Most NRIs first encounter TDS through their bank -- a fixed deposit matures, and 30% (plus surcharge and cess) disappears before the interest ever reaches the NRO account. Mutual fund payouts work differently, both in the section of law that applies and in how little room there is to argue the rate down. An Indian asset management company (AMC) is a 'person responsible for paying' income to a non-resident, and the Income-tax Act requires it to deduct tax before a single rupee of dividend or capital gain reaches an NRI investor's account -- there's no threshold below which the deduction is skipped, unlike the exemption thresholds that sometimes apply to resident investors.
Two separate withholding provisions are in play, and conflating them is the most common mistake NRI investors make when they see multiple TDS entries against the same fund house in their Annual Information Statement.
Dividend and IDCW payouts
Income distributed by a mutual fund -- dividend or Income Distribution cum Capital Withdrawal (IDCW) payouts -- falls under the section that specifically deals with income from mutual fund units paid to non-residents. Under the old Income-tax Act, 1961 this was Section 196A; under the Income-tax Act, 2025, which took effect from 1 April 2026, the same withholding rule sits inside Section 393(2) (Table S. No. 10 of the Act's TDS schedule). The rate is a flat 20% (before surcharge and cess), applied regardless of the investor's income slab, because non-residents don't get slab-rate treatment at the point of deduction the way resident investors do.
A DTAA can lower this, but not automatically. The AMC will apply the treaty rate only if the investor furnishes a valid Tax Residency Certificate (TRC) for the relevant year and the treaty rate is actually lower than 20%. Even then, tax practitioners flag a real limitation: income distributed by an Indian mutual fund often doesn't fit neatly inside a treaty's definition of 'dividend,' so claiming treaty relief on this specific income stream isn't as straightforward as it is for, say, bank interest. Some AMCs will honour a lower treaty rate with a TRC and Form 10F on file; others default to the domestic 20% and leave the investor to claim the difference as a refund when filing a return.
Capital gains on redemption
Capital gains from redeeming or switching mutual fund units are withheld under the general non-resident payment provision -- old Section 195, now Section 393(2) of the 2025 Act (a different table row from the dividend rule above) -- at the rates 'in force' for that category of gain. Following the Budget 2024 changes, those rates for equity-oriented funds are 20% for short-term capital gains (units held 12 months or less) and 12.5% for long-term gains above the Rs 1.25 lakh annual exemption, both plus applicable surcharge and cess. For debt-oriented and other non-equity funds -- where units bought on or after 1 April 2023 no longer get indexation or a long-term category at all -- AMCs generally withhold at a flat 30%, since there's no slab rate to apply at the point of a non-resident redemption the way there would be for a resident investor at their own income slab.
This is a meaningful contrast with residents, who face no TDS at all on mutual fund capital gains -- the withholding obligation on redemption gains exists only because the investor is non-resident. It also means the AMC's deduction is often a rough, conservative estimate of the actual tax owed, not a precise final figure -- particularly for debt funds, where 30% is well above what many NRIs' effective India tax rate on that gain would otherwise be.
Reducing or reconciling the deduction
Two paths exist to avoid overpaying through the year. One is upfront: submitting a TRC and Form 10F to the AMC before redemption or dividend payout, so a lower treaty rate applies at source where the AMC accepts it (this is a narrower version of the same TRC-and-10F paperwork used for Form 15CA/15CB remittance certification on other outward payments). The other is after the fact: filing an Indian income tax return to claim a refund of TDS deducted in excess of actual tax liability, which is common for debt-fund redemptions given the flat 30% rate.
Either way, the deducted amounts should show up against the investor's PAN in Form 26AS and the Annual Information Statement, typically with a lag of one to two quarters after the AMC files its TDS return. Checking that reconciliation before filing -- rather than relying on the AMC's TDS certificate alone -- catches the fairly common case of a mismatched PAN or a late TDS return delaying credit into the wrong assessment year.