“Where a Double Taxation Avoidance Agreement applies, the treaty prevails—domestic law must yield to international commitments.”
— Section 90(2), Income-tax Act, 1961“Gains from the alienation of any property other than those referred to in paragraphs 1 to 4 shall be taxable only in the State of which the alienator is a resident.”
— Article 13(5), India–Singapore DTAA
In a significant development, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that short-term capital gains (STCG) earned by a Singapore-resident NRI from the sale of Indian mutual fund units are not taxable in India. The decision is based on the India–Singapore Double Taxation Avoidance Agreement (DTAA), particularly Article 13(5), which grants exclusive taxing rights to the country of residence in cases where the property alienated does not fall under Articles 13(1) to 13(4).
This case dealt with a disputed addition of ₹1.35 crore in STCG, which the Assessing Officer had sought to tax under Indian domestic law. However, the tribunal held that gains on mutual fund units—being neither immovable property, business assets, ships/aircraft, nor shares in Indian companies—fell under the residuary clause of Article 13(5), and thus, only Singapore had the right to tax the income.
Article 13 of the India–Singapore DTAA: Detailed Interpretation
Article 13(1): Immovable Property
Gains derived from the alienation of immovable property situated in the source state may be taxed in that state.
Not applicable to mutual fund units, which are movable and intangible financial instruments.
Article 13(2): Permanent Establishment (PE) Assets
Gains from the sale of movable property forming part of the business property of a PE in the source state may be taxed in the source state.
Not applicable, as the Singapore-resident individual did not have a PE in India.
Article 13(3): Ships or Aircraft in International Traffic
Covers gains from the sale of ships or aircraft operated in international traffic.
Clearly irrelevant to mutual fund units.
Article 13(4): Shares of Indian Companies (as amended)
This article permits India to tax gains from the alienation of shares in a company resident in India, subject to certain conditions.
However, mutual fund units are not "shares" in a company—they are units of a trust, regulated under a distinct framework (SEBI Mutual Funds Regulations), and not equity in a corporate entity.
Thus, mutual fund units do not fall within the scope of Article 13(4).
Article 13(5): Residuary Clause – Exclusive Taxation in State of Residence
“Gains from the alienation of any property other than those referred to in paragraphs 1 to 4 shall be taxable only in the Contracting State of which the alienator is a resident.”
Since mutual fund units are not covered under Articles 13(1) to 13(4), the gains clearly fall under Article 13(5). This clause grants exclusive taxing rights to the country of residence of the alienator—in this case, Singapore. Accordingly, India has no right to tax such gains, even if the source of the income (i.e., mutual fund investments) is in India.
Key Implications of the ITAT Ruling
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Reinforces Treaty Supremacy: Confirms that treaty provisions override the Income-tax Act where they are more beneficial to the taxpayer, as per Section 90(2) of the Act.
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Clear Classification of Mutual Fund Units: The ruling establishes that mutual fund units are not "shares" and hence fall outside Article 13(4). This creates certainty for future classification under DTAA provisions.
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Exclusive Residency-Based Taxation: Article 13(5) applies cleanly, and the capital gains from such units are taxable only in Singapore, where the taxpayer is a resident.
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Applies Beyond Singapore: Many Indian DTAAs with countries like Mauritius, Netherlands, Luxembourg, France, and the UAE contain similarly worded Article 13(5) clauses. Thus, this judgment could serve as a persuasive precedent for NRIs and foreign investors in multiple jurisdictions.
Checklist for Claiming Treaty Benefit on Mutual Fund Gains
To successfully claim exemption under Article 13(5), a non-resident investor should ensure:
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Valid Tax Residency Certificate (TRC) from the country of residence (e.g., Singapore)
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Mutual fund units are not shares in Indian companies
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No Permanent Establishment (PE) in India
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Sale consideration is received outside India or as per FEMA guidelines
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Proper disclosure in the Income Tax Return (ITR) filed in India (if any)
Conclusion
The Mumbai ITAT’s interpretation of Article 13(5) provides strong judicial support for treaty relief on capital gains from Indian mutual funds. It promotes clarity, consistency, and predictability in cross-border investment taxation, aligning with international tax principles that favour residency-based taxation over source-based taxation in certain asset classes.
For NRIs and global investors, this ruling underscores the importance of careful tax treaty analysis and documentation to optimize tax outcomes while remaining compliant.
