**UAE Resident Investing in Indian Mutual Funds: Why DTAA & TRC Still Matter Even When Tax Is Paid in India**

**UAE Resident Investing in Indian Mutual Funds: DTAA, TRC, and the Debate Between “Pay Tax” vs “No Tax”**

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Facts of the Case

An individual tax resident of the United Arab Emirates has invested in mutual funds in India. On redemption of these mutual fund units, capital gains arise in India.

Since the UAE does not levy personal income tax, a recurring and practical question arises:

If the assessee is anyway taxed in India at Indian rates, what is the purpose of invoking the India–UAE DTAA and submitting a Tax Residency Certificate (TRC)?

This question has gained renewed attention due to recent articles and discussions suggesting that capital gains on Indian mutual funds may be fully exempt under the India–UAE DTAA.

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Question Raised by the Assessee

“UAE has no tax. I am paying tax in India anyway. Why submit TRC? And some articles even claim that mutual fund gains are not taxable in India at all under the DTAA. Which position is correct?”

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Answer by the Tax Expert

You have spotted a very sharp and crucial distinction.

There are two competing treaty interpretations, both supported by legal reasoning, but with very different risk profiles.

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1. Role of TRC: Establishing Non-Resident Status and Protecting Global Income

A Tax Residency Certificate (TRC) serves a purpose far wider than rate reduction.

By furnishing a valid TRC:

• The assessee establishes that he is non-resident in India

• Confirms treaty residence in UAE

• Consequently:

  • India can tax only Indian-source income

  • Global income earned outside India remains outside the Indian tax net

This aspect is independent of the capital gains exemption debate and is a fundamental reason why TRC is critical.

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2. DTAA Is About Allocation of Taxing Rights, Not Merely Rates

Under the India–UAE DTAA:

• Capital gains are governed by Article 13

• The treaty does not prescribe a concessional rate

• Therefore, under the conventional interpretation, Indian domestic tax rates apply

This is the conservative position followed in most compliance-driven advice.

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3. The “No Tax” Argument – The Aggressive Treaty Interpretation

Certain judicial precedents have taken a technical view of treaty wording, particularly the use of the term “shares” in Article 13.

Core Legal Argument

1. Indian mutual funds are constituted as trusts, not companies

2. Units of mutual funds are not “shares” in a company

3. Therefore, Article 13 provisions dealing with “shares” do not apply

4. Such gains fall under the residuary clause of Article 13

5. The residuary clause allocates taxing rights exclusively to the country of residence

6. Since UAE levies no personal income tax, effective taxation becomes Nil

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4. Judicial References Supporting the Aggressive View (ITAT)

The following Income Tax Appellate Tribunal (ITAT) rulings are commonly cited in support of the above interpretation:

1. Anushka Sanjay Shah v. ACIT

• ITAT Mumbai

• Held that mutual fund units are not “shares”

• Capital gains on MF units held by a UAE resident fall under the residuary clause of Article 13

• India was held not entitled to tax such gains under the DTAA

2. Satish Raheja v. DCIT

• ITAT Mumbai

• Reiterated that units of mutual funds are distinct from shares

• Applied the residuary article of the India–UAE DTAA

• Taxing rights allocated exclusively to UAE

3. Additional Tribunal Observations (Consistent Line)

• Mutual fund units represent beneficial interest in a trust

• Treaty language must be interpreted strictly

• If an item is not expressly covered, residuary allocation applies

⚠️ Important Note:
These are Tribunal-level rulings, not High Court or Supreme Court decisions, and the Income-tax Department has not accepted this position as settled law.

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5. The “Pay Tax” Argument – The Conservative and Practical View

Most professionals advise a conservative approach because:

• The Income-tax Department treats MF units as securities taxable in India

• Mutual fund houses deduct TDS automatically

• Claiming exemption requires:

  • Filing a return claiming 100% refund

  • Almost certain scrutiny

  • Possible multi-level litigation

This approach prioritises certainty, compliance, and peace of mind.

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6. Comparison of the Two Approaches

Aspect	Conservative View	Aggressive View
Tax outcome	Tax paid in India	Nil tax claimed
Legal basis	MF units ≈ shares/securities	MF units ≠ shares
Case law	Departmental position	Select ITAT rulings
TDS handling	Accept TDS	Claim full refund
Scrutiny risk	Low	High
Role of TRC	Mandatory	Absolutely critical

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7. Clarification on Business Income Argument

It is well-settled that:

• Mutual fund gains are capital gains by nature

• Mere frequency or volume does not convert them into business income

• Investors do not control fund trading decisions

The debate is not about character of income, but treaty allocation of taxing rights.

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Conclusion: Strategy Depends on Risk Appetite

Both interpretations have legal backing, but they serve different objectives.

• Risk-averse taxpayers
  → Pay Indian tax
  → Use TRC to protect global income and residence status

• Tax-optimising, litigation-ready taxpayers
  → Claim DTAA exemption based on ITAT rulings
  → TRC becomes foundational evidence
  → Be prepared for assessment and appellate proceedings

DTAA planning is not just tax planning — it is risk planning.

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