Taxation of investments in Indian Mutual Funds in the UK

Gains made on disposal of Indian mutual funds are taxed at highest marginal rate of taxation

Special rules apply to disposal of offshore funds.

Basically, any gain on disposal of investments in Offshore Mutual funds (i.e., any fund based outside UK) will be taxed at the highest marginal rate of tax and not as capital gains.

Double whammy – in case of loss, the loss is only allowed to be set-off against capital losses and not against `income gains`.

Lastly, annual capital exemption is also not available to such gains.

Exceptions:

1. HMRC has classified overseas funds as `reporting` and `non-reporting`.
Reporting means funds which provided certain data to HMRC on periodic basis. HMRC publishes a list of these funds monthly. In case your mutual fund is such a fund your gain will be taxed as Capital Gains.

Non-reporting means any funds which do not comply with these requirements.

Recent article in taxation magazine states that not a single fund from India is a reporting fund.

2. Further exception to this is given in HMRC Manual – see link

Conclusion: From a tax perspective, if you wish to invest in Indian stock market better invest directly in stock and shares and not via a Mutual fund.

Bonus:

  1. An article with an example
  2. This is a complex area of law; further information can be seen at HMRC Investment Funds Manual – IFM12000 and IFM13000.