International mutual funds — funds that invest in overseas equities like the Nasdaq 100, S&P 500, or global themes — went through a tax regime overhaul starting April 2023. Before that, they qualified for long-term capital gains treatment (20% with indexation after 3 years). After the change, gains are taxed at your income tax slab rate regardless of holding period. As of 2026, this rule has stabilised and has significant implications for Indian investors holding global funds.
Current tax treatment (FY2026-27)
For funds investing more than 65% in overseas equities: - All gains are taxed as short-term capital gains, i.e., at your marginal income tax rate - Holding period does not change the rate — whether you hold for 6 months or 6 years, the tax is the same - No indexation benefit - Dividend income is added to income and taxed at slab rate
For FOFs (Fund of Funds) investing in overseas equity ETFs: - Same treatment as above — slab rate regardless of holding period
The mathematical impact
For an investor in the 30% tax bracket: - Pre-2023: A ₹10 lakh gain held 3+ years → 20% tax with indexation = effective tax often 12-15% - Post-2023: Same ₹10 lakh gain → 30% tax = ₹3 lakh tax
This nearly doubled the effective post-tax cost of global investing through domestic mutual fund routes.
Should you still hold international funds?
The answer depends on purpose, not just tax:
- Currency diversification: If you hold USD-denominated assets, you benefit when INR depreciates. This is a genuine risk management benefit, not just return-chasing.
- Asset class diversification: US tech and global healthcare have low correlation to Indian equity. For portfolios above ₹50 lakh, this matters.
- Tax-efficient alternatives: For pure US equity exposure, investing directly via LRS (Liberalised Remittance Scheme) in US ETFs (like SPY or QQQ) may be more tax-efficient — US ETFs held over a year qualify for 12.5% LTCG in India as foreign assets.
LRS direct investment as an alternative
Under LRS, you can remit up to $250,000 per year abroad and invest in foreign stocks and ETFs through brokers like Interactive Brokers, Vested, or INDmoney. Gains from these investments, if held over 24 months, are taxed at 12.5% without indexation — significantly better than the slab rate.
Conclusion
International mutual funds remain useful for small portfolios or investors who want simplicity. For larger portfolios, the tax disadvantage makes direct LRS investment worth the additional operational complexity.