‘Shift to UAE for 183 Days’: Kotak MD Warns of Tax Loophole Following ITAT Ruling on NRI Mutual Fund Capital Gains

In a landmark ruling, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that capital gains from mutual fund investments made by an NRI are not taxable in India, owing to the provisions of the India–Singapore Double Taxation Avoidance Agreement (DTAA).

In the case, Anushka Sanjay Shah vs. Income Tax Officer, (2025 TAXSCAN (ITAT) 746), The taxpayer, a Singapore-based NRI, had declared these gains under the residual clause of Article 13(5) of the India-Singapore DTAA, which allows taxation only in the country of residence, not in India. DRP and AO argued that mutual fund units derive value from Indian assets and thus fall within India's taxation scope.

The tribunal ruled that the capital gains were only taxable in Singapore, not in India, and allowed the appeal. The tribunal also referenced similar DTAA provisions with countries like the UAE, Portugal, Netherlands, Spain, and Mauritius, stating that capital gains from financial instruments, excluding immovable property and company shares, should be taxed in the seller’s country of residence.

The ruling has sparked debate over the use and potential abuse of international tax treaties by wealthy Indian residents who temporarily relocate abroad to avoid capital gains tax. Nilesh Shah, Managing Director of Kotak Mutual Fund, sharply criticized this growing practice in a viral post on X (formerly Twitter).

Know How to Investigate Books of Accounts and Other Documents, Click Here

“India is incentivising citizens to shift tax residency and save on capital gains tax liability. If you have significant capital gains tax liability on eligible securities, shift to UAE for more than 183 days. Your family holiday abroad will be funded from the savings on capital gains tax,” Shah wrote.

Citing the ITAT’s ruling in the Anushka Shah case, Shah described how individuals strategically obtain NRI status by staying outside India for more than 183 days in a financial year. Countries like the UAE, which do not impose capital gains tax, effectively become safe havens for such individuals under DTAA rules.

Read More: New ISD Rules Effective April 2025: How Debit and Credit Notes Affect ITC Distribution

Shah explained that this behaviour, which he termed “seasonal non-residency” undermines the principle of tax equity, leaving compliant Indian taxpayers at a disadvantage.

He drew on cultural metaphors, including Basanti’s iconic line from Sholay—“Aam ke aam, gutliyon ke daam”—to underline the unfairness, and a Gujarati proverb:

“ઘરના છોકરા ઘંટી ચાટે અને પાડોશીને આટો”
(Children at home lick the grinder while the neighbors take the flour).

Shah has called for immediate legislative reforms to close this loophole, proposing that tax should be levied in the country where the income arises (India), with credits claimed in the taxpayer’s country of residence.

“If we have to persist with tax benefits for larger causes, they should only be available to foreign citizens and not to ‘seasonal non-residents,’” he wrote.

He warned that the current system, if left unchecked, might encourage mass tax avoidance, stating:

“Today it might be a small amount, but tomorrow it could open a floodgate.”

Shah also pointed to the United States' exit tax regime, where individuals relinquishing residency or citizenship are taxed on unrealized gains. He suggested India consider similar safeguards to prevent capital flight disguised as temporary emigration.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates