International mutual funds post-Finance Act 2024: 12.5% LTCG without indexation and the 24-month switch

For Indian investors looking to diversify beyond Nifty and Sensex, two routes have always existed in parallel. The first is to buy a feeder mutual fund such as Motilal Oswal Nasdaq 100 FoF or Franklin India Feeder US Opportunities, which routes rupees through a domestic AMC into overseas equity. The second is to use the Reserve Bank of India's Liberalised Remittance Scheme (LRS) to remit up to USD 250,000 per financial year and buy US-listed stocks or ETFs directly through a broker partner.

The Finance (No. 2) Act 2024, notified on 23 July 2024, has redrawn the tax map for the first route in a way that even seasoned investors mis-state in WhatsApp groups. International mutual funds are no longer "debt-like" by default, but they are not "equity-like" either. The treatment now depends on a 1 April 2023 cut-off, a 24-month holding period, and Section 50AA of the Income-tax Act 1961. This article compares the two routes head-to-head, walks through the new tax matrix, and helps you decide which is right for a 10-to-15-year global diversification goal.

Side-by-Side Comparison

International mutual funds and direct LRS investing solve the same problem, exposure to companies listed outside India, but they differ on access, cost, taxation and operational friction. Below is a like-for-like comparison for a resident Indian planning to invest Rs 25 lakh towards a long-term goal between FY 2025-26 and FY 2035-36.

Two points stand out. First, the LRS route triggers 20% TCS once your annual remittances cross Rs 7 lakh in a financial year under Section 206C(1G) of the Income-tax Act 1961, although the TCS is fully adjustable against your tax liability when you file the return. Second, direct US investing exposes a resident Indian to US non-resident-alien (NRA) estate tax above the small USD 60,000 exemption under section 2102(b)(3) of the US Internal Revenue Code, a risk that simply does not exist with an India-domiciled feeder fund.

For most investors below USD 250,000 of annual capacity, the choice therefore reduces to a tax and convenience question rather than an access question. That is where the rewrite of Section 50AA and Section 112 matters most.

Tax Treatment

The taxation of international mutual funds in India now operates in three eras, separated by two dates: 1 April 2023 and 23 July 2024. Getting the era right matters because the same fund unit can be taxed at zero-indexation 12.5% or at 30%-plus slab rate depending on when you bought and when you sold.

Era 1 — units acquired before 1 April 2023, sold on or before 22 July 2024. Treated as a non-equity mutual fund. Holding period above 36 months produced LTCG at 20% with indexation under Section 112; below 36 months, slab-rate STCG. This regime is now historical, but matters if you have FY 2024-25 returns still under scrutiny.

Era 2 — units acquired before 1 April 2023, sold on or after 23 July 2024. The Finance (No. 2) Act 2024 reduced the long-term holding threshold for non-listed and specified categories to 24 months and pegged the LTCG rate at 12.5% without indexation. Indexation benefit was withdrawn from this date. So a unit bought on 1 January 2023 and sold on 1 December 2025 is held for over 24 months and qualifies for 12.5% LTCG, but the cost cannot be indexed.

Era 3 — units acquired on or after 1 April 2023. Section 50AA, inserted by the Finance Act 2023 effective 1 April 2023, treats them as "specified mutual funds" where not more than 35% of the fund's total proceeds is invested in equity shares of domestic companies. International feeder funds, by definition, hold zero domestic equity, so they fall squarely in this bucket. Gains are deemed short-term irrespective of holding period and taxed at the investor's slab rate.

The matrix below summarises this for a resident Indian taxpayer under the new regime in FY 2025-26.

The Rs 1.25 lakh annual exemption that the same Budget 2024 introduced for equity LTCG under Section 112A does not apply to international mutual funds, because those funds fail the equity-oriented test (less than 65% in Indian-listed equity with STT paid). So even the 12.5% LTCG rate, where it applies, is levied from the first rupee of gain.

Direct overseas equity bought via LRS is taxed under the general capital gains framework. Foreign shares are treated as unlisted assets under Indian tax law because they are not listed on a recognised stock exchange in India; held for over 24 months they attract LTCG at 12.5% without indexation under Section 112; below 24 months, slab rate. Dividends from US companies suffer 25% withholding at source, and the credit can be claimed in India by filing Form 67 before the ITR due date. India still taxes the gross dividend at slab rate and grants a foreign tax credit equal to the lower of Indian tax payable or the treaty rate; it does not exempt the dividend.

The currency factor cuts both ways. INR depreciation against the US dollar has historically averaged 3% to 4% per year over rolling 10-year windows; that depreciation translates into additional rupee gain when you redeem an international fund or sell US shares, and the entire rupee-translated gain is taxable. There is no separate forex-loss carve-out for resident individuals. Over a 10-year hold, the currency tailwind alone can add roughly one-third to the rupee return, but it is fully taxable wealth and not exempt income.

Who Should Pick Which

The right answer depends on three variables: your marginal slab rate, your annual ticket size, and your willingness to handle Schedule FA in your ITR.

Pick an international feeder mutual fund if:

• Your marginal rate is in the 5%, 10% or 15% slab of the new regime (taxable income up to Rs 16 lakh in FY 2025-26). Section 50AA at slab rate is then lower than the 12.5% LTCG rate that direct shares attract, so the post-2023 acquisition rule actually helps small-to-mid earners.
• You are SIP-driven, want to compound Rs 5,000 to Rs 50,000 monthly, and do not want to handle USD conversion or 20% TCS on remittances above Rs 7 lakh per FY.
• Your total intended international exposure is under Rs 25 to 30 lakh: the convenience of staying within the rupee tax system outweighs the cost saving of going direct.
• You want fractional, programmatic compounding without dealing with foreign brokerage account opening, KYC re-verification, and the W-8BEN form.

