Moving Abroad And Buying A House In India? Know The Tax Rules On Mutual Fund Gains

Relocating overseas for employment often brings changes to a person's financial and tax responsibilities. However, many individuals continue to hold investments in India even after moving to another country. Mutual funds, shares and other assets may remain part of their financial portfolio, while property purchases back home can feature in their long-term plans.

Consider someone who moved to Luxembourg for a job in February and recently sold mutual fund investments. The individual now wants to use the proceeds to purchase a house in Delhi. Does living abroad affect the possibility of claiming a capital gains tax exemption in India?

The answer depends on the investment, the taxpayer's residential status and the conditions attached to the relevant exemption.

Can Someone Living Abroad Claim Section 86 Tax Exemption ?

Moving overseas does not automatically disqualify an individual from claiming the exemption under Section 86 of the Income-tax Act, 2025, which corresponds to Section 54F of the Income-tax Act, 1961.

The provision allows eligible individuals and Hindu Undivided Families (HUFs) to claim relief on long-term capital gains arising from the sale of a long-term capital asset other than a residential house. To qualify, the taxpayer must invest the net consideration in one residential property situated in India.

The exemption is not restricted exclusively to individuals who remain Indian residents. A non-resident may also qualify if all the prescribed conditions are fulfilled.

Therefore, someone who has relocated to Luxembourg could potentially claim the benefit when purchasing a qualifying residential property in Delhi. However, the overseas move, the date of the asset sale and the applicable tax residency rules must be examined before reaching a conclusion.

Do Mutual Fund Gains Qualify For The Exemption?

Not every mutual fund sale automatically qualifies for relief under Section 86. The investment must generate long-term capital gains, and the holding period is an important factor.

Different categories of mutual funds may have different holding-period requirements for determining whether gains are short-term or long-term. Equity-oriented funds and certain debt-oriented funds, for instance, may receive different tax treatment.

If the gains are classified as short-term, the taxpayer cannot claim the Section 86 exemption on those gains.

Another important distinction is that the exemption calculation is based on the net consideration received from the sale, not simply the profit earned. Net consideration generally refers to the sale proceeds after deducting expenses directly related to the transfer.

What Is The Deadline For Buying A House In India ?

The law specifies clear timelines for purchasing or constructing the new residential property.

An eligible taxpayer can purchase one residential house in India within one year before the sale of the original asset or within two years after the transfer. Alternatively, the individual can construct a residential property within three years from the date of the transfer.

For someone who has already sold mutual fund units and intends to buy a house in Delhi, the transaction date is particularly important. The property purchase must fall within the prescribed period.

The location requirement is equally significant. The qualifying residential property must be in India. Purchasing a house in Luxembourg or another overseas country will not satisfy this condition.

How Much Tax Exemption Can An Investor Claim?

The amount of relief depends on how much of the net sale consideration is invested in the new residential property.

If the cost of the qualifying house is equal to or greater than the eligible net consideration, the entire long-term capital gain may qualify for exemption, subject to the applicable statutory ceiling and other conditions.

If only part of the net consideration is invested, the exemption is calculated proportionately.

For example, suppose an individual sells eligible mutual fund investments for a net consideration of ₹60 lakh and earns a long-term capital gain of ₹20 lakh. If ₹30 lakh is invested in a qualifying residential property, the exemption would be ₹10 lakh.

The remaining ₹10 lakh would be taxable under the applicable capital gains provisions.

The exemption calculation is also subject to a maximum limit of ₹10 crore. Any amount beyond the prescribed ceiling is not considered for the relevant calculation.

What If The Money Has Not Been Invested Before Filing The Return?

Sometimes, an individual may sell investments but complete the property purchase at a later date. The Capital Gains Account Scheme (CGAS) provides a mechanism for keeping the unutilised amount eligible for the proposed investment.

The amount that has not been used for purchasing or constructing the property must be deposited under the scheme before filing the income tax return. The deposit must also be made no later than the applicable return-filing due date.

The money can subsequently be withdrawn and used for the qualifying property purchase or construction within the prescribed period.

Keeping the proceeds in an ordinary savings account does not fulfil this requirement. If the deposited amount remains unused after the permitted period, the relevant exemption may be withdrawn and the unutilised portion may become taxable.

Property Ownership Rules Can Affect Eligibility

Apart from investment deadlines, taxpayers must also check how many residential properties they already own.

At the time of transferring the original asset, the individual should not own more than one residential house apart from the new property being acquired. Additional restrictions apply to purchasing or constructing another residential house within the specified period.

If the taxpayer purchases another residential property within two years or constructs another one within three years of the original asset transfer, the exemption may be withdrawn under the applicable provisions.

The newly acquired property must also be held for at least three years. Selling it within that period can result in the earlier exemption being withdrawn or adjusted for tax purposes.

These conditions make it important to review existing property ownership and future purchase plans before claiming relief.

What Should Someone Moving To Luxembourg Check?

In the example of an individual who moved to Luxembourg in February, sold mutual fund investments last month and plans to purchase a house in Delhi, several factors need attention.

First, the individual's residential status for the financial year in which the mutual fund units were sold must be established. The date of departure, the number of days spent in India and other relevant circumstances can influence the determination.

Next, the taxpayer should check whether the mutual fund gains qualify as long-term, whether the proposed property purchase meets the deadline and whether the ownership conditions are satisfied. Documents relating to the sale, investment holdings, property purchase and any CGAS deposit should be retained.

The tax position in Luxembourg also requires separate consideration. Becoming a tax resident there may create reporting obligations or tax implications for overseas investments and income. The interaction between Indian and Luxembourg tax rules should therefore be reviewed before transferring or using the sale proceeds.

Ultimately, moving abroad does not automatically prevent someone from claiming the Section 86 exemption when purchasing a house in India. However, the benefit is conditional, and a taxpayer must meet the eligibility requirements, investment deadlines and property ownership rules before treating the capital gains as exempt.

Disclaimer: This article is intended for general informational purposes only and should not be treated as professional tax or legal advice. Individual circumstances may differ. Consult a qualified tax professional before making investment or property-related decisions.