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At a time when India is seeking stronger participation from its global diaspora, such tax mismatches are making traditional investment routes less attractive
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Specialists recommend alternatives such as US-listed India-focused exchange-traded funds or direct equity investments, which may offer clearer and more predictable tax treatment. Improved investor education, they say, is essential to prevent erosion of NRI wealth
PRAVASISAMWAD.COM
As more non-resident Indians (NRIs) look to invest back home, many are facing an unpleasant surprise: heavy taxes that quietly reduce their returns. Experts say high tax burdens and limited awareness of cross-border regulations are discouraging overseas Indians from investing in Indian markets.
Financial specialists point out that Indian mutual funds, often promoted as tax-efficient within India, can become costly for NRIs living in countries such as the United States and Canada. In several real-life cases shared by industry experts, investors have seen a large portion of their profits wiped out by foreign tax liabilities.
“One such example involves an NRI based in the US who invested ₹45 lakh in Indian mutual funds and earned a profit of ₹12 lakh. While this would usually be considered a strong return, the gains triggered a tax demand of nearly $18,000 (around ₹15 lakh) from US tax authorities, significantly reducing the overall benefit of the investment,” a report in msn.com quoted Aryan Singh, co-founder at fintech firm Rupeia.
The core issue lies in how Indian mutual funds are treated under US tax law. They are classified as Passive Foreign Investment Companies (PFICs), which are subject to higher taxation. Under PFIC rules, gains are taxed as ordinary income at rates that can go up to 37%, rather than at the lower long-term capital gains rate. In some cases, additional interest penalties also apply.
Experts explain that many NRIs expect to pay relatively low tax in India on their gains, but fail to account for the much higher tax imposed overseas. This often leads to situations where more than 40% of profits are lost to taxation. Industry estimates suggest that a vast majority of NRIs are unaware of how foreign tax laws interact with Indian investments, and that many advisors do not adequately flag these risks.