Pick direct LRS investing if:

• Your marginal rate is 30% (taxable income above Rs 24 lakh in the new regime in FY 2025-26) and your acquisition will be on or after 1 April 2023; slab-rate taxation under Section 50AA on a feeder fund hurts you, while direct foreign shares get 12.5% LTCG once held over 24 months.
• You can hold for at least 24 months and tolerate USD currency volatility of 8% to 12% per year.
• Your annual contribution is large enough that the 20% TCS cash-flow drag is manageable; TCS is refundable through the ITR but blocks capital till the return is processed.
• You want single-stock control: global thematic baskets such as AI, semiconductors, or biotech are easier to express in direct stocks than in feeder funds, which typically track broad indices like Nasdaq 100 or S&P 500.

Stay with Indian equity mutual funds if your international allocation would be below 10% of total portfolio. The 12.5% LTCG on Section 112A equity with a Rs 1.25 lakh annual exemption is the most tax-efficient bucket available to a resident Indian today, and a small international tilt rarely justifies the tax friction.

You can model these scenarios on the Oquilia SIP calculator and the lumpsum calculator, and compare the after-tax outcome against a domestic ELSS allocation for the equity-oriented portion. For lock-in alternatives, the PPF calculator shows how a fully tax-exempt rupee instrument earning 7.1% per annum stacks up against a post-tax international fund. Background reading: our hybrid mutual fund tax classification explainer covers Section 50AA in more depth, and the ELSS vs PPF post-tax XIRR comparison is a useful benchmark for the equity-LTCG advantage that international funds give up.

FAQ

Are international mutual funds still treated as debt funds in India?

No. After 23 July 2024 they are no longer in the old debt-fund bucket. For units acquired on or after 1 April 2023 they fall under Section 50AA as specified mutual funds and are taxed at slab rate regardless of holding period. For older units, gains above 24 months qualify for 12.5% LTCG without indexation under Section 112. The 20% with-indexation regime that existed for non-equity funds before 23 July 2024 has been completely withdrawn. Source: Finance (No. 2) Act 2024 amendments to Section 112 of the Income-tax Act 1961, incometaxindia.gov.in.

Does the Rs 1.25 lakh equity LTCG exemption apply to international funds?

No. The Rs 1.25 lakh annual exemption under Section 112A is exclusive to equity-oriented funds whose underlying is taxed STT and is at least 65% Indian-listed equity. International funds fail both tests because their underlying is foreign equity outside the Indian STT net, so the exemption does not apply. The 12.5% rate, where it applies under Section 112, runs from the first rupee of gain.

What is the SEBI overseas investment limit and is it still in force?

SEBI has historically capped the mutual fund industry's aggregate overseas investment at USD 7 billion, with a separate USD 1 billion bucket for ETFs that invest abroad. When the limit is reached, AMCs pause fresh subscriptions to international schemes; existing SIPs are sometimes also paused at the AMC's discretion. This cap is monitored monthly by SEBI; see the regulator's circular page at sebi.gov.in for the latest position. The cap is at the industry level, not the investor level, and does not affect direct LRS investors.

How does the LRS limit work for an Indian resident investing in US stocks?

Under the Liberalised Remittance Scheme, a resident Indian (including a minor, through a guardian) can remit up to USD 250,000 per financial year for permitted current and capital account transactions, including investing in foreign equities, ETFs and real estate. Above Rs 7 lakh of aggregate non-education, non-medical remittance per FY, 20% TCS is collected by the authorised dealer bank under Section 206C(1G), which the investor adjusts when filing the return. See the RBI's LRS master direction at rbi.org.in for full eligibility, reporting and prohibited-investment lists.

Are dividends from foreign stocks taxable in India?

Yes. Dividends from foreign companies are taxable in India at the investor's slab rate, with the gross dividend included in income from other sources. For US dividends, the US withholds 25% at source for Indian residents who file Form W-8BEN with their broker; this withholding can be claimed as foreign tax credit in India by filing Form 67 before the ITR due date, subject to the lower of Indian tax and the treaty rate. Dividends from international feeder funds are usually reinvested at the fund level and never reach the unit-holder as a taxable cash payout, which simplifies compliance but means you cannot harvest dividend income directly.

Can I switch between international mutual funds without triggering tax?

No. A switch from one international fund to another is a redemption of the existing units followed by a fresh purchase under Indian tax law. Each switch triggers capital gains in the originating fund and resets the holding period and acquisition date in the destination fund. If you switch a pre-1-Apr-2023 unit, the new units are post-Apr-2023 and immediately fall under Section 50AA slab-rate treatment. So tax-loss harvesting via switching is rarely wise unless the loss is meaningfully large.

What happens to currency gains when I sell an international feeder fund?

There is no separate forex-gain head for resident investors holding rupee-denominated mutual fund units. The NAV of the feeder fund already embeds the rupee value of foreign holdings, so any rupee depreciation flows into your capital gain or loss at redemption. The entire gain is then taxed under whichever regime applies: slab rate under Section 50AA for post-1-Apr-2023 units, or 12.5% LTCG under Section 112 for older units held over 24 months. There is no exemption for the currency component.