Indian Mutual Funds: Sell Before or After the Move

A mutual fund bought in India is Indian income in every status and a foreign fund to the US. While you are a US person, the second fact is the costly one. When you move back, the two rules separate: the Indian tax stays where it was, and the US treatment changes on a date you can often influence. This chapter explains what changes, for whom, and how to compare selling before the move with selling after it. The chapter "Foreign Mutual Funds and the PFIC Rules" in the visa shelf's second book explains the PFIC regime in full; this one starts from there.

What stays the same: the Indian tax

Section 5 of the Income-tax Act, 2025 taxes income that accrues or arises in India for a resident and for a non-resident alike (section 5(1)(b) and 5(2)(b)). A gain on an Indian mutual fund arises in India, so your Indian status, NR, RNOR or ROR, does not change whether India taxes it. The rates in the sections read for this book, before surcharge and cess:

• Units of an equity-oriented fund held for more than 12 months, when securities transaction tax is paid on the sale: the long-term gain above ₹1.25 lakh in a tax year is taxed at 12.5% (section 198). An equity-oriented fund is a mutual fund scheme that holds at least 65% of its money in the shares of domestic listed companies, or puts at least 90% into another exchange-traded fund that itself holds at least 90% in them (section 198(8)).
• The same units sold within 12 months: the gain is taxed at 20% (section 196), when securities transaction tax applies to the sale.
• Debt funds are not covered by the rates above. A fund that invests more than 65% of its money in debt and money market instruments is a "specified mutual fund", and a gain on units bought on or after 1 April 2023 is treated as short-term whatever the holding period, with no indexation, so it is added to your income and taxed at your slab rate (section 76, read as enacted in the Gazette; the Finance Act, 2026 changes were not read).
• Other funds follow the general rule: a holding of more than 24 months is long term at 12.5% (section 197), unless the unit is a listed security, which takes the 12-month test (section 2(101)). Enter your own rate in the calculator, and confirm your fund's class and the rate with the fund house and a Chartered Accountant.

One rule needs care: the ₹1.25 lakh cushion in section 198 applies once per tax year across all the gains section 198 covers, shares as well as funds, not to each fund. Spreading a sale across two Indian tax years, which run April to March, gives you the cushion in each.

What changes: the US side

For the US, the question is whether you are a "United States person" on the day you sell. That depends on your citizenship and on your residency termination date, the date Publication 519 sets as the day your US residency ends.

A citizen or green card holder. Moving to India does not change this. You stay a US person, the PFIC rules keep applying to every Indian fund, and Form 8621 is still due each year the form is required. A US citizen's routes out are narrow: selling and paying the PFIC tax, a mark-to-market election where the fund qualifies, or holding. A long-term green card holder who gives up the card should first read the expatriation chapter in the visa shelf's third book, because a person who held a green card in 8 of the last 15 tax years can become a covered expatriate and face a deemed sale of their assets when the status ends.

A visa holder who leaves for good. The PFIC rules apply to a US person. After your residency termination date you are a nonresident alien. The US then taxes a nonresident alien on US-source income and on a limited list of gains (Publication 519 taxes a nonresident's capital gains only from US sources, and then in narrow cases), and the sale of an Indian fund by someone whose tax home is in India is not US-source. On that reading the sale owes no US tax and creates no Form 8621, which your US preparer should confirm for your dates. Publication 519 sets the date: it is the last day you are physically present in the US if your tax home is abroad and you have a closer connection to another country for the rest of the year, and otherwise December 31; for a green card holder who gives up the card, it is the first day they are no longer a lawful permanent resident. An earlier date has to be established with a signed statement filed with the IRS. A sale in the months before that date is still the sale of a US resident.

So the same fund can cost very different amounts on either side of one date. The PFIC calculator has a moving-back mode that prices the sale before the move and after it for your dates, with the Indian tax entered as your own rate.

The default PFIC tax, for scale

Under the default rules, a gain on a PFIC is spread over the years you held it. The share for the sale year is taxed at your ordinary rate, the shares for earlier years at the top rate, 37% for 2026, and interest is charged on those earlier years. A holding that grew steadily gets a bigger bill the longer it was held while you were resident, which is why the date of the sale matters.

Rupee gain, dollar gain

India taxes the gain in rupees. The US measures a gain in dollars, using the exchange rate when you bought and when you sold. Over the 2005 to 2025 window the rupee weakened by 3.48% a year on average, so a fund that rose in rupees showed a smaller gain in dollars. The two blocks below start from the same $40,000 placed at the purchase-date rate. The first grows at 12.0% a year in rupees, shown at that old rate. The second is the same fund in dollars after the rupee's average fall, which is (1 + 12%) ÷ (1 + 3.48%) − 1, about 8.2% a year.

After 10 years the rupee gain India sees is worth $84,234 at the purchase-date rate. The dollar gain the US sees is $48,295. If you sold as a US resident, that smaller dollar gain would be spread over the years held, with most of it charged at the top rate and with interest. If you sold after your residency termination date as a non-citizen, the US tax on the gain would be nil. The Indian tax applies on the rupee gain either way. The US foreign tax credit for the Indian tax is limited to the US tax on the dollar gain, so for someone who stays a US person a large rupee gain can leave Indian tax unused. A non-citizen who owes no US tax on the sale has no credit to claim.

Options for the funds

1. Sell before you leave, accepting the PFIC tax in the dollar-gain year. It costs least for a small position or one held only a few years.
2. Sell after the residency termination date, as a non-citizen, accepting the Indian tax only. Check which tax year the sale falls in, so the section 198 cushion is not wasted or doubled.
3. Hold and keep reporting, as a citizen or green card holder who stays a US person, with the Form 8621 each year.
4. Stop new monthly investments into the funds, since each instalment is a separate lot with its own dates and dollar cost.

Whichever applies, tell each fund house your new residential status and keep the statements for each purchase date and rate, because both countries' tax calculations use them.