taxed similar to debt fund taxation in India. That is, investments held for less than 3 years are classified as short-term while those held for more than 3 years are treated as long-term.
As per the latest International Funds Taxation Rules (2022):
- Short Term Capital Gains (or STCG) on International funds are taxed as per the investor’s marginal income tax slab rate. Investments held for less than 3 years are treated as short-term
- Long Term Capital Gains (or LTCG) on International funds are taxed at 20% with indexation benefits. Investments held for more than 3 years are treated as long-term.
A couple of examples will make this easier to understand.
Example 1 (Taxation of Short Term Gains from International Funds)
Suppose you invested Rs 5 lakh in an international fund in February 2019. After a little more than 2 years (but less than 3 years), i.e. in July 2021, the value of your investments has become Rs 8 lakh. Assume you sell your international fund then.
You have made capital gains of Rs 3 lakh (Rs 8 lakh – Rs 5 lakh).
Since the gains are made (and booked by selling) are made in less than 3 years (between February 2019 and July 2021), these will be treated as short term capital gains and hence, taxed as per the investor’s tax slab.
If the slab is 30%, then it will be taxed as follows:
30% of Rs 3 lakh = Rs 90,000.
Example 2 (Taxation of Long Term Gains from International Funds)
Suppose you invested Rs 5 lakh in an international fund in July 2015. After a little more than 4 years, i.e. in November 2019, the value of your investments has become Rs 9 lakh. Assume you sell it at this point.
So mathematically speaking, you made capital gains of Rs 4 lakh. But this gain was made after a period of 4 years, which is more than 3 years requirement for capital gains qualifying as Long Term Capital Gains for Debt Funds.
Hence you do not pay tax on this full Rs 4 lakh gain at the time of selling.
Because as per the latest taxation rules of mutual funds, the Long Term Capital Gains on International funds are taxed at 20% after indexation.
This means you need to adjust the cost of acquisition of debt fund units for indexation first. And for that, the following numbers are known:
- Cost of acquisition = Rs 5 lakh
- CII number for 2015-16, the year of purchase = 254
- CII number for 2019-20, the year of sale = 289
So the indexed cost price of the acquisition is calculated using the formula:
Indexed Cost = Actual Cost * (CII of Sale Year / CII of Purchase Year)
And in our example, this comes out as follows:
= Rs 5 lakh * (289/254) = Rs 5.69 lakh
And this means that the long term capital gains are calculated as follows:
= Rs 9 lakh – Rs 5.69 lakh = Rs 3.31 lakh
So you get taxed at 20% on this amount of Rs 3.31 lakh (instead of Rs 4 lakh without indexation). And this translates to:
LTCG tax of 20% on Rs 3.31 lakh, i.e. Rs 66,000 (approx.)
Had it not been for indexation benefit, your tax would have been 20% on the full actual profit of Rs 4 lakh = Rs 80,000.
If you want to know more about the Cost Inflation Index (CII), then read about the latest Cost Inflation Index (CII). To indexation benefit, you need to be aware of the CII number in the year of purchase and the year of sale of debt fund units. The CII Index is updated for each financial year and is also available on the income tax website.
Hopefully, this detailed post on what are the latest taxation rules of international funds helped you better understand the taxation of international mutual fund investments in India (2022)