Big India returns, bigger tax shock: Why NRIs are losing money on investments

High tax burdens and a lack of awareness around cross-border tax rules are quietly eroding returns for non-resident Indians (NRIs) investing in India, potentially discouraging overseas capital inflows, according to Aryan Singh, co-founder at fintech firm Rupeia. 

In a recent LinkedIn post, Singh highlighted how Indian mutual funds — often marketed as tax-efficient domestically — can become punitive investments for NRIs based in countries like the United States and Canada due to foreign tax regulations. 

“If you’re an NRI in the US investing in India, you’re getting destroyed by taxes,” Singh wrote, sharing a real-world case of a client based in San Francisco. 

According to Singh, the client invested ₹45 lakh in Indian mutual funds and earned a profit of ₹12 lakh — a return that would typically be considered strong. However, the gains triggered a tax bill of nearly $18,000 (around ₹15 lakh) from the US Internal Revenue Service (IRS), significantly wiping out returns. 

The issue stems from the US classification of Indian mutual funds as Passive Foreign Investment Companies (PFICs). Under PFIC rules, gains are taxed as ordinary income at rates as high as 37%, rather than at the lower long-term capital gains rate of around 20%. In many cases, interest penalties are also levied. 

Singh explained that while an investor might expect to pay roughly ₹62,500 in tax in India on a ₹5 lakh gain, the actual US tax liability can exceed ₹2.1 lakh — translating into a loss of over 40% of profits to taxation. 

“His Indian chartered accountant said mutual funds are tax-efficient. Nobody told him about PFIC,” Singh noted, pointing to a widespread advisory gap. 

The problem, Singh argues, is not limited to isolated cases. He estimates that 95% of NRIs are unaware of how foreign tax laws interact with Indian investments, and that many financial advisors fail to flag these risks. 

This lack of clarity comes at a time when India is seeking greater participation from its global diaspora to support domestic capital markets. However, high effective tax rates and regulatory mismatches are making traditional investment routes unattractive for overseas Indians. 

Singh said alternative structures can significantly reduce tax friction. For US and Canada-based NRIs, US-listed India exchange-traded funds (ETFs) such as INDA and INDY, or direct investment in Indian stocks through the Portfolio Investment Scheme (PIS), may offer more predictable taxation, including a 12.5% long-term capital gains rate in India for equities. 

“NRIs want exposure to India’s growth story, but the tax system is pushing them away,” Singh said, adding that better investor education and cross-border tax awareness are essential to prevent capital erosion.