A lot of investors added a US or global fund to their portfolio for diversification, saw the old tax rules quoted somewhere online, and are now surprised at redemption time. The rules changed. Here's what actually applies today.
The tax treatment isn't about the fund's name — it's about where the money is actually invested. A fund is taxed as "non-equity" for this purpose if it holds less than 65% in Indian equity shares on average. This covers:
Domestic equity funds and most hybrid funds with 65%+ Indian equity are unaffected — they retain the older, more favourable equity tax treatment.
| Domestic Equity Fund | International / US Fund | |
|---|---|---|
| Holding period distinction | Yes — 1 year cut-off (LTCG/STCG) | None — same rate regardless of holding period |
| Tax rate | STCG 20%; LTCG 12.5% above ₹1.25L/yr | Added to income, taxed at your slab rate |
| Indexation benefit | Not applicable | Not available (removed from April 2023) |
| Exemption threshold | ₹1.25 lakh LTCG per year | None |
In effect: if you're in the 30% tax bracket, gains on your US fund are taxed at 30% (plus cess), whether you held it for 4 months or 8 years. There's no reward for patience built into the tax code here — the reward has to come from the fund's own returns.
Suppose you invested ₹5,00,000 in a Nasdaq-linked fund three years ago and it's now worth ₹8,00,000 — a gain of ₹3,00,000. If your total taxable income puts you in the 30% slab:
The difference isn't small. It's a real drag on your net, after-tax return, and it should be factored into how much you allocate abroad, not just whether you allocate at all.
Before April 2023, funds with less than 65% domestic equity (including international funds and fund-of-funds) got debt-fund-like tax treatment with indexation after 3 years — often a better deal than pure equity taxation. The Finance Act 2023 removed indexation for these categories and pushed them to slab-rate taxation for all gains, aligning them with how debt funds are now taxed. International funds got swept into this change because structurally, they don't meet the 65% domestic equity threshold.
If you invest in a US fund through an Indian mutual fund (a feeder fund structure, which is how most retail investors access US and global markets), you hold units of an Indian scheme. You are not required to disclose this under Schedule FA (Foreign Assets) in your income tax return — that requirement applies to direct holdings of foreign shares, ESOPs, or foreign brokerage accounts, not domestic mutual fund units investing overseas.
International and US funds remain a legitimate diversification tool, but they're no longer a tax-efficient one. Go in with eyes open: slab-rate tax on every rupee of gain, no indexation, and no reward for holding long. Size the allocation for what it's meant to do — reduce concentration risk — and plan redemptions around your tax slab, not just market timing. For how equity fund taxation itself works, see our piece on LTCG tax on mutual funds, and if you're deciding how much to allocate abroad in the first place, read asset allocation basics.